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The demands on judges' time are largely a function of both the number and complexity of the cases on their dockets. To measure the case- related workload of district court judges, the Judicial Conference has adopted weighted case filings. The purpose of the district court case weights was to create a measure of the average judge time that a specific number and mix of cases filed in a district court would require. Importantly, the weights were designed to be descriptive, not prescriptive--that is, the weights were designed to develop a measure of the national average amount of time that judges actually spent on specific cases, not to develop a measure of how much time judges should spend on various types of cases. Moreover, the weights were designed to measure only case-related workload. Judges have noncase-related duties and responsibilities, such as administrative tasks, that are not reflected in the case weights. With few exceptions, such as cases that are remanded to a district court from the court of appeals, each civil or criminal case filed in a district court is assigned a case weight. For example, in the 2004 case weights--which are still in use--drug possession cases are weighted at 0.86, while civil copyright and trademark cases are weighted at 2.12. The total annual weighted filings for a district are determined by summing the case weight associated with all the cases filed in the district during the year. A weighted case filing per authorized judgeship is the total annual weighted filings divided by the total number of authorized judgeships. The Judicial Conference uses weighted filings of 430 or more per authorized judgeship as an indication that a district may need additional judgeships. Thus, for example, a district with 460 weighted filings per authorized judgeship, including newly requested judgeships, could be considered for an additional judgeship. However, the Judicial Conference does not consider a district for additional judgeships, regardless of its weighted case filings, if the district does not request any additional judgeships. In our 2003 report, we found the district court case weights approved in 1993 to be a reasonably accurate measure of the average time demands a specific number and mix of cases filed in a district court could be expected to place on the district judges in that court. The methodology used to develop the weights used a valid sampling procedure, developed weights based on actual case-related time recorded by judges from case filings to disposition, and included a measure (standard errors) of the statistical confidence in the final weight for each weighted case type. Without such a measure, it is not possible to objectively assess the accuracy of the final case weights. At the time of our 2003 report, the Subcommittee on Judicial Statistics of the Judicial Conference's Judicial Resources Committee had approved the research design for revising the 1993 case weights, with a goal of having new weights submitted to the Judicial Resources Committee for review in the summer of 2004. The design for the new case weights relied on three sources of data for specific types of cases: (1) data from automated databases identifying the docketed events associated with the cases; (2) data from automated sources on the time associated with courtroom events for cases, such as trials or hearings; and (3) consensus of estimated time data from structured, guided discussion among experienced judges on the time associated with noncourtroom events for cases, such as reading briefs or writing opinions. As we reported in 2009, according to FJC, the subcommittee wanted a study that could produce case weights in a relatively short period of time without imposing a substantial record-keeping burden on district judges. FJC staff provided the subcommittee with information about various approaches to case weighting, and the subcommittee chose an event- based method--that is, a method that used data on the number and types of events, such as trials and other evidentiary hearings, in a case. The design did not involve the type of time study that was used to develop the 1993 case weights. Although the proposed methodology appeared to offer the benefit of reduced judicial burden (no time study data collection), potential cost savings, and reduced calendar time to develop the new weights, we had two areas of concern--the challenge of obtaining reliable, comparable data from two different data systems for the analysis and the limited collection of actual data on the time judges spend on cases. First, the design assumed that judicial time spent on a given case could be accurately estimated by viewing the case as a set of individual tasks or events in the case. Information about event frequencies and, where available, time spent on the events would be extracted from existing administrative databases and reports and used to develop estimates of the judge time spent on different types of cases. For event data, the research design proposed using data from two databases (one of which was new in 2003 and had not been implemented in all district courts) that would have to be integrated to obtain and analyze the event data. FJC proposed creating a technical advisory group to address this issue. In August 2013, FJC officials told us that the process of integrating the two data systems, though labor-intensive, was successful and resulted in accurate data. However, we have not reviewed the integration process for the two data systems, so we cannot determine the effectiveness of this process or whether accurate data resulted. Second, we reported that the research design did not require judges to record time spent on individual cases, as was done for the 1993 case weights. Actual time data would be limited to that available from existing databases and reports on the time associated with certain courtroom events and proceedings for different types of cases. However, a majority of district judges' time is spent on case-related work outside the courtroom. The time required for noncourtroom events--and some courtroom events that did not have actual time data available--would be derived from structured, guided discussion of groups of 8 to 13 experienced district court judges in each of the 12 regional circuits (about 100 judges in all). The judges would develop estimates of the time required for different events in different types of cases within each circuit using FJC-developed "default values" as the reference point for developing their estimates. These default values would be based in part on the existing case weights and, in part, on other types of analyses. Following the meetings of the judges in each circuit, a national group of 24 judges (2 from each circuit) would consider the data from the 12 circuit groups and develop the new weights. The accuracy of judges' time estimates is dependent upon the experience and knowledge of the participating judges and the accuracy and reliability of the judges' recall about the average time required for different events in different types of cases--about 150 if all the case types in the 1993 case weights were used. In 2003, we found that these consensus data could not have been used to calculate statistical measures of the accuracy of the resulting case weights. Thus, we concluded that the planned methodology did not make it possible to objectively, statistically assess how accurate the new case weights are--weights whose accuracy the Judicial Conference relies upon in assessing judgeship needs. In August 2013, AOUSC officials stated that, since 2005, for purposes of determining the need for an additional authorized judgeship, a district's weighted case filings per authorized judgeship is calculated by including the potential additional judgeship. For example, if a district had total weighted filings of 4,600 and 9 authorized judgeships, and it planned to request 1 additional judgeship, its weighted filings per authorized judgeship, for purposes of the judgeship request process, would be 460. Without including the potential additional judgeship in the calculation, the weighted case filings would be about 511. AOUSC officials stated in August 2013 that the judiciary adopted the proposed methodology in 2004 and does not have plans to update the 2004 district court case weights. In 2003, we found that the principal quantitative measure the Judicial Conference used to assess the need for additional courts of appeals judgeships was adjusted case filings. The measure is based on data available from standard statistical reports for the courts of appeals. The adjusted filings workload measure is not based on any empirical data regarding the time that different types of cases required of appellate judges. The Judicial Conference's policy is that courts of appeals with adjusted case filings of 500 or more per 3-judge panel may be considered for 1 or more additional judgeships. Courts of appeals generally decide cases using constantly rotating 3-judge panels. Thus, if a court had 12 authorized judgeships, those judges could be assigned to four panels of 3 judges each. In assessing judgeship needs for the courts of appeals, the conference may also consider factors other than adjusted filings, such as the geography of the circuit or the median time from case filings to disposition. Essentially, the adjusted case filings workload measure counts all case filings equally, with two exceptions. First, cases refiled and approved for reinstatement are excluded from total case filings. Second, pro se cases are weighted at 0.33, or one-third as much as other cases, which are weighted at 1.0. For example, a court with 600 total pro se case filings in a year would be credited with 198 adjusted pro se case filings (600 x 0.33). Thus, a court of appeals with 1,600 filings (excluding reinstatements)--600 pro se cases and 1,000 non-pro se cases--would be credited with 1,198 adjusted case filings (198 discounted pro se cases plus 1,000 non-pro se cases). If this court had 6 judges (allowing two panels of 3 judges each), it would have 599 adjusted case filings per 3- judge panel, and, thus, under Judicial Conference policy, could be considered for an additional judgeship. The current court of appeals workload measure, which, AOUSC officials stated, was adopted in 1996, represents an effort to improve the previous measure. In our 1993 report on judgeship needs assessment, we found that the restraint of individual courts of appeals, not the workload standards, seemed to have determined the actual number of appellate judgeships the Judicial Conference requested. At the time the current measure was developed and approved, using the new benchmark of 500 adjusted case filings resulted in judgeship numbers that closely approximated the judgeship needs of the majority of the courts of appeals, as the judges of each court perceived them. The current courts of appeals case-related workload measure principally reflects a policy decision using historical data on filings and terminations. It is not based on empirical data regarding the judge time that different types of cases may require. On the basis of the documentation we reviewed for our 2003 report, we determined that there was no empirical basis for assessing the potential accuracy of adjusted case filings as a measure of case-related judge workload. In our 2003 report, we recommended that the Judicial Conference of the United States update the district court case weights using a methodology that supports an objective, statistically reliable means of calculating the accuracy of the resulting weights, and develop a methodology for measuring the case-related workload of courts of appeals judges that supports an objective, statistically reliable means of calculating the accuracy of the resulting workload measures and that addresses the special case characteristics of the Court of Appeals for the D.C. Circuit. Neither of these recommendations has been implemented, and in August 2013, AOUSC officials stated that the judiciary does not have plans to update the 2004 district court case weights or the 1996 court of appeals adjusted filings weights. With regard to our 2003 recommendation for updating the district court case weights, we reported that FJC agreed that the method used to develop the new case weights would not permit the calculation of standard errors, but that other methods could be used to assess the integrity of the resulting case weight system. In response, we noted that the Delphi technique to be used for developing out-of-court time estimates was most appropriate when more precise analytical techniques were not feasible and the issue could benefit from subjective judgments on a collective basis. More precise techniques were available for developing the new case weights and were to be used for developing new bankruptcy court case weights. In our 2003 report, we also concluded that the methodology the Judicial Conference decided to begin in June 2002 for the revision of the bankruptcy case weights offered an approach that could be usefully adopted for the revision of the district court case weights. The bankruptcy court methodology used a two-phased approach. First, new case weights were to be developed based on time data recorded by bankruptcy judges for a period of weeks--a methodology very similar to that used to develop the bankruptcy case weights that existed in 2003 at the time of our report. The accuracy of the new case weights could be assessed using standard errors. The second part represents experimental research to determine if it is possible to make future revisions of the weights without conducting a time study. The data from the time study could be used to validate the feasibility of this approach. If the research determined that this was possible, the case weights could be updated more frequently with less cost than required by a time study. We concluded in 2003 that that approach could provide (1) more accurate weighted case filings than the design developed and used for the development of the 2004 district court case weights, and (2) a sounder method of developing and testing the accuracy of case weights that were developed without a time study. However, we have not reviewed the effectiveness of this methodology or confirmed whether the judiciary implemented this approach. With regard to our recommendation on improving the case-related workload measure for the courts of appeals, the Chair of the Committee on Judicial Resources commented that the workload of the courts of appeals entails important factors that have defied measurement, including significant differences in case-processing techniques. We recognized that there were significant methodological challenges in developing a more precise workload measure for the courts of appeals. However, we stated that using the data available, neither we nor the Judicial Conference could have assessed the accuracy of adjusted case filings as a measure of the case-related workload of courts of appeals judges. The Ranking Member of the Subcommittee on Bankruptcy and the Courts has requested that we conduct a full review of the case-related workload measures for district court and courts of appeals judges, including a follow-up on our 2003 recommendations. Such a review will allow us to evaluate the judiciary's methodology and efforts over the last 10 years. Mr. Chairman, this concludes my statement for the record. For further information about this statement, please contact David C. Maurer, Director, Homeland Security and Justice Issues, on (202) 512- 9627 or [email protected]. In addition to the contact named above, the following individuals also made major contributions to this testimony: Chris Currie, Acting Director; David P. Alexander, Assistant Director; Brendan Kretzschmar; Jean M. Orland; Rebecca Kuhlmann Taylor; and Janet G. Temko. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The demands on judges' time are largely a function of both the number and complexity of the cases on their dockets. To measure the case-related workload of district court judges, the Judicial Conference has adopted weighted case filings. The purpose of the district court case weights was to create a measure of the average judge time that a specific number and mix of cases filed in a district court would require. Importantly, the weights were designed to be descriptive, not prescriptive--that is, the weights were designed to develop a measure of the national average amount of time that judges actually spent on specific cases, not to develop a measure of how much time judges should spend on various types of cases. Moreover, the weights were designed to measure only case-related workload. Judges have noncase-related duties and responsibilities, such as administrative tasks, that are not reflected in the case weights. With few exceptions, such as cases that are remanded to a district court from the court of appeals, each civil or criminal case filed in a district court is assigned a case weight. For example, in the 2004 case weights--which are still in use--drug possession cases are weighted at 0.86, while civil copyright and trademark cases are weighted at 2.12. The total annual weighted filings for a district are determined by summing the case weight associated with all the cases filed in the district during the year. A weighted case filing per authorized judgeship is the total annual weighted filings divided by the total number of authorized judgeships. The Judicial Conference uses weighted filings of 430 or more per authorized judgeship as an indication that a district may need additional judgeships. Thus, for example, a district with 460 weighted filings per authorized judgeship, including newly requested judgeships, could be considered for an additional judgeship. However, the Judicial Conference does not consider a district for additional judgeships, regardless of its weighted case filings, if the district does not request any additional judgeships. Based on GAO's 2003 report, it was found that the district court case weights approved in 1993 to be a reasonably accurate measure of the average time demands a specific number and mix of cases filed in a district court could be expected to place on the district judges in that court. The methodology used to develop the weights used a valid sampling procedure, developed weights based on actual case-related time recorded by judges from case filings to disposition, and included a measure (standard errors) of the statistical confidence in the final weight for each weighted case type. Without such a measure, it is not possible to objectively assess the accuracy of the final case weights. At the time of GAO's 2003 report, the Subcommittee on Judicial Statistics of the Judicial Conference's Judicial Resources Committee had approved the research design for revising the 1993 case weights, with a goal of having new weights submitted to the Judicial Resources Committee for review in the summer of 2004. The design for the new case weights relied on three sources of data for specific types of cases: (1) data from automated databases identifying the docketed events associated with the cases; (2) data from automated sources on the time associated with courtroom events for cases, such as trials or hearings; and (3) consensus of estimated time data from structured, guided discussion among experienced judges on the time associated with noncourtroom events for cases, such as reading briefs or writing opinions. In addition, GAO found that the principal quantitative measure the Judicial Conference used to assess the need for additional courts of appeals judgeships was adjusted case filings. The measure is based on data available from standard statistical reports for the courts of appeals. The adjusted filings workload measure is not based on any empirical data regarding the time that different types of cases required of appellate judges. The Judicial Conference's policy is that courts of appeals with adjusted case filings of 500 or more per 3-judge panel may be considered for 1 or more additional judgeships. Courts of appeals generally decide cases using constantly rotating 3-judge panels. Thus, if a court had 12 authorized judgeships, those judges could be assigned to four panels of 3 judges each. In assessing judgeship needs for the courts of appeals, the conference may also consider factors other than adjusted filings, such as the geography of the circuit or the median time from case filings to disposition.

The LDA requires lobbyists to register with the Secretary of the Senate and the Clerk of the House and to file quarterly reports disclosing their lobbying activity. Lobbyists are required to file their registrations and reports electronically with the Secretary of the Senate and the Clerk of the House through a single entry point. Registrations and reports must be publicly available in downloadable, searchable databases from the Secretary of the Senate and the Clerk of the House. No specific statutory requirements exist for lobbyists to generate or maintain documentation in support of the information disclosed in the reports they file. However, guidance issued by the Secretary of the Senate and the Clerk of the House recommends that lobbyists retain copies of their filings and documentation supporting reported income and expenses for at least 6 years after they file their reports. The LDA requires that the Secretary of the Senate and the Clerk of the House provide guidance and assistance on the registration and reporting requirements and develop common standards, rules, and procedures for LDA compliance. The Secretary of the Senate and the Clerk of the House review the guidance semiannually. It was last reviewed December 15, 2014. The last revision occurred on February 15, 2013, to (among other issues) update the reporting thresholds for inflation. The guidance provides definitions of terms in the LDA, elaborates on the registration and reporting requirements, includes specific examples of different scenarios, and provides explanations of why certain scenarios prompt or do not prompt disclosure under the LDA. The Secretary of the Senate and Clerk of the House's Offices told us they continue to consider information we report on lobbying disclosure compliance when they periodically update the guidance. In addition, they told us they e-mail registered lobbyists quarterly on common compliance issues and reminders to file reports by the due dates. The LDA defines a lobbyist as an individual who is employed or retained by a client for compensation, who has made more than one lobbying contact (written or oral communication to covered officials, such as a high ranking agency official or a Member of Congress made on behalf of a client), and whose lobbying activities represent at least 20 percent of the time that he or she spends on behalf of the client during the quarter. Lobbying firms are persons or entities that have one or more employees who lobby on behalf of a client other than that person or entity. Figure 1 provides an overview of the registration and filing process. Lobbying firms are required to register with the Secretary of the Senate and the Clerk of the House for each client if the firms receive or expect to receive over $3,000 in income from that client for lobbying activities. Lobbyists are also required to submit an LD-2 quarterly report for each registration filed. The LD-2s contain information that includes: a list of individuals who acted as lobbyists on behalf of the client the name of the lobbyist reporting on quarterly lobbying activities; the name of the client for whom the lobbyist lobbied; during the reporting period; whether any lobbyists served in covered positions in the executive or legislative branch such as high ranking agency officials or congressional staff positions, in the previous 20 years; codes describing general issue areas, such as agriculture and education; a description of the specific lobbying issues; houses of Congress and federal agencies lobbied during the reporting period; and reported income (or expenses for organizations with in-house lobbyists) related to lobbying activities during the quarter (rounded to the nearest $10,000). The LDA also requires lobbyists to report certain political contributions semiannually in the LD-203 report. These reports must be filed 30 days after the end of a semiannual period by each lobbying firm registered to lobby and by each individual listed as a lobbyist on a firm's lobbying report. The lobbyists or lobbying firms must: list the name of each federal candidate or officeholder, leadership political action committee, or political party committee to which he or she contributed at least $200 in the aggregate during the semiannual period; report contributions made to presidential library foundations and presidential inaugural committees; report funds contributed to pay the cost of an event to honor or recognize a covered official, funds paid to an entity named for or controlled by a covered official, and contributions to a person or entity in recognition of an official, or to pay the costs of a meeting or other event held by or in the name of a covered official; and certify that they have read and are familiar with the gift and travel rules of the Senate and House and that they have not provided, requested, or directed a gift or travel to a member, officer, or employee of Congress that would violate those rules. The Secretary of the Senate and the Clerk of the House, along with USAO are responsible for ensuring LDA compliance. The Secretary of the Senate and the Clerk of the House notify lobbyists or lobbying firms in writing that they are not complying with the LDA reporting. Subsequently, they refer those lobbyists who fail to provide an appropriate response to USAO. USAO researches these referrals and sends additional noncompliance notices to the lobbyists or lobbying firms, requesting that they file reports or terminate their registration. If USAO does not receive a response after 60 days, it decides whether to pursue a civil or criminal case against each noncompliant lobbyist. A civil case could lead to penalties up to $200,000 for each violation, while a criminal case--usually pursued if a lobbyist's noncompliance is found to be knowing and corrupt--could lead to a maximum of 5 years in prison. Generally, under the LDA, within 45 days of being employed or retained to make lobbying contacts on behalf of a client, the lobbyist must register by filing an LD-1 form with the Clerk of the House and the Secretary of the Senate. Thereafter, the lobbyist must file quarterly disclosure (LD-2) reports detailing the lobbying activities. Of the 3,112 new registrations we identified for the third and fourth quarters of 2014 and the first and second quarters of 2015, we matched 2,743 of them (88.1 percent) to corresponding LD-2 reports filed within the same quarter as the registration. These results are consistent with the findings we have reported in prior reviews. We used the House lobbyists' disclosure database as the source of the reports. We also used an electronic matching algorithm that allows for misspellings and other minor inconsistencies between the registrations and reports. Figure 2 shows lobbyists filed disclosure reports as required for most new lobbying registrations from 2010 through 2015. The Clerk of the House and Secretary of the Senate will follow up with newly filed registrations where quarterly reports were not filed as part of their regular enforcement procedures. If the Clerk and the Secretary of the Senate are unsuccessful in bringing the lobbyist into compliance, they may refer those cases to the USAO as described earlier in figure 1. For selected elements of lobbyists' LD-2 reports that can be generalized to the population of lobbying reports our findings have been consistent from year to year. Most lobbyists reporting $5,000 or more in income or expenses provided written documentation to varying degrees for the reporting elements in their disclosure reports. For this year's review, lobbyists for an estimated 93 percent of LD-2 reports provided written documentation for the income and expenses reported for the third and fourth quarters of 2014 and the first and second quarters of 2015. Figure 3 shows that for most LD-2 reports, lobbyists provided documentation for income and expenses for sampled reports from 2010 through 2015. Figure 4 shows that for some LD-2 reports, lobbyists did not round their income or expenses as the guidance requires. In 2015, we identified 31 percent of reports that did not round reported income or expenses according to the guidance. We have found that rounding difficulties have been a recurring issue on LD-2 reports from 2010 through 2015. As we previously reported, several lobbyists who listed expenses told us that based on their reading of the LD-2 form they believed they were required to report the exact amount. While this is not consistent with the LDA or the guidance, this may be a source of some of the confusion regarding rounding errors. In 2015, 7 percent of lobbyists reported the exact amount of income or expenses. The LDA requires lobbyists to disclose lobbying contacts made to federal agencies on behalf of the client for the reporting period. This year, of the 80 LD-2 reports in our sample, 37 reports disclosed lobbying activities at federal agencies. Of those, lobbyists provided documentation for all lobbying activities at executive branch agencies for 21 LD-2 reports. Figures 5 through 8 show that lobbyists for most LD-2 reports provided documentation for selected elements of their LD-2 reports from 2010 through 2015. Lobbyists for an estimated 85 percent of LD-2 reports in our 2015 sample filed year-end 2014 LD-203 reports for all lobbyists listed on the report as required. All but four firms with reports selected in our sample filed the year-end 2014 LD-203s for the firm. Of those four firms, three filed after we contacted them. Figure 9 shows that lobbyists for most lobbying firms filed contribution reports as required in our sample from 2010 through 2015. All individual lobbyists and lobbying firms reporting lobbying activity are required to file LD-203 reports semiannually, even if they have no contributions to report, because they must certify compliance with the gift and travel rules. The LDA requires a lobbyist to disclose previously held covered positions in the executive or legislative branch, such as high ranking agency officials and congressional staff, when first registering as a lobbyist for a new client. This can be done either on the LD-1 or on the LD-2 quarterly filing when added as a new lobbyist. This year, we estimate that 21 percent of all LD-2 reports may not have properly disclosed one or more previously held covered positions as required. As in our other reports, some lobbyists were still unclear about the need to disclose certain covered positions, such as paid congressional internships or certain executive agency positions. Figure 10 shows the extent to which lobbyists may not have properly disclosed one or more covered positions as required from 2010 through 2015. Lobbyists amended 7 of the 80 LD- 2 disclosure reports in our original sample to make changes to previously reported information after we contacted them. Of the 7 reports, 5 were amended after we notified the lobbyists of our review, but before we met with them. An additional 2 of the 7 reports were amended after we met with the lobbyists to review their documentation. We consistently find a notable number of amended LD-2 reports in our sample each year following notification of our review. This suggests that sometimes our contact spurs lobbyists to more closely scrutinize their reports than they would have without our review. Table 1 lists reasons lobbying firms in our sample amended their LD-1 or LD-2 reports. As part of our review, we compared contributions listed on lobbyists' and lobbying firms' LD-203 reports against those political contributions reported in the Federal Election Commission (FEC) database to identify whether political contributions were omitted on LD-203 reports in our sample. The sample of LD-203 reports we reviewed contained 80 reports with contributions and 80 reports without contributions. We estimate that overall for 2015, lobbyists failed to disclose one or more reportable contributions on 4 percent of reports. For this element in prior reports, we reported an estimated minimum percentage of reports based on a one-sided 95 percent confidence interval rather than the estimated proportion as shown here. Estimates in the table have a maximum margin of error of 9.6 percentage points. The year to year differences are not statistically significant. Table 2 illustrates that from 2010 through 2015 most lobbyists disclosed FEC reportable contributions on their LD-203 reports as required. In 2015, 10 LD-203 reports were amended in response to our review. As part of our review, 77 different lobbying firms were included in our 2015 sample of LD-2 disclosure reports. Consistent with prior reviews, most lobbying firms reported that they found it "very easy" or "somewhat easy" to comply with reporting requirements. Of the 77 different lobbying firms in our sample, 23 reported that the disclosure requirements were "very easy," 42 reported them "somewhat easy," and 10 reported them "somewhat difficult" or "very difficult". (See figure 11). Most lobbying firms we surveyed rated the definitions of terms used in LD-2 reporting as "very easy" or "somewhat easy" to understand with regard to meeting their reporting requirements. This is consistent with prior reviews. Figures 12 through 16 show what lobbyists reported as their ease of understanding the terms associated with LD-2 reporting requirements from 2012 through 2015. U.S. Attorney's Office (USAO) officials stated that they continue to have sufficient personnel resources and authority under the LDA to enforce reporting requirements. This includes imposing civil or criminal penalties for noncompliance. Noncompliance refers to a lobbyist's or lobbying firm's failure to comply with the LDA. According to USAO officials, they have one contract paralegal specialist who primarily handles LDA compliance work. Additionally, there are five civil attorneys and one criminal attorney whose responsibilities include LDA compliance work. In addition, USAO officials stated that the USAO participates in a program that provides Special Assistant United States Attorneys (SAUSA) to the USAO. Some of the SAUSAs assist with LDA compliance by working with the Assistant United States Attorneys and contract paralegal specialist to contact referred lobbyists or lobbying firms who do not comply with the LDA. USAO officials stated that lobbyists resolve their noncompliance issues by filing LD-2s, LD-203s, or LD-2 amendments or by terminating their registration, depending on the issue. Resolving referrals can take anywhere from a few days to years, depending on the circumstances. During this time, USAO uses summary reports from its database to track the overall number of referrals that are pending or become compliant as a result of the lobbyist receiving an e-mail, phone call, or noncompliance letter. Referrals remain in the pending category until they are resolved. The category is divided into the following areas: "initial research for referral," "responded but not compliant," "no response /waiting for a response," "bad address," and "unable to locate." USAO focuses its enforcement efforts primarily on the responded but not compliant group. Officials say USAO attempts to review pending cases every 6 months. Officials told us that after four unsuccessful attempts have been made, USAO confers with both the Secretary of the Senate and the Clerk of the House to determine whether further action should be taken. In some cases where the lobbying firm is repeatedly referred for not filing disclosure reports but does not appear to be actively lobbying, USAO suspends enforcement actions. USAO monitors these firms, including checking the lobbying disclosure databases maintained by the Secretary of the Senate and the Clerk of the House. If the lobbyist begins to lobby again, USAO will resume enforcement actions. USAO received 2,417 referrals from both the Secretary of the Senate and the Clerk of the House for failure to comply with LD-2 reporting requirements cumulatively for filing years 2009 through 2014. Table 3 shows the number and status of the referrals received and the number of enforcement actions taken by USAO in its effort to bring lobbying firms into compliance. Enforcement actions include USAO attempts to bring lobbyists into compliance through letters, e-mails, and calls About 52 percent (1,256 of 2,417) of the total referrals received are now compliant because lobbying firms either filed their reports or terminated their registrations. In addition, some of the referrals were found to be compliant when USAO received the referral. Therefore no action was taken. This may occur when lobbying firms respond to the contact letters from the Secretary of the Senate and Clerk of the House after USAO received the referrals. About 48 percent (1,150 of 2,417) of referrals are pending further action because USAO could not locate the lobbying firm, did not receive a response from the firm after an enforcement action, or plans to conduct additional research to determine if it can locate the lobbying firm. The remaining 11 referrals did not require action or were suspended because the lobbyist or client was no longer in business or the lobbyist was deceased. LD-203 referrals consist of two types: LD-203(R) referrals represent lobbying firms that have failed to file LD-203 reports for their lobbying firm and LD-203 referrals represent the lobbyists at the lobbying firm who have failed to file their individual LD-203 reports as required. USAO received 1,672 LD-203(R) referrals (cumulatively from 2009 through 2014) and 2,979 LD-203 referrals (cumulatively from 2009 through 2013 from the Secretary of the Senate and the Clerk of the House for lobbying firms and lobbyists for noncompliance with reporting requirements. LD-203 referrals may be more complicated than LD-2 referrals because both the lobbying firm and the individual lobbyists within the firm are each required to file a LD-203. However, according to USAO officials, lobbyists employed by a lobbying firm typically use the firm's contact information and not the lobbyists personal contact information. This makes it difficult to locate a lobbyist who may have left the firm. USAO officials reported that, while many firms have assisted USAO by providing contact information for lobbyists, they are not required to do so. According to officials, USAO has difficulty pursuing LD-203 referrals for lobbyists who have departed a firm without leaving forwarding contact information with the firm. While USAO utilizes web searches and online databases including LinkedIn, Lexis/Nexis, Glass Door, Facebook and the Sunlight Foundation websites to find these missing lobbyists, it is not always successful. When USAO is unable to locate lobbyists because it does not have forwarding contact information to find a lobbyist who has left a firm, USAO has no recourse to pursue enforcement action, according to officials. Table 4 shows the status of LD-203 (R) referrals received and the number of enforcement actions taken by USAO in its effort to bring lobbying firms into compliance. About 53 percent (888 of 1,672) of the lobbying firms referred by the Secretary of the Senate and Clerk of the House for noncompliance from the 2009 through 2014 reporting periods are now considered compliant because firms either filed their reports or terminated their registrations. About 47 percent (783 of 1,672) of the referrals are pending further action. Table 5 shows that USAO received 2,979 LD-203 referrals from the Secretary of the Senate and Clerk of the House for lobbyists who failed to comply with LD-203 reporting requirements for calendar years 2009 through 2013. It also shows the status of the referrals received and the number of enforcement actions taken by USAO in its effort to bring lobbyists into compliance. In addition, table 5 shows that 46 percent (1,366 of 2,979) of the lobbyists had come into compliance by filing their reports or are no longer registered as a lobbyist. About 54 percent (1,604 of 2,779) of the referrals are pending further action because USAO could not locate the lobbyist, did not receive a response from the lobbyist, or plans to conduct additional research to determine if it can locate the lobbyist. Table 6 shows that USAO received LD-203 referrals from the Secretary of the Senate and Clerk of the House for 4,131 lobbyists who failed to comply with LD-203 reporting requirements for any filing year from 2009 through 2013. It also shows the status of compliance for individual lobbyists listed on referrals to USAO. About 50 percent (2,070 of 4,131) of the lobbyists had come into compliance by filing their reports or are no longer registered as a lobbyist. About 50 percent (2,061 of 4,131) of the referrals are pending action because USAO could not locate the lobbyists, did not receive a response from the lobbyists, or plans to conduct additional research to determine if it can locate the lobbyists. USAO officials said that many of the pending LD-203 referrals represent lobbyists who no longer lobby for the lobbying firms affiliated with the referrals, even though these lobbying firms may be listed on the lobbyist's LD-203 report. According to USAO officials, lobbyists who repeatedly fail to file reports are labeled chronic offenders and referred to one of the assigned attorneys for follow-up. According to officials, USAO monitors and reviews chronic offenders to determine appropriate enforcement actions. This may lead to settlements or other successful civil actions. However, instead of pursuing a civil penalty, USAO may decide to pursue other actions such as closing out referrals if the lobbyist appears to be inactive. According to USAO, in these cases, there would be no benefit in pursuing enforcement actions. In August 2015, USAO finalized a settlement in the amount of $125,000 for the Carmen Group to address failure to file for several years. This is the largest civil penalty assessed under the LDA to date. USAO reports that it is currently collecting payments on two cases which will be closed soon and has three cases which should result in further action in the next 6 months. We provided a draft of this report to the Attorney General for review and comment. The Department of Justice provided updated data which we incorporated into the report. We are sending copies of this report to the Attorney General, Secretary of the Senate, Clerk of the House of Representatives, and interested congressional committees and members. In addition, this 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) 512-2717 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to determine the extent to which lobbyists are able to demonstrate compliance with the Lobbying Disclosure Act of 1995, as amended (LDA) by providing documentation to support information contained on registrations and reports filed under the LDA; to identify challenges and potential improvements to compliance, if any; and to describe the resources and authorities available to the U.S. Attorney's Office for the District of Columbia (USAO), its role in enforcing LDA compliance, and the efforts it has made to improve LDA enforcement. We used information in the lobbying disclosure database maintained by the Clerk of the House of Representatives (Clerk of the House). To assess whether these disclosure data were sufficiently reliable for the purposes of this report, we reviewed relevant documentation and consulted with knowledgeable officials. Although registrations and reports are filed through a single web portal, each chamber subsequently receives copies of the data and follows different data-cleaning, processing, and editing procedures before storing the data in either individual files (in the House) or databases (in the Senate). Currently, there is no means of reconciling discrepancies between the two databases caused by the differences in data processing. For example, Senate staff told us during previous reviews they set aside a greater proportion of registration and report submissions than the House for manual review before entering the information into the database. As a result, the Senate database would be slightly less current than the House database on any given day pending review and clearance. House staff told us during previous reviews that they rely heavily on automated processing. In addition, while they manually review reports that do not perfectly match information on file for a given lobbyist or client, staff members will approve and upload such reports as originally filed by each lobbyist, even if the reports contain errors or discrepancies (such as a variant on how a name is spelled). Nevertheless, we do not have reasons to believe that the content of the Senate and House systems would vary substantially. Based on interviews with knowledgeable officials and a review of documentation, we determined that House disclosure data were sufficiently reliable for identifying a sample of quarterly disclosure (LD-2) reports and for assessing whether newly filed lobbyists also filed required reports. We used the House database for sampling LD- 2 reports from the third and fourth quarters of 2014 and the first and second quarters of 2015, as well as for sampling year-end 2014 and midyear 2015 political contributions (LD-203) reports. We also used the database for matching quarterly registrations with filed reports. We did not evaluate the Offices of the Secretary of the Senate or the Clerk of the House, both of which have key roles in the lobbying disclosure process. However, we did consult with officials from each office. They provided us with general background information at our request. To assess the extent to which lobbyists could provide evidence of their compliance with reporting requirements, we examined a stratified random sample of 80 LD-2 reports from the third and fourth quarters of 2014 and the first and second quarters of 2015. We excluded reports with no lobbying activity or with income or expenses of less than $5,000 from our sampling frame. We drew our sample from 45,565 activity reports filed for the third and fourth quarters of 2014 and the first and second quarters of 2015 available in the public House database, as of our final download date for each quarter. Our sample of LD-2 reports was not designed to detect differences over time. However, we conducted tests of significance for changes from 2010 to 2015 for the generalizable elements of our review and found that results were generally consistent from year to year and there were few statistically significant changes after using a Bonferroni adjustment to account for multiple comparisons. These changes are identified in the report. While the results provide some confidence that apparent fluctuations in our results across years are likely attributable to sampling error, the inability to detect significant differences may also be related to the nature of our sample, which was relatively small and was designed only for cross-sectional analysis. Our sample is based on a stratified random selection and it is only one of a large number of samples that we may have drawn. Because each sample could have provided different estimates, we express our confidence in the precision of our particular sample's results as a 95 percent confidence interval. This interval would contain the actual population value for 95 percent of the samples that we could have drawn. The percentage estimates for LD-2 reports have 95 percent confidence intervals of within plus or minus 12.1 percentage points or fewer of the estimate itself. the amount of income reported for lobbying activities; the amount of expenses reported on lobbying activities; the names of those lobbyists listed in the report; the houses of Congress and federal agencies that they lobbied and the issue codes listed to describe their lobbying activity. After reviewing the survey results for completeness, we interviewed lobbyists and lobbying firms to review the documentation they reported as having on their online survey for selected elements of their respective LD- 2 report. Prior to each interview, we conducted a search to determine whether lobbyists properly disclosed their covered position as required by the LDA. We reviewed the lobbyists' previous work histories by searching lobbying firms' websites, LinkedIn, Leadership Directories, Legistorm, and Google. Prior to 2008, lobbyists were only required to disclose covered official positions held within 2 years of registering as a lobbyist for the client. The Honest Leadership and Open Government Act of 2007 amended that time frame to require disclosure of positions held 20 years before the date the lobbyists first lobbied on behalf of the client. Lobbyists are required to disclose previously held covered official positions either on the client registration (LD-1) or on an LD-2 report. Consequently, those who held covered official positions may have disclosed the information on the LD-1 or a LD-2 report filed prior to the report we examined as part of our random sample. Therefore, where we found evidence that a lobbyist previously held a covered official position, and that information was not disclosed on the LD-2 report under review, we conducted an additional review of the publicly available Secretary of the Senate or Clerk of the House database to determine whether the lobbyist properly disclosed the covered official position on a prior report or LD-1. Finally, if a lobbyist appeared to hold a covered position that was not disclosed, we asked for an explanation at the interview with the lobbying firm to ensure that our research was accurate. In previous reports, we reported the lower bound of a 90 percent confidence interval to provide a minimum estimate of omitted covered positions and omitted contributions with a 95 percent confidence level. We did so to account for the possibility that our searches may have failed to identify all possible omitted covered positions and contributions. As we have developed our methodology over time, we are more confident in the comprehensiveness of our searches for these items. Accordingly, this report presents the estimated percentages for omitted contributions and omitted covered positions, rather than the minimum estimates. As a result, percentage estimates for these items will differ slightly from the minimum percentage estimates presented in prior reports. In addition to examining the content of the LD-2 reports, we confirmed whether the most recent LD-203 reports had been filed for each firm and lobbyist listed on the LD-2 reports in our random sample. Although this review represents a random selection of lobbyists and firms, it is not a direct probability sample of firms filing LD-2 reports or lobbyists listed on LD-2 reports. As such, we did not estimate the likelihood that LD-203 reports were appropriately filed for the population of firms or lobbyists listed on LD-2 reports. To determine if the LDA's requirement for lobbyists to file a report in the quarter of registration was met for the third and fourth quarters of 2014 and the first and second quarters of 2015, we used data filed with the Clerk of the House to match newly filed registrations with corresponding disclosure reports. Using an electronic matching algorithm that includes strict and loose text matching procedures, we identified matching disclosure reports for 2,743, or 88.1 percent, of the 3,112 newly filed registrations. We began by standardizing client and lobbyist names in both the report and registration files (including removing punctuation and standardizing words and abbreviations, such as "company" and "CO"). We then matched reports and registrations using the House identification number (which is linked to a unique lobbyist-client pair), as well as the names of the lobbyist and client. For reports we could not match by identification number and standardized name, we also attempted to match reports and registrations by client and lobbyist name, allowing for variations in the names to accommodate minor misspellings or typos. For these cases, we used professional judgment to determine whether cases with typos were sufficiently similar to consider as matches. We could not readily identify matches in the report database for the remaining registrations using electronic means. To assess the accuracy of the LD-203 reports, we analyzed stratified random samples of LD-203 reports from the 29,189 total LD-203 reports. The first sample contains 80 reports of the 9,348 reports with political contributions and the second contains 80 reports of the 19,841 reports listing no contributions. Each sample contains 40 reports from the year- end 2014 filing period and 40 reports from the midyear 2015 filing period. The samples from 2015 allow us to generalize estimates in this report to either the population of LD-203 reports with contributions or the reports without contributions to within a 95 percent confidence interval of within plus or minus 9.6 percentage points or fewer. Although our sample of LD- 203 reports was not designed to detect differences over time, we conducted tests of significance for changes from 2010 to 2015 and found no statistically significant differences after adjusting for multiple comparisons. While the results provide some confidence that apparent fluctuations in our results across years are likely attributable to sampling error, the inability to detect significant differences may also be related to the nature of our sample, which was relatively small and designed only for cross- sectional analysis. We analyzed the contents of the LD-203 reports and compared them to contribution data found in the publicly available Federal Elections Commission's (FEC) political contribution database. We consulted with staff at FEC responsible for administering the database. We determined that the data are sufficiently reliable for our purposes. We compared the FEC-reportable contributions on the LD-203 reports with information in the FEC database. The verification process required text and pattern matching procedures so we used professional judgment when assessing whether an individual listed is the same individual filing an LD-203. For contributions reported in the FEC database and not on the LD-203 report, we asked the lobbyists or organizations to explain why the contribution was not listed on the LD-203 report or to provide documentation of those contributions. As with covered positions on LD-2 disclosure reports, we cannot be certain that our review identified all cases of FEC-reportable contributions that were inappropriately omitted from a lobbyist's LD-203 report. We did not estimate the percentage of other non-FEC political contributions that were omitted because they tend to constitute a small minority of all listed contributions and cannot be verified against an external source. To identify challenges to compliance, we used a structured web-based survey and obtained the views from 77 different lobbying firms included in our sample on any challenges to compliance. The number of different lobbying firms is 77, which is less than our sample of 80 reports because some lobbying firms had more than one LD-2 report included in our sample. We calculated responses based on the number of different lobbying firms that we contacted rather than the number of interviews. Prior to our calculations, we removed the duplicate lobbying firms based on the most recent date of their responses. For those cases with the same response date, the decision rule was to keep the cases with the smallest assigned case identification number. To obtain their views, we asked them to rate their ease with complying with the LD-2 disclosure requirements using a scale of "very easy," "somewhat easy," "somewhat difficult," or "very difficult." In addition, using the same scale we asked them to rate the ease of understanding the terms associated with LD-2 reporting requirements. To describe the resources and authorities available to the U.S. Attorney's Office for the District of Columbia (USAO) and its efforts to improve its LDA enforcement, we interviewed USAO officials. We obtained information on the capabilities of the system officials established to track and report compliance trends and referrals and on other practices established to focus resources on LDA enforcement. USAO provided us with reports from the tracking system on the number and status of referrals and chronically noncompliant lobbyists and lobbying firms. The mandate does not require us to identify lobbyists who failed to register and report in accordance with the LDA requirements, or determine for those lobbyists who did register and report whether all lobbying activity or contributions were disclosed. Therefore, this was outside the scope of our audit. We conducted this performance audit from May 2015 to March 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. The random sample of lobbying disclosure reports we selected was based on unique combinations of house ID, lobbyist and client names (see table 7). See table 8 for a list of the lobbyists and lobbying firms from our random sample of lobbying contributions reports with contributions. See table 9 for a list of the lobbyists and lobbying firms from our random sample of lobbying contribution reports without contributions. In addition to the contact named above, Clifton G. Douglas, Jr. (Assistant Director), Shirley Jones (Assistant General Counsel) and Katherine Wulff (analyst-in-charge) supervised the development of this report. James Ashley, Amy Bowser, Steven Flint, Kathleen Jones, and Amanda Miller, Anna Maria Ortiz, Colleen Taylor, Stewart Small and Robert Robinson made key contributions to this report. Assisting with lobbyist file reviews were Angeline Bickner, Brett Caloia, Michelle Duren, Christopher Falcone, Jennifer Felder, Joseph Fread, Lauren Friedman, Samantha Hsieh, Jennifer Kamara, Jessica Lewis, Alan Rozzi, Shelley Rao, and Edith Yuh.

The LDA, as amended, requires lobbyists to file quarterly lobbying disclosure reports and semiannual reports on certain political contributions. The law also requires that GAO annually audit lobbyists' compliance with the LDA. GAO's objectives were to (1) determine the extent to which lobbyists can demonstrate compliance with disclosure requirements, (2) identify challenges to compliance that lobbyists report, and (3) describe the resources and authorities available to USAO in its role in enforcing LDA compliance, and the efforts USAO has made to improve enforcement. This is GAO's ninth report under the mandate. GAO reviewed a stratified random sample of 80 quarterly disclosure LD-2 reports filed for the third and fourth quarters of 2014 and the first and second quarters of 2015. GAO also reviewed two random samples totaling 160 LD-203 reports from year-end 2014 and midyear 2015. This methodology allowed GAO to generalize to the population of 45,565 disclosure reports with $5,000 or more in lobbying activity, and 29,189 reports of federal political campaign contributions. GAO met with officials from USAO to obtain status updates on its efforts to focus resources on lobbyists who fail to comply. GAO provided a draft of this report to the Attorney General for review and comment. The Department of Justice provided updated data which GAO incorporated into the report. GAO is not making any recommendations in this report. For the 2015 reporting period, most lobbyists provided documentation for key elements of their disclosure reports to demonstrate compliance with the Lobbying Disclosure Act of 1995, as amended (LDA). For lobbying disclosure (LD-2) reports filed during the third and fourth quarter of 2014 and the first and second quarter of 2015, GAO estimates that 88 percent of lobbyists filed initial LD-2 reports as required for new lobbying registrations (lobbyists are required to file LD-2 reports for the quarter in which they first register); the figure below describes the filing process and enforcement; 93 percent could provide documentation for income and expenses, but on 31 percent of these LD-2 reports lobbyists did not correctly follow the guidance to round to the nearest $10,000; and 85 percent filed year-end LD-203 2014 reports as required. These findings are generally consistent with prior reports GAO issued for the 2010 through 2014 reporting periods. As in our other reports, some lobbyists were still unclear about the need to disclose certain covered positions, such as paid congressional internships or certain executive agency positions. GAO estimates that 21 percent of all LD-2 reports may not have properly disclosed one or more previously held covered positions. However, over the past several years of reporting on lobbying disclosure, GAO has found that most lobbyists in the sample rated the terms associated with LD-2 reporting as "very easy" or "somewhat easy" to understand with regard to meeting their reporting requirements. The U.S. Attorney's Office for the District of Columbia (USAO) stated it has sufficient resources and authority to enforce compliance with the LDA. USAO continued its efforts to bring lobbyists into compliance by prompting them to file reports or applying civil penalties. In August 2015, USAO finalized a $125,000 settlement with the Carmen Group, the largest civil penalty settlement for noncompliance.

Federal statutes and regulations collectively require agencies to establish an ethics program intended to preserve and promote public confidence in the integrity of federal officials through their self-reporting of potential conflicts-of-interest (financial disclosure), through knowledge of post- government employment restrictions (training), and through independent investigations of alleged wrongdoing. A key objective of an ethics program is to provide a formal and systematic means for agencies to prevent and detect ethics violations. The elements of a comprehensive ethics program include (1) a written policy of standards of ethical conduct and ethics guidance; (2) effective training and dissemination of information on ethical standards, procedures, and compliance; (3) monitoring to ensure the ethics program is followed; (4) periodically evaluating the effectiveness of the ethics program; and (5) levying disciplinary measures for misconduct and for failing to take reasonable steps to prevent or detect misconduct. The joint ethics regulation is DOD's written policy establishing its ethics program. The ethics program emphasizes training and counseling to raise awareness of standards of ethical behavior and to prevent misconduct. DOD's ethics training requirement includes educating employees about the procedures to follow when considering employment outside of DOD and the post-government employment restrictions that may apply and to inform employees of the resources that are available to them to address ethics questions and concerns. The training includes an initial briefing to introduce employees to ethics regulations, such as conflict-of-interest and procurement integrity rules, and exit briefings to discuss restrictions that may apply once employees leave government service. Additional ethics briefings are held for certain senior employees on an annual basis. DOD's ethics counseling aims to address employee concerns and questions as they arise. The training and counseling is also to raise awareness so that DOD employees can recognize misconduct and report the matter to ethics officials, inspectors general officials, the head of the command or agency, criminal investigative offices, or any number of DOD hotlines. Responsibility for recognizing and reporting potential misconduct rests with all DOD employees. Additionally, the joint ethics regulation requires ethics officials to track and follow up on reports of potential misconduct. Finally, the DOD regulation requires periodic evaluations of local activities, which implement DOD's ethics program, to ensure they meet standards. Defense regulations provide that government contractors should have standards of conduct and internal control systems to promote ethical standards, facilitate timely discovery and disclosure of improper conduct in connection with government contracts, and ensure corrective measures are promptly implemented. The regulations provide that contractors should have a written code of business ethics and conduct, an ethics training program for all employees, and to periodically review practices, procedures, policies, and internal controls for compliance with standards of conduct. The federal government has a host of laws and regulations governing the conduct of its employees and contractors. The Compilation of Federal Ethics laws prepared by the United States Office of Government Ethics includes nearly 100 pages of statutes alone. For the purposes of this report, however, we note a few laws relevant to DOD officials whose responsibilities involved participation in DOD's acquisition process. The statutes are complex, and the brief summaries here are intended only to provide context for the issues discussed in this report. The principal restrictions concerning employment for federal employees after leaving government service are found in 18 U.S.C. 207 and 41 U.S.C. 423 (procurement integrity). The title 18 provision generally prohibits former federal employees and their supervisors from representing non- government entities concerning matters they handled while working for the federal government. Violation of the statute entails criminal penalties. In contrast, the title 41 provision more narrowly applies to contracting officials and also entails civil and administrative penalties. The provision generally restricts employment with a contractor if the official performed certain functions involving the contractor and a contract valued in excess of $10,000,000. The law, however, permits employees to accept compensation "from any division or affiliate of a contractor that does not produce the same or similar products or services" that were produced under the contract. There are also provisions related to post-government employment that are applicable to federal employees' actions while still in federal service. 18 U.S.C. 208 prohibits government employees from participating in matters in which they have a financial interest. The statute imposes criminal penalties on federal employees who begin negotiating future employment without first disqualifying themselves from any duties related to the potential employer. In addition 41 U.S.C. 423(c) requires officials who participate personally and substantially in a procurement exceeding $100,000 to report promptly contacts by bidders or offerors regarding future employment. The official must either reject the possibility of employment or disqualify himself or herself from further participation in the procurement. DOD's joint ethics regulation, administered by DOD's General Counsel, requires DOD to provide training and counseling to educate employees regarding applicable ethics laws and regulations. To implement its ethics program, DOD relies on local ethics counselors within DOD's military services and agencies to train and counsel employees on conflict-of- interest and procurement integrity rules. Training is to raise individual awareness and to enable DOD employees to recognize misconduct and report any matter to appropriate officials. The joint ethics regulation also requires ethics officials to track and follow up on reports of misconduct. However, DOD lacks knowledge to evaluate the ability of its training and counseling efforts to prevent misconduct and ensure the public trust. DOD has delegated responsibility for training and counseling to more than 2,000 ethics counselors assigned to commands and organizations worldwide. These ethics counselors administer ethics training and briefings, provide advice and counseling, and review employees' financial disclosure documents as outlined in the joint ethics regulation. At the 12 DOD locations we visited we found training and counseling efforts varied in the content of ethics information provided, who is required to attend training and counseling, and how often the training and counseling is provided. For example, some ethics counselors conduct extensive discussions about employees' plans upon separation at the exit briefing, some provide written advice, and others distribute pamphlets summarizing employment restrictions. Some ethics counselors have supplemented their annual training because they do not believe that the minimum requirements in the joint ethics regulation--an annual ethics briefing--are sufficient to ensure employees understand employment restrictions both during and after they leave government service. For example, a Navy ethics office offers live, interactive ethics training to all personnel at its location approximately three to four times a year. DOD currently evaluates its ethics program's performance in terms of process indicators--such as the number of financial disclosure forms completed, the number of ethics counselors, and the amount of time spent by ethics counselors on training and counseling services. According to DOD officials, the information on the number of ethics counselors at each location and the amount of time they spend with employees can provide insight into the level of resources used. However, these process indicators do not provide DOD knowledge of which employees are subject to restrictions, which employees receive training and counseling, the quality and content of training, and who is leaving DOD for employment with contractors. For example, DOD does not know if the population critical to the acquisition process, those employees covered by procurement integrity restrictions, are trained. Further, many ethics counselors could not provide evidence that employees received the annual ethics training. Additionally, DOD does not know whether the training and counseling includes all relevant conflict-of-interest and procurement integrity rules. As shown in Table 1, we found that the ethics counselors we interviewed did not consistently include information on the restrictions provided for in 18 U.S.C. 207, 18 U.S.C. 208, and 41 U.S.C. 423 in their annual ethics briefings for the past 3 years. Training is to raise awareness of procurement integrity and conflict-of- interest rules so DOD employees are able to recognize misconduct and report matters to appropriate officials. Ethics counselors are required to (1) review the facts of an allegation of misconduct and report the allegation to appropriate investigative organizations or the head of the DOD command of the suspected violator and the appropriate contracting officer, if applicable; (2) follow-up with the investigative office until a final determination is made on the allegation; and (3) periodically report on the status of the allegation of misconduct to the military service and defense agencies head ethics official. However, when we asked the ethics officials for information on allegations of misconduct and the status of investigations, they were not tracking or following-up on the status of alleged misconduct cases. For information on reported allegations of potential misconduct the ethics officials referred us to the inspectors general offices. According to inspectors general officials, DOD has not made an attempt to determine the extent that potential misconduct in terms of conflict-of-interest and procurement integrity is reported. The information on reports of potential misconduct is maintained in various files and databases by multiple offices. As a result, DOD has not determined if reports of potential misconduct are increasing or decreasing and why such a change may be occurring. DOD Inspector General's hotline official told us that anecdotal evidence indicates post-government employment misconduct is a problem, but DOD has no basis for assessing the severity. At the locations we visited, we obtained information from the inspector general officials demonstrating at least 53 cases of potential misconduct reported in the last 5 years. However, ethics officials at the Office of Secretary of Defense and the military headquarters we spoke with were not tracking the status of the reports of potential misconduct. Lacking this knowledge DOD has no assurance that ethics-related laws and regulations are properly followed and that appropriate administrative or disciplinary action is taken. Also, the information on potential misconduct can help DOD understand the extent of the problem and the risk such behavior poses. Concerned about the effectiveness of its efforts to minimize misconduct and prevent violations of conflict-of-interest and procurement integrity rules, DOD has taken actions aimed at enhancing its ethics program. In October 2004, the Deputy Secretary of Defense required (1) personnel who file public financial disclosure reports to certify that they are aware of and have not violated employment restrictions, (2) DOD components to include training on employment restrictions in annual ethics briefings to financial disclosure filers, and (3) DOD components to provide guidance on employment restrictions to all personnel leaving government service. While this directive clarifies the content required in DOD's training and counseling, no provisions were made to provide knowledge about whether the policy is implemented. Therefore, it is unclear at this time the extent that the actions called for in the directive will improve DOD's effort to prevent violations of post-government employment restrictions. In November 2004, the acting Undersecretary of Defense asked the Defense Science Board to establish a task force to assess whether DOD has adequate management and oversight processes to ensure the integrity of acquisition decisions. The task force report was due January 31, 2005, and is expected to recommend options for improving checks and balances to protect the integrity of procurement decisions. Currently, the Defense Science Board is briefing preliminary findings to senior DOD officials and Congress. Acknowledging the risk to the acquisition process the United States Attorney for the Eastern District of Virginia announced, in February 2005, the creation of a procurement fraud working group to increase prevention and prosecution of fraud in the federal procurement process. This working group will facilitate the exchange of information among participating agencies, including DOD, and assist them in developing new strategies to prevent and to promote early detection of procurement fraud. Among the ideas and initiatives to be undertaken by the working group are efforts to detect ethics violations and conflicts of interest by current and former agency officials. Defense acquisition regulations provide that government contractors should have standards of conduct and internal control systems that promote ethical standards, facilitate timely discovery and disclosure of improper conduct, and ensure corrective measures are promptly implemented. However, DOD cannot identify nor take action to mitigate risks because it lacks knowledge of its contractors' efforts to promote ethical standards. Recently a major defense contractor chartered an independent review of its hiring processes of current and former government employees. This review found both gaps in the company's procedures and a failure to follow written policy, in some cases. Weaknesses in the contractor's policies, procedures, and structure were identified, and recommendations were made for actions to be taken to mitigate risks. Defense regulations provide that government contractors must conduct themselves with the highest degree of integrity and honesty. Specifically, defense regulations provide that contractors should have (1) a written code of ethical conduct; (2) ethics training for all employees; (3) periodic reviews of its compliance with its code of ethical conduct; (4) systems to detect improper conduct in connection with government contracts; and (5) processes to ensure corrective actions are taken. The seven contractors we visited indicated that DOD had not discussed or reviewed their practices for hiring current and former government employees. While DOD evaluates components of contractors' financial and management controls, neither the Defense Contract Management Agency nor the Defense Contract Audit Agency--the agencies responsible for oversight of defense contractors' operations--had assessed the adequacy of contractors' practices for hiring current and former government employees. DOD's lack of knowledge of the contractors' hiring practices and policies prevents DOD from being assured that effective controls are in place to address the risks posed by contractors. In February 2004, a major defense contractor hired an outside entity to conduct an independent evaluation of its hiring policies and practices. This review found that the company relied excessively on employees to self-monitor their compliance with post-government employment restrictions. The review concluded that by relying on employees to monitor their own behavior, the company increased the risk of noncompliance, due to either employees' willful misconduct or failure to understand complex ethics rules. The independent evaluation of the company's hiring policies and practices illustrates an opportunity for DOD to leverage knowledge of contractors' practices to identify and mitigate risks. In general, the review identified lack of management controls as a weakness in the company's ethics program. Specifically, the review found the company lacked (1) a single focal point for managing its hiring process; (2) centralized management of its hiring process, which made it difficult to implement consistent procedures and effectively monitor efforts; (3) consistent maintenance of pre-hire records; (4) internal audits of its process for hiring former government employees; and (5) sufficient emphasis from senior company management to the ethics program in general and the training program in particular, among other things. As a result of these weaknesses, the company did not know whether employees were following its written policies and procedures addressing post- government employment restrictions. Some contractors we spoke with stated that they used the lessons learned from the company's independent review to assess their own policies for recruiting, hiring, and assigning of current and former government employees to ensure they are complying with ethical standards. For example, some of the contractors are reviewing company personnel files to identify employees trained as well as former government employees hired. Some contractors were in the process of identifying methods to ensure that information on the hiring and training of former government employees is readily available, such as corporate personnel systems that will provide electronic files to allow the contractor to identify employees with prior DOD experience including contracts on which they worked as well as monitor employees' post-government career path. Similarly, knowledge of conditions at the company and at other contractors could provide DOD with information to better identify and understand risks to its acquisition process. In an environment where the risk of ethical misconduct can be costly, DOD is missing opportunities to raise the level of confidence that its safeguards protect the public trust. Better knowledge of training and counseling efforts is essential to ensuring that the large numbers of employees who leave DOD for contractors each year are aware of and abide by conflict-of-interest and procurement integrity rules. Finally, enhanced awareness of contractor programs would enable DOD to assess whether the public trust is protected. We are making three recommendations to the Secretary of Defense to take actions to improve DOD's knowledge and oversight of its ethics program and contractors' ethics programs to raise the level of confidence that DOD's business is conducted with impartiality and integrity: Regularly assess training and counseling efforts for quality and content, to ensure that individuals covered by conflict-of-interest and procurement integrity rules receive training and counseling that meet standards promulgated by DOD Standards of Conduct Office. Ensure ethics officials, as required by the joint ethics regulation, track and report on the status of alleged misconduct to the military services and defense agencies head ethics officials. Assess, as appropriate, contractor ethics programs in order to facilitate awareness and mitigation of risks in DOD contracting relationships. DOD provided written comments on a draft of this report. DOD concurred with two of our recommendations and partially concurred with the third. DOD concurred with our recommendation to regularly assess training and counseling efforts for quality and content, and stated that it currently assesses and will continue to assess agencies' training and counseling efforts to ensure that personnel required to receive such training do so in accordance with applicable standards. As discussed in this report, DOD currently assesses its ethics program's performance in terms of process indicators--for example, number of financial disclosure forms completed, the number of ethics counselors, and the amount of time spent by ethics counselors on training and counseling. However, as DOD moves forward, its assessments should also provide DOD knowledge of which employees are subject to restrictions, which employees receive training and counseling, and the quality and content of training to ensure its ethics program achieves the goal of raising awareness of conflict-of-interest and procurement integrity rules in order to prevent ethical misconduct. DOD concurred with our recommendation that DOD assess, as appropriate, contractor ethics programs, and stated that it intends to call upon companies throughout the defense industry to reexamine their ethics programs and share best practices. DOD also stated that the recommendation is currently implemented when contracting officers make, prior to awarding a contract, an affirmative determination of responsibility, which includes consideration of the potential contractor's business practices and the potential contractor's integrity. We believe assessments of contractor ethics programs would enhance contracting officers' ability to make such determinations. Knowledge about contractors' policies and practices for hiring former and current DOD employees would provide DOD more assurance that effective controls are in place to address the risks posed by potential violations of post government employment restrictions. As recent GAO bid protest decisions illustrate, lapses in ethical behavior can have significant consequences. DOD partially concurred with our recommendation that the Secretary of Defense ensure that ethics officials, as required by the joint ethics regulation, track and report on the status of alleged misconduct to the military services and defense agencies head ethics officials. DOD stated that responsibility for tracking and reporting on the status of alleged misconduct resides with Departmental and federal law enforcement agencies, rather than ethics officials. While we agree that responsibility for enforcement should not reside with ethics officials, we believe senior DOD ethics officials should be knowledgeable concerning the scope and extent of ethics violations within the Department. Tracking alleged misconduct cases would provide senior DOD ethics officials knowledge about whether ethics-related laws and regulations are properly followed and that appropriate administrative or disciplinary action is taken. Also, information on alleged misconduct can position DOD to assess the effectiveness of its training and counseling efforts and understand the extent of the problem and the risk such behavior poses. As DOD revises its Joint Ethics Regulation, it should ensure its reporting structure provides for relaying misconduct information to senior DOD ethics officials. Finally, DOD expressed concern that our report may be misinterpreted because it does not accurately capture the full extent of DOD programs. We recognize that the Department's programs are broader than reflected in our report. Our report identifies opportunities to improve (1) DOD's efforts to train and counsel its workforce to raise awareness of ethics rules and standards as well as DOD measures of the effectiveness of these efforts and (2) DOD's knowledge of defense contractors' programs to promote ethical standards of conduct. Notwithstanding its concerns, however, we note that DOD agreed that our report identifies opportunities to strengthen safeguards for procurement integrity. DOD's comments are included in appendix II. We are sending copies of this report to the Secretary of Defense and interested congressional committees. We will provide copies to others on request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you have any questions about this report or need additional information please contact me at (202) 512-4125 or Blake Ainsworth, Assistant Director, at (202)512-4609. Other major contributors to this report were Penny Berrier, Kate Bittinger, Anne McDonough-Hughes, Holly Reil, and Karen Sloan. To address DOD's oversight of its agencies' implementation of ethics regulations we compared DOD's practices to established management guidelines. We did not determine the effectiveness of post-government employment legal restrictions or the extent to which violations of these restrictions may be occurring. In assessing DOD oversight of its programs, we used the Standards for Internal Control in the Federal Government, Internal Control Management and Evaluation Tool, Office of Management and Budget Circular A-123 regarding management accountability and control, and the United States Sentencing Commission Guidelines Manual. We applied the management control framework to DOD and DOD component ethics programs. To assess DOD's efforts to train and counsel its workforce to raise awareness and DOD measures of the effectiveness of these efforts, we met with the designated agency ethics official, their designee or ethics counselors in the Office of the Secretary of Defense, Air Force, Army, Navy, Defense Contract Management Agency. In addition to headquarters offices, we selected locations that according to the Federal Procurement Database System and DOD officials spent a large amount of money on acquisitions. Specifically, we met with officials from: (1) Standards of Conduct Office, General Counsel, Office of the Secretary of Defense; (2) General Counsel--Ethics and Personnel Office, Defense Contract Management Agency; (3) Associate Counsel--Ethics and Personnel, Eastern Region, Defense Contract Management Agency, (4) Ethics Office and Associate General Counsel (Fiscal & Administrative Law), Air Force; (5) Air Force Materiel Command, Wright Patterson Air Force Base, Air Force; (6) Electronic Systems Center, Hanscom Air Force Base, Air Force, (7) Deputy General Counsel (Ethics & Fiscal) and Standards of Conduct Office, Army; (8) Army Materiel Command, Fort Belvoir, Army; (9) Communications-Electronics Command Fort Monmouth, Army; (10) Office of General Counsel, Navy; and (11) Naval Air Systems Command, Patuxent River, Navy, (12) Naval Air Warfare Center Weapons Division, China Lake, Navy. We met with five contracting/acquisition offices and nine investigative offices at these locations. To assess DOD's knowledge of defense contractors' programs to promote ethical standards of conduct, we interviewed seven defense contractors about their ethics programs and hiring practices of former government employees. Six of the contractors are ranked in the top 10 of defense contractors based on DOD spending in fiscal year 2003. The seventh is a contractor that was in the top 100 of defense contractors based on DOD spending. We attended the annual Defense Industry Initiative Annual Best Practices Forum, 2004. In addition, we reviewed a report to the chairman and board of directors of one major defense contractor responding to concerns about the company's policies and practices for the hiring of government and former government employees. As part of these efforts, we reviewed relevant Federal ethics laws, the Federal Acquisition Regulation, Defense Federal Acquisition Regulation, DOD policies, directives and guidance governing conflict of interest and procurement integrity rules. We supplemented the DOD and DOD component ethics program information we collected by interviewing officials from the Office of Government Ethics, Department of Justice, Army Contracting Agency, Defense Acquisition Regulations Council, Office of Secretary of Defense Acquisition, Technology, and Logistics Office, World Policy Institute, and the American Federation of Government Employees. We also attended the 26th Annual Council of Governmental Ethics Laws Conference, 2004. We conducted our review from April 2004 to March 2005 in accordance with generally accepted government auditing standards.

In fiscal year 2004, the Department of Defense (DOD) spent more than $200 billion to purchase goods and services. To help ensure defense contracts are awarded fairly and current and former employees do not use their knowledge of DOD acquisition activities to gain financial or other benefits, DOD personnel are required to conduct themselves in a manner that meets federal ethics rules and standards. Regulations require DOD to implement an ethics program and provide that contractors meet certain ethics standards. For this report, GAO assessed (1) DOD's efforts to train and counsel its workforce to raise awareness of ethics rules and standards as well as DOD measures of the effectiveness of these efforts and (2) DOD's knowledge of defense contractors' programs to promote ethical standards of conduct. To implement its ethics program, DOD has delegated responsibility for training and counseling employees on conflict-of-interest and procurement integrity rules to more than 2,000 ethics counselors in DOD's military services and agencies. These efforts vary in who is required to attend training and counseling, the content of ethics information provided, and how often the training and counseling is provided. While some variation may be warranted, DOD lacks the knowledge needed to determine whether local efforts are meeting the objectives of its ethics program--in large part because DOD does not systematically capture information on the quality and content of the training and counseling or employee activity as they relate to ethics rules and restrictions. Specifically, ethics counselors were unable to tell us if people subject to procurement integrity rules were trained. Instead, DOD evaluates its ethics program in terms of process indicators--such as the number of people filing financial disclosure forms, the number of ethics officials providing training and counseling services, and the amount of time ethics officials spend on such activities--which do not provide metrics to assess the effectiveness of local training and counseling efforts. DOD also lacks adequate information on the number and status of allegations of potential misconduct related to conflict-of-interest and procurement integrity rules. Ethics officials did not know of 53 reported allegations of potential misconduct referred to inspectors general offices. DOD has taken several actions since October 2004 aimed at enhancing its ethics program. However, without knowledge of training, counseling, and reported allegations of misconduct, DOD is not positioned to assess the effectiveness of its efforts. DOD's knowledge of defense contractor efforts to promote ethical standards is also limited. Defense regulations provide that contractors should have ethics programs, provide ethics training for all employees and implement systems to detect improper conduct in connection with government contracts. Despite these regulations, DOD had not evaluated the hiring practices of the contractors GAO contacted. Neither the Defense Contract Management Agency nor the Defense Contract Audit Agency--the agencies responsible for oversight of defense contractors' operations--had assessed the adequacy of contractors' practices for hiring current and former government employees. An independent review of one of DOD's largest contractors found that the company lacked the management controls needed to ensure an effective ethics program. Instead, the review found that the company relied excessively on employees to self-monitor their compliance with post-government employment restrictions. The review concluded that by relying on self-monitoring, the company increased the risk of noncompliance, due to either employees' willful misconduct or failure to understand complex ethics rules.

Internet-based services using Web 2.0 technology have become increasingly popular. Web 2.0 technologies refer to a second generation of the World Wide Web as an enabling platform for Web- based communities of interest, collaboration, and interactive services. These technologies include Web logs (known as "blogs"), which allow individuals to respond online to agency notices and other postings; social-networking sites (such as Facebook and Twitter), which also facilitate informal sharing of information among agencies and individuals; video-sharing Web sites (such as YouTube), which allow users to discover, watch, and share originally created videos; "wikis," which allow individual users to directly collaborate on the content of Web pages; "podcasting," which allows users to download audio content; and "mashups," which are Web sites that combine content from multiple sources. While in the past Internet usage concentrated on sites that provide online shopping opportunities and other services, according to the Nielsen Company, today video and social networking sites have moved to the forefront, becoming the two fastest growing types of Web sites in 2009, with 87 percent more users than in 2003. Furthermore, in February 2009, usage of social networking services reportedly exceeded Web-based e-mail usage for the first time. Similarly, the number of American users frequenting online video sites has more than tripled since 2003. Some of the most popular Web 2.0 technologies in use today are social networking services, such as Facebook and Twitter. Facebook is a social networking site that lets users create personal profiles describing themselves and then locate and connect with friends, co-workers, and others who share similar interests or who have common backgrounds. According to the Nielsen Company, Facebook was the number one global social networking site in December 2009 with 206.9 million unique visitors. Twitter is a social networking and blogging site that allows users to share and receive information through short messages. According to the Nielsen Company, Twitter has been the fastest-growing social networking Web site in terms of unique visitors, increasing over 500 percent, from 2.7 million visitors in December 2008 to 18.1 million in December 2009. Federal agencies are increasingly using Web 2.0 technologies to enhance services and interactions with the public. Federal Web managers use these applications to connect to people in new ways. As of July 2010, we identified that 22 of 24 major federal agencies had a presence on Facebook, Twitter, and YouTube. Use of such technologies was endorsed in President Obama's January 2009 memorandum promoting transparency and open government. The memorandum encouraged executive departments and agencies to harness new technologies to put information about their operations and decisions online so that it would be readily available to the public. It also encouraged the solicitation of public feedback to identify information of the greatest use to the public, assess and improve levels of collaboration, and identify new opportunities for cooperation in government. Table 1 presents examples of Web 2.0 technologies and their current uses in the federal government. Federal agencies have been adapting Web 2.0 technologies to support their individual missions. For example: * The U.S. Agency for International Development (USAID) uses Facebook to inform the public about the developmental and humanitarian assistance that it is providing to different countries in the world. It also posts links to other USAID resources, including blogs, videos, and relevant news articles. * The National Aeronautics and Space Administration (NASA) uses Twitter to notify the public about the status of its missions as well as to respond to questions regarding space exploration. For example, NASA recently posted entries about its Mars Phoenix Lander mission on Twitter, which included answers to questions by individuals who followed its updates on the site. * The State Department uses YouTube and other video technology in supporting its public diplomacy efforts. The department posts YouTube videos of remarks by Secretary Clinton, daily press briefings, interviews of U.S. diplomats, and testimonies by ambassadors. It also conducted a global video contest that encouraged public participation. The department then posted the videos submitted to it on its America.gov Web site to prompt further online discussion and participation. * The Transportation Security Administration (TSA) developed a blog to facilitate an ongoing dialogue on security enhancements to the passenger screening process. The blog provides a forum for TSA to provide explanations about issues that can arise during the passenger screening process and describe the rationale for the agency's policies and practices. TSA also uses Twitter to alert subscribers to new blog posts. A program analyst in TSA's Office of Strategic Communications and Public Affairs stated that blogging encourages conversation, and provides direct and timely clarification regarding issues of public concern. While the use of Web 2.0 technologies can transform how federal agencies engage the public by allowing citizens to be more involved in the governing process, agency use of such technologies can also present challenges related to privacy, security, records management, and freedom of information. Determining how the Privacy Act of 1974 applies to government use of social media. The Privacy Act of 1974 places limitations on agencies' collection, disclosure, and use of personal information maintained in systems of records. The act describes a "record" as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines "system of records" as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. However, because of the nature of Web 2.0 technologies, identifying how the act applies to the information exchanged is difficult. Some cases may be more clear-cut than others. For example, as noted by a participant discussing Web 2.0 challenges at a recent conference sponsored by DHS, the Privacy Act clearly applies to systems owned and operated by the government that make use of Web 2.0 technologies. Government agencies may also take advantage of commercial Web 2.0 offerings, in which case they are likely to have much less control over the systems that maintain and exchange information. For example, a government agency that chooses to establish a presence on a third party provider's service, such as Facebook, could have limited control over what is done with its information once posted on the electronic venue. Given this limited control, key officials we interviewed said they are unsure about the extent to which personal information that is exchanged in such forums is protected by the provisions of the Privacy Act. Ensuring that agencies are taking appropriate steps to limit the collection and use of personal information through social media. Privacy could be compromised if clear limits are not set on how the government uses personal information to which it has access in social networking environments. Social networking sites, such as Facebook, encourage people to provide personal information that they intend to be used only for social purposes. Government agencies that participate in such sites may have access to this information and may need rules on how such information can be used. While such agencies cannot control what information may be captured by social networking sites, they can make determinations about what information they will collect and what to disclose. However, unless rules to guide their decisions are clear, agencies could handle information inconsistently. Individual privacy could be affected, depending upon whether and how government agencies collect or use personal information disclosed by individuals in interactive settings. Extending privacy protections to the collection and use of personal information by third party providers. Individuals interacting with the government via Web 2.0 media may provide personal information for specific government purposes and may not understand that the information may be collected and stored by third-party commercial providers. It also may not be clear as to whose privacy policy applies when a third party manages content on a government agency Web site. Accordingly, agencies may need to be clear about the extent to which they make use of commercial providers and the providers' specific roles. Uncertainty about who has access to personal information provided through agency social networking sites could diminish individuals' willingness to express their views and otherwise interact with the government. Safeguarding personal information from security threats that target Web 2.0 technologies. Federal government information systems have been targeted by persistent, pervasive, aggressive threats. In addition, as the popularity of social media has grown, they have increasingly been targeted as well. Thus as agencies make use of Web 2.0 technologies, they face persistent, sophisticated threats targeting their own information as well as the personal information of individuals interacting with them. The rapid development of Web 2.0 technologies makes it challenging to keep up with the constantly evolving threats deployed against them and raises the risks associated with government participation in such technologies. Further, the Federal Information Security Management Act states that agencies are responsible for the security of information collected or maintained on their behalf and for information systems used or operated on their behalf. The extent to which FISMA makes federal agencies responsible for the security of third-party social media Web sites may depend on whether such sites are operating their systems or collecting information on behalf of the federal government, which may not be clear. Training government participants on the proper use of social networking tools. Use of Web 2.0 technologies can result in a blending of professional and personal use by government employees, which can pose risks to their agencies. When an individual identifies him- or herself on a social media site as a federal employee, he or she provides information that may be exploited in a cyber attack on the agency. However, federal guidance may be needed for employees on how to use social media Web sites properly and how to handle personal information in the context of social media. In addition, training may be needed to ensure that employees are aware of agency policies and accountable for adhering to them. Determining requirements for preserving Web 2.0 information as federal records. A challenge associated with government use of Web 2.0 technologies, including government blogs and wikis and Web pages hosted by commercial providers, is the question of whether information exchanged through these technologies constitute federal records pursuant to the Federal Records Act. The National Archives and Records Administration (NARA) has issued guidance to help agencies make decisions on what records generated by these technologies should be considered agency records. According to the guidance, records generated when a user interacts with an agency Web site may form part of a set of official agency records. NARA guidance also indicates that content created with interactive software on government Web sites is owned by the government, not the individuals who created it, and is likely to constitute agency records and should be managed as such. Given these complex considerations, it may be challenging for federal agencies engaging the public via Web 2.0 technologies to assess the information they generate and receive via these technologies to determine its status as federal records. Establishing mechanisms for preserving Web 2.0 information as records. Once the need to preserve information as federal records has been established, mechanisms need to be put in place to capture such records and preserve them properly. Proper records retention management needs to take into account NARA record scheduling requirements and federal law, which requires that the disposition of all federal records be planned according to an agency schedule or a general records schedule approved by NARA. The records schedule identifies records as being either temporary or permanent and sets times for their disposal. These requirements may be challenging for agencies because the types of records involved when information is collected via Web 2.0 technologies may not be clear. For example, part of managing Web records includes determining when and how Web "snapshots" should be taken to capture the content of agency Web pages as they existed at particular points in time. Business needs and the extent to which unique information is at risk of being lost determine whether such snapshots are warranted and their frequency. NARA guidance requires that snapshots be taken each time a Web site changes significantly; thus, agencies may need to assess how frequently the information on their sites changes. Comments by individuals on agency postings may need to be scheduled in addition to agency postings. In the case of a wiki, NARA guidance requires agencies to determine whether the collaborative wiki process should be scheduled along with the resulting final product. In addition, because a wiki depends on a collaborative community to provide content, agencies are required to make determinations about how much content is required to make the wiki significant or "authoritative" from a record perspective. The potential complexity of these decisions and the resulting record-keeping requirements and processes can be daunting to agencies. Ensuring proper adherence to the requirements of FOIA. Federal agencies' use of Web 2.0 technologies could pose challenges in appropriately responding to FOIA requests. Determining whether Web 2.0 records qualify as "agency records" under FOIA's definition is a complex question. FOIA's definition focuses on the extent to which the government controls the information in question. According to the Department of Justice's FOIA guidance, courts apply a four-part test to determine whether an agency exercises control over a record. They examine: (a) who created the record and the intent of the record creator; (b) whether the agency intended to relinquish control; (c) the agency's ability to use or dispose of the record; and (d) the extent to which the record is integrated into the agency's files. Agency "control" is also the predominant consideration in determining whether information generated or maintained by a government contractor is subject to FOIA's requirements. Given the complexity of these criteria, agencies may be challenged in making appropriate FOIA determinations about information generated or disseminated via Web 2.0 technologies. If not handled properly, such information may become unavailable for public access. As federal agencies have increasingly adopted Web 2.0 technologies, often by making use of commercially provided services, information technology officials have begun to consider the array of privacy, security, records management, and freedom of information issues that such usage poses. Once these issues are understood, measures can then be developed and implemented to address them. Several steps have been taken to identify these issues and to begin developing processes and procedures to address them: In June 2009, DHS hosted a two-day public workshop to discuss * leading practices for the use of social media technologies to further the President's Transparency and Open Government Initiative. The workshop consisted of panels of academic, private-sector, and public-sector experts and included discussions on social media activities of federal agencies and the impact of those activities on privacy and security. In November 2009, DHS released a report summarizing the findings of the panels and highlighting potential solutions. According to a DHS official involved in coordinating the workshop, the array of issues raised during the workshop--which are reflected in the challenges I have discussed today--remain critically important to effective agency use of Web 2.0 technologies and have not yet been fully addressed across the government. * NARA has issued guidance outlining issues related to the management of government information associated with Web 2.0 use. The agency recently released a brief document, Implications of Recent Web Technologies for NARA Web Guidance, as a supplement to its guidance to federal agencies on managing Web-based records. The document discusses Web technologies used by federal agencies--including Web portals, blogs, and wikis--and their impact on records management. NARA officials recognize that the guidance does not fully address more recent Web 2.0 technologies, and they said the agency is currently conducting a study of the impact of those technologies and plans to release additional guidance later this year. * that it had negotiated terms-of-service agreements with several social networking providers, including Facebook, MySpace, and YouTube. The purpose of these agreements was to provide federal agencies with standardized vehicles for engaging these providers and to resolve legal concerns raised by following the terms and conditions generally used by the providers, which posed problems for federal agencies, including liability, endorsements, advertising, and freedom of information. As a result, other federal agencies can take advantage of these negotiated agreements when determining whether to use the providers' services. In April 2009, the General Services Administration announced * The Office of Management and Budget (OMB), in response to President Obama's January 2009 memorandum promoting transparency and open government, recently issued guidance intended to (1) clarify when and how the Paperwork Reduction Act of 1995 (PRA) applies to federal agency use of social media and Web-based interactive technologies; and (2) help federal agencies protect privacy when using third-party Web sites and applications. Specifically, a memo issued in April 2010 explained that certain uses of social media and web-based interactive technologies would not be treated as "information collections" that would otherwise require review under the PRA. Such uses include many uses of wikis, the posting of comments, the conduct of certain contests, and the rating and ranking of posts or comments by Web site users. It also states that items collected by third party Web sites or platforms that are not collecting information on behalf of the federal government are not subject to the PRA. In addition, a memorandum issued by OMB in June 2010 called for agencies to provide transparent privacy policies, individual notice, and a careful analysis of the privacy implications whenever they choose to use third-party technologies to engage with the public. The memo stated--among other things--that prior to using any third-party Web site or application, agencies should examine the third-party's privacy policy to evaluate the risks and determine whether it is appropriate for agency use. Further, if agencies post links on their Web sites that lead to third-party Web sites, they should notify users that they are being directed to non-government Web sites that may have privacy policies that differ from the agency's. In addition, the memo required agencies to complete a privacy impact assessment whenever an agency's use of a third- party Web site or application gives it access to personally identifiable information. In summary, federal agencies are increasingly using Web 2.0 technologies to enhance services and interactions with the public, and such technologies have the potential to transform how federal agencies engage the public by allowing citizens to become more involved in the governing process and thus promoting transparency and collaboration. However, determining the appropriate use of these new technologies presents new potential challenges to the ability of agencies to protect the privacy and security of sensitive information, including personal information, shared by individuals interacting with the government and to the ability of agencies to manage, preserve, and make available official government records. Agencies have taken steps to identify these issues and begun developing processes and procedures for addressing them. Until such procedures are in place, agencies will likely continue to face challenges in appropriately using Web 2.0 technologies. We have ongoing work to assess these actions. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other Members of the Subcommittee may have. If you have any questions regarding this testimony, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other individuals who made key contributions include John de Ferrari (Assistant Director), Sher'rie Bacon, Marisol Cruz, Susan Czachor, Fatima Jahan, Nick Marinos, Lee McCracken, David Plocher, and Jeffrey Woodward. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

"Web 2.0" technologies--such as Web logs ("blogs"), social networking Web sites, video- and multimedia-sharing sites, and "wikis"--are increasingly being utilized by federal agencies to communicate with the public. These tools have the potential to, among other things, better include the public in the governing process. However, agency use of these technologies can present risks associated with properly managing and protecting government records and sensitive information, including personally identifiable information. In light of the rapidly increasing popularity of Web 2.0 technologies, GAO was asked to identify and describe current uses of Web 2.0 technologies by federal agencies and key challenges associated with their use. To accomplish this, GAO analyzed federal policies, reports, and guidance related to the use of Web 2.0 technologies and interviewed officials at selected federal agencies, including the Department of Homeland Security, the General Services Administration, and the National Archives and Records Administration. Federal agencies are using Web 2.0 technologies to enhance services and support their individual missions. Federal Web managers use these applications to connect to people in new ways. As of July 2010, we identified that 22 of 24 major federal agencies had a presence on Facebook, Twitter, and YouTube. Several challenges in federal agencies' use of Web 2.0 technologies have been identified: (1) Privacy and security. Agencies are faced with the challenges of determining how the Privacy Act of 1974, which provides certain protections to personally identifiable information, applies to information exchanged in the use of Web 2.0 technologies, such as social networking sites. Further, the federal government may face challenges in determining how to appropriately limit collection and use of personal information as agencies utilize these technologies and how and when to extend privacy protections to information collected and used by third-party providers of Web 2.0 services. In addition, personal information needs to be safeguarded from security threats, and guidance may be needed for employees on how to use social media Web sites properly and how to handle personal information in the context of social media. (2) Records management and freedom of information. Web 2.0 technologies raise issues in the government's ability to identify and preserve federal records. Agencies may face challenges in assessing whether the information they generate and receive by means of these technologies constitutes federal records and establish mechanisms for preserving such records, which involves, among other things, determining the appropriate intervals at which to capture constantly changing Web content. The use of Web 2.0 technologies can also present challenges in appropriately responding to Freedom of Information Act (FOIA) requests because there are significant complexities in determining whether agencies control Web 2.0-generated content, as understood within the context of FOIA. Federal agencies have begun to identify some of the issues associated with Web 2.0 technologies and have taken steps to start addressing them. For example, the Office of Management and Budget recently issued guidance intended to (1) clarify when and how the Paperwork Reduction Act of 1995 applies to federal agency use of social media and Web-based interactive technologies; and (2) help federal agencies protect privacy when using third-party Web sites and applications.

In many cases, contamination on idle or underused industrial sites--brownfields--is not identified until the sites are sold or an environmental accident--such as a toxic substance seeping into drinking water--occurs. Once contamination is identified, federal and state environmental laws and regulations impose potentially broad pollution cleanup liability. For example, under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund, past or present owners of a site containing hazardous substances may be liable for cleanup costs. Also, each party responsible for cleanup costs may be held liable under CERCLA for the entire cost of the cleanup. While the Environmental Protection Agency's (EPA) policy is to place only the worst sites on its National Priorities List for cleanup under Superfund, federal environmental laws--including liability standards--still apply to sites with lower-level contamination. This report explores issues related to redeveloping brownfield sites with lower-level contamination that are not on the National Priorities List. We collected information on state and local initiatives in Boston, Massachusetts; Union County, New Jersey; Chicago, Illinois; and Pittsburgh, Pennsylvania, because these cities were identified by EPA officials and brownfield researchers as having active site reuse programs. While the precise magnitude and severity of brownfields is unknown because there is no national inventory, the cities we visited had hundreds of acres of brownfields. In trying to redevelop brownfields, local governments and community organizations have faced reluctance on the part of lenders and developers who fear having to pay for costly environmental cleanups. To overcome this obstacle and others and to speed redevelopment, state and local governments have created a variety of initiatives. State and local governments have estimated that they have thousands of vacant industrial properties that could be redeveloped. In 1987, we estimated that anywhere from about 130,000 to over 425,000 sites throughout the nation contain some contamination. This estimate includes many vacant industrial sites. Our visits to the four states confirmed the existence of numerous former industrial sites that were once productive but now sit abandoned and probably contaminated: The state of Illinois has estimated that 5,000 abandoned or inactive industrial/commercial sites exist throughout the state. In Chicago alone, an estimated 18 percent of the industrial acreage is unused. This estimate includes 1,500 acres spread among 2,000 sites. One Boston neighborhood, located around Dudley Street, covers just 1-1/2 square miles but has within its boundaries 54 state-identified hazardous waste sites. A regional planning group study of Union County, New Jersey, identified 185 separate sites containing more than 2,500 acres of reusable land in the county, all zoned for commercial or industrial development. Towns throughout the Monongahela Valley in Pennsylvania, once a major steel-making center, contain hundreds of acres of land filled with vacant steel mills and other manufacturing facilities. As states and localities attempt to redevelop their abandoned industrial sites, they have faced several obstacles, including the possibility of contamination and the associated liability for cleanup. This situation is caused largely by federal and state environmental laws and court decisions that impose or imply potentially far-reaching liability. The uncertain liability has encouraged businesses to build in previously undeveloped nonurban areas--called "greenfields"--where they feel more confident that no previous industrial use has occurred. Lenders, environmental attorneys, local officials, and community development officials in the areas we visited and the documents we reviewed reported that the general uncertainty about the costs of environmental cleanup and who will pay those costs has delayed the redevelopment of industrial properties. A lending official with a large Pittsburgh-based bank, for example, stated that little redevelopment has occurred on the former steel mill sites because of environmental concerns. In some cases, the bank has chosen not to foreclose on properties because it does not want to assume cleanup and associated liabilities. Furthermore, some owners have preferred to keep properties idle rather than sell them and take the risk that the environmental assessments required upon sale will detect contamination that they will have to clean up. A January 1995 EPA action agenda on brownfields stated that the fear of contamination and its associated liability has left many investors wary of buying properties that may be contaminated and is enough to stop real estate transactions from moving forward. In its local strategic plan, EPA's Chicago Regional Office further concluded that lenders are often unwilling to provide loans for property that could be contaminated because they are concerned about their own liability, the reduced collateral value of the land if it is found to be contaminated, and the ability of the property owners to repay a loan if they must also pay for a major cleanup. A variety of interest groups has also concluded that the potentially large and uncertain liability thwarts efforts to revitalize communities. For example, the U.S. Conference of Mayors has adopted the brownfield issue as one of five priority areas and has publicly endorsed EPA's efforts to reduce the fear of and uncertainty about cleanup liability. The National Association for the Advancement of Colored People testified before the Congress in June 1994 that liability concerns have impeded the efforts of communities to clean up brownfield sites. Furthermore, the Mortgage Bankers Association of America has concluded that the redevelopment of potentially viable properties has been obstructed by concerns in the commercial real estate market that lenders will be held liable for environmental contamination that they did not cause. Rather than face the uncertain liability and potential delays associated with an old industrial site, businesses have looked to greenfields--previously undeveloped sites in rural and suburban areas--for expansion and new development. This trend, according to a regional EPA official, has contributed to suburban sprawl and leads to increased congestion and air pollution. Furthermore, such development requires the construction of new infrastructure and results in reduced tax bases and employment in traditional urban centers, according to state officials and community development practitioners. In addition to the fear of and uncertainty about the costs of environmental cleanups, other factors have also contributed to the slow pace of brownfields' redevelopment. City and state officials and community development practitioners told us that, often, unused industrial sites have infrastructure weaknesses (e.g., poor transportation access), are perceived to be areas of high crime, and have a general unattractiveness that reduce their redevelopment potential. Wanting to revitalize their communities and yet fearing environmental cleanups, state and local governments and community groups have responded with a variety of initiatives. These efforts address those state laws and regulations that appear to hinder redevelopment. For example, some of the provisions provide covenants not to sue so that innocent purchasers are protected from liabilities, some clarify the lender's liability, and others seek to streamline the states' regulatory processes. A few even provide seed money and loans for cleanup and redevelopment. In Massachusetts, for example, the legislature changed environmental laws to make it clear that a lender does not automatically become liable for environmental cleanup when it forecloses on property, according to state officials. The state law also authorizes state officials to take into account future uses of the site and surrounding areas in determining the appropriate cleanup level. And, among other things, for economically distressed target areas, under a pilot program Massachusetts will provide a covenant to new property owners: The state will not sue new owners who have followed the procedures of the state's voluntary cleanup program. This provision, it is hoped, will reduce some property owners' and lenders' fear of liability for contamination identified in the future. New Jersey recently made some similar legislative changes with the Industrial Sites Recovery Act and the Lender Liability Act. One component is a $55 million hazardous site remediation fund to provide grants and low-interest loans for assessing and cleaning up sites. Also, the state participated in a model industrial site redevelopment project in Union County that identified numerous sites having less contamination and more development potential than most officials had thought. Local governments and neighborhood groups, working with other stakeholders, have also been trying to overcome obstacles and spur redevelopment. For example, officials in Chicago have recognized that if cleanup is not coupled with redevelopment, sites are likely to be recontaminated through illegal dumping. The city has worked closely with state and federal environmental protection agencies in assessing and cleaning up five demonstration brownfield sites. The project has received $2 million in city funds for the sites, several of which have specific redevelopment plans. In Boston, the Dudley Street neighborhood has been working to overcome the negative impact of years of industrial contamination. A community group, with the help of city officials, was recently successful in getting a private developer to build a supermarket and shopping center on a large former industrial tract. Not only does this shopping center provide essential services for community residents, but its success has caused adjacent vacant lots to become more economically viable. As state and local governments have shown increased interest in redeveloping their industrial sites, several federal agencies have begun to help them. Both EPA and EDA have gained practical experience through redevelopment activities at several sites, while HUD has started a series of projects to carry out its brownfield strategy. In addition, the agencies have begun to coordinate their efforts and sponsor joint projects. While maintaining its chief focus on the National Priorities List, EPA has in recent years become more involved with state and local governments in efforts to redevelop less contaminated industrial sites. In January 1995, the agency announced a multifaceted action agenda on brownfields, which includes a variety of ongoing, enhanced, and new initiatives. A major element of EPA's agenda is the demonstration pilots funded under the Brownfields Economic Redevelopment Initiative. The main intent of these demonstrations, according to EPA, is to learn how environmental hurdles can be overcome and urban communities restored. The first major project started with the State of Ohio and Cuyahoga County (Cleveland) in November 1993. EPA contributed $200,000, which the county used to identify contaminated areas for cleanup and redevelopment. According to the Cuyahoga County Planning Commission, the project has generated $625,000 in new tax revenues and resulted in 100 new jobs. The project also includes plans to consult with communities surrounding these sites to help decide on future uses. Two more cities, Richmond, Virginia, and Bridgeport, Connecticut, were selected as demonstration projects in 1994, and EPA expects to select 47 more locations by 1996. EPA plans to work closely with EDA to make the transition from the cleanup to the redevelopment stage of its demonstration projects. Another item on EPA's agenda was its announcement that it has removed from its data base of potentially contaminated sites about 25,000 sites where the agency planned to take no further remedial action. According to EPA, many of these sites either were not contaminated, had already been cleaned up under state programs, or were being cleaned up; still, potential developers were reluctant to get involved with them because they remained on EPA's list. To further reduce the stigma associated with these sites, EPA officials planned an outreach program to inform interested parties about the true status of a purchaser's federal liability in each case. To assist in removing liability barriers, the action agenda calls for EPA to develop a package of reforms to limit liability for brownfield sites. As part of this package, EPA is developing guidance that is intended to expand the circumstances under which the agency will agree not to hold prospective purchasers liable for preexisting contamination on a property. In addition, EPA plans to issue guidance explaining its policy of not pursuing lenders for cleanup costs. EPA is also working to clarify municipal liability so that local governments will be encouraged to start the cleanup process without concern for liability under Superfund. Aside from the brownfield activities led by EPA's headquarters offices, several regional offices have formed partnerships with local governments to work on industrial site redevelopment issues. EPA's Region 5 office in Chicago, for example, has developed a strategy aimed at developing partnerships with key stakeholders, encouraging voluntary cleanups, promoting broad community participation in the cleanup processes, and disseminating information to prospective purchasers and lenders involved in brownfield sites. EPA has also loaned staff to local governments to further assist efforts to redevelop brownfields. EDA's involvement in industrial sites' redevelopment has two primary aspects: The agency, according to its environmental officer, has had direct experience in cleaning up and developing its own properties, and it has sponsored projects to educate and inform state and local entities about redevelopment issues. The agency's direct experience stems largely from loans that EDA guaranteed in the 1970s and early 1980s to improve industrial facilities. When several borrowers defaulted on the loans, EDA acquired title to the sites and was thus faced with the responsibility for cleaning them up before they could be sold and redeveloped. The sites, which include a 176-acre steel mill in southeast Chicago and a 22-acre foundry in Two Harbors, Minnesota, have undergone environmental assessments and are now in the cleanup phase. EDA officials have used this practical experience to help communities as they attempt to redevelop their industrial sites. The agency has provided, among other things, funds for independent research into the issues related to reusing industrial buildings. EDA has awarded a grant to develop and publish a booklet aimed at helping communities deal with their abandoned industrial sites. In addition, EDA has developed a cooperative relationship with EPA on its pilot initiative concerning brownfields, which has included providing help in selecting projects and assisting EPA on technical matters. While HUD has become active in brownfield issues relatively recently, it has developed a strategy with several ongoing and planned components. The Department's Empowerment Zone and Enterprise Community program may provide, among other things, opportunities for the agency to learn and disseminate information on how selected communities deal with issues related to reusing industrial sites. And in addition to its own initiatives, HUD has formed a cooperative relationship with EPA to pursue research and other mutually beneficial objectives. One of HUD's first major activities in brownfield issues was a December 1994 conference on "The Relationship Between Environmental Protection and Opportunities for Inner-City Economic Development." The meeting, attended by a wide variety of federal, state, and local officials, researchers, and community development practitioners, was aimed at advising and informing HUD on programs' obstacles and policy options associated with reusing industrial sites. In 1994, almost 300 communities applied for six federal Urban Empowerment Zone and 65 Enterprise Community designations that provide tax incentives. Empowerment Zones also provide other benefits to businesses that locate in these economically distressed communities. Several cities that received designations in late 1994 included industrial and commercial sites' redevelopment as part of their Empowerment Zone strategies: Chicago cited its own brownfield program as an element of its revitalization plan and listed several "environmental waivers" that could speed the cleanup and redevelopment of sites in the zone. Boston, which contains an Enhanced Enterprise Community, proposed a strategy including plans to redevelop a 175-acre former hospital site and create a center for emerging industries at the site of a former computer-manufacturing facility. For the two-state Empowerment Zone contained in Philadelphia/Camden there is a plan to clean up and redevelop a former oil company site with help from Pennsylvania's program to clean up industrial sites. Another important brownfield project, according to HUD officials, is a research project sponsored jointly with EPA. Although the project started out with HUD, the two agencies have since combined resources and plan to contract for a study that will explore the reasons why businesses locate in certain areas. The study is designed to provide knowledge that will be useful to both agencies as they look for ways to help communities redevelop industrial sites. HUD officials also told us that brownfield issues are mentioned specifically in two major initiatives: HUD's own plan to transform or reinvent itself and a strategy announced in March 1995 targeted to achieving environmental justice. In the reinvention plan, HUD proposes to consolidate its grants for community economic development into a single Community Opportunity Fund. A bonus pool in this program would be used to give good performers the opportunity to compete for additional funds for large-scale job creation projects and environmental cleanup of brownfield sites. HUD's environmental justice plan, which is part of a larger strategy approved by the President, designates brownfields' redevelopment as one of four priority initiatives. We requested comments on a draft of this report from EPA, the Department of Commerce, and HUD. We met with the Director for Outreach and Special Projects Staff in the Office of Solid Waste and Emergency Response, EPA; and the Director of the Building and Technology Division in the Office of Policy Development and Research, HUD, to discuss their agencies' comments on our report. EPA and HUD generally agreed with the information provided in the report; however, both agencies said that they had made substantial recent progress on brownfield issues. We incorporated information that EPA and HUD provided us about their new initiatives into the report where appropriate. The Department of Commerce, in written comments that are contained in appendix I of this report, suggested that we include additional information on EDA's initiatives. In response, we added to our report information about EDA's current activities and partnership with EPA. We did not address several other issues raised in the comments--such as rural brownfields and existing businesses' relocations--because the issues were beyond the scope of this assignment. To determine what is known about the extent and nature of abandoned industrial sites in distressed urban communities and the barriers that brownfields present to redevelopment efforts, we reviewed previous GAO reports on Superfund issues and other reports on the subject, such as the Northeast-Midwest Institute's report entitled New Life For Old Buildings and Resources for the Future's report entitled The Impact of Uncertain Environmental Liability on Industrial Real Estate Development. To find out about state and local initiatives, we visited Boston, Massachusetts; Union County, New Jersey; Chicago, Illinois; and Pittsburgh, Pennsylvania, because they were identified by EPA and brownfield researchers as having active site reuse programs. While there, we obtained information from directors of state and local government environmental and community development efforts, environmental attorneys, developers, and community development practitioners, such as those at the Jamaica Plain Neighborhood Development Corporation in Boston and Bethel New Life, Inc., in Chicago. We also interviewed public interest group officials, including the Directors of the Coalition for Low Income Community Development, the National Council for Urban Economic Development, and the Urban Land Institute and researchers and analysts at the Northeast-Midwest Institute, the Environmental Defense Fund, and Resources for the Future to obtain their perspectives on the issue. To provide information on federal initiatives aimed at helping communities overcome obstacles to reusing brownfield sites, we discussed brownfield programs and issues at three federal agencies--EPA, HUD, and the Department of Commerce--that were identified by public interest group, state government, or local government officials as having brownfield programs. We interviewed EPA's Director of Outreach and Special Projects, Office of Solid Waste and Emergency Response, and her staff; HUD's Director of the Building and Technology Division in the Office of Policy Development and Research and the Director, Office of Block Grant Assistance, and their staffs; and the environmental officer and staff in the Department of Commerce's EDA's Office of Research and Technical Assistance. We also reviewed programs' guidance, policy statements, and reports on the programs at these agencies. Finally, we also contacted officials at other federal agencies, such as the Small Business Administration, the Department of Agriculture's Farmer's Home Administration, and the Department of Transportation, to determine whether they had any initiatives under way. We conducted our review between November 1994 and May 1995 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 14 days from the date of this letter. At that time, we will send copies to the appropriate congressional committees and subcommittees, the Secretaries of HUD and Commerce, the Administrator of EPA, and the Director of the Office of Management and Budget. We will also make copies available to others on request. If you would like additional information on this report, please call me at (202) 512-7631. Erin Bozik, Assistant Director Wendy Bakal Susan Beekman Frank Putallaz Tom Repasch 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 brownfields, focusing on: (1) the extent and nature of abandoned industrial sites in distressed urban communities and the barriers brownfields present to redevelopment efforts; and (2) federal initiatives aimed at helping communities overcome obstacles to reusing brownfield sites. GAO found that: (1) while no national inventory of brownfield sites exist, states have identified thousands of former industrial sites that are abandoned and possibly contaminated; (2) although brownfield sites are usually not contaminated enough to qualify for the Superfund Program, many offer great potential for redevelopment; (3) although developers and lenders have been reluctant to get involved with brownfields due to uncertain liability, governments have created initiatives, such as offering loans and liability protection, to speed up redevelopment efforts; (4) brownfield redevelopment has remained state and local in nature, but federal agencies have begun assisting local governments to reclaim sites; (5) the Environmental Protection Agency has provided demonstration grants to help redevelop industrial properties that were not contaminated or had been cleaned up; (6) the Economic Development Administration has provided financial support for brownfield research and has also acquired practical experience from cleaning up properties it acquired through loan defaults; and (7) the Department of Housing and Urban Development is implementing several brownfield projects through its Empowerment Zone and Enterprise Community program.

The Highway Revenue Act of 1956 established the Highway Trust Fund as an accounting mechanism to help finance federal highway programs. In 1983, the Highway Trust Fund was divided into two accounts: a Highway Account and a Mass Transit Account. Receipts to the Highway Account are used to fund highway programs, through which billions of dollars are distributed to the states annually for the construction and repair of highways and related activities. Treasury uses a revenue allocation and reporting process to distribute highway user taxes to the Highway Trust Fund. Financing for the Highway Trust Fund is derived from a variety of federal highway user taxes including excise taxes on motor fuels (gasoline, gasohol, diesel, and special fuels) and tires, sales of new trucks and trailers, and the use of heavy vehicles. As table 1 shows, the excise tax rates and distribution of the tax revenues vary. The different tax rates reflect federal policy decisions. For example, in the 1970s and 1980s, the federal government adopted numerous policies to encourage the use of alternatives to imported fossil fuels and help support farm incomes. Among these policies were tax incentives that targeted the use of alcohol fuels derived from biomass materials, such as ethanol. Ethanol blended fuels (gasohol) are partially exempt from the standard excise tax on gasoline (18.4 cents). The proportion of ethanol contained in each gallon of fuel determines the size of the partial exemption. The most common ethanol blend contains 90 percent gasoline and 10 percent ethanol and is currently taxed at 13.1 cents per gallon--an exemption of 5.3 cents. The federal government also uses the distribution of excise tax receipts to different accounts to achieve policy goals. For example, a small part of the excise tax on most motor fuels is distributed to the Leaking Underground Storage Tank Trust Fund to clean-up contamination caused by underground storage tanks. Additionally, 2.5 cents of the tax received on each gallon of gasohol is transferred to the General Fund, rather than the Highway Trust Fund, for deficit reduction purposes. TEA-21 continued the use of the Highway Trust Fund as the mechanism for accounting for federal highway user taxes. TEA-21 also established guaranteed spending levels for certain highway and transit programs. Prior to TEA-21, these programs competed for budgetary resources through the annual appropriations process with other domestic discretionary programs. New budget categories were established for highway and transit spending, effectively establishing a budgetary "firewall" between those programs and other domestic discretionary spending programs. Of the $217.9 billion authorized for surface transportation programs over the 6-year life of TEA-21, about $198 billion is protected by the budgetary firewall--about $162 billion for highway programs and $36 billion for transit programs. Under TEA-21, the amount of highway program funds distributed to the states is tied to the amount of actual tax receipts credited to the Highway Account of the Highway Trust Fund. TEA-21 guaranteed specific levels of funding for highway programs from fiscal year 1999 through fiscal year 2003, on the basis of projected receipts of the Highway Account. TEA-21 also provided that beginning in fiscal year 2000, this guaranteed funding level for each fiscal year would be adjusted upward or downward through the RABA calculation as the levels of Highway Account receipts increased or decreased. To determine the RABA adjustment, the Office of Management and Budget and the Office of the Secretary in the Department of Transportation rely on information on Highway Account receipts and revised Highway Account projections supplied by Treasury. Specifically, the Bureau of Public Debt provides the actual Highway Account receipts for the prior fiscal year, and the Office of Tax Analysis (OTA) provides a projection of Highway Account receipts for the next fiscal year. On the basis of the information we reviewed, the fiscal year 2003 RABA calculation--a negative $4.369 billion--appears reasonable. The RABA adjustment for fiscal year 2003 was calculated by (1) comparing the actual Highway Account receipts for fiscal year 2001 to the projections of receipts for fiscal year 2001 included in TEA-21, and an adjustment for the RABA calculation made for that year (the look back portion of the calculation) and (2) comparing projections of Highway Account receipts for fiscal year 2003 with the projection of these receipts contained in TEA-21 (the look ahead portion of the calculation). The sum of these differences is the RABA adjustment. Table 2 shows the RABA calculations for fiscal years 2000 through 2003. As shown, the RABA adjustments for fiscal year 2000 through fiscal year 2002 were positive--increasing highway funding levels by a total of over $9 billion. However, the RABA adjustment for fiscal year 2003 is negative $4.369 billion. Eighty percent of the fiscal year 2003 RABA adjustment is attributable to the look back portion of the calculation. The actual fiscal year 2001 Highway Account receipts were about $1.6 billion lower than projections in TEA-21. According to Treasury, actual fiscal year 2001 receipts were lower than expected due to the slowdown in the economy, which especially affected heavy truck sales, and increased gasohol use. We reviewed the amounts distributed to the Highway Trust Fund for the first 9 months of fiscal year 2001, and concluded that these amounts were reasonable and adequately supported on the basis of available information. With respect to the look ahead portion of the calculation, we reviewed Treasury's process for projecting Highway Account revenues. Although we did not independently evaluate the methodology and the economic models Treasury used to develop its revenue projections, our review of a qualitative description of the process, key inputs, and changes to the models gave us no reason to question the resulting projections. The Secretary of the Treasury transfers applicable excise tax receipts, including receipts from gasoline and other highway taxes, from the General Fund to the excise tax related trust funds, including the Highway Trust Fund, on a monthly basis. These transfers are based on estimates because actual data on which to base the allocations are not available when the deposits are initially made. OTA prepares these estimates on the basis of historical IRS certification data and actual excise tax revenue collections. Subsequently, IRS certifies the actual excise tax revenue collections that should have been distributed to the trust funds on the basis of tax returns and payment data. Using the IRS certifications, Treasury makes quarterly adjustments to the initial trust fund distributions. For example, in March 2001, Treasury made an adjustment to decrease the fiscal year 2001 excise tax revenue distributions to the Highway Trust Fund to correct for actual collections in the fourth quarter of fiscal year 2000. The certified fourth quarter receipts were $1.2 billion less than the amount initially distributed on the basis of OTA's estimates for that quarter. According to an OTA official, OTA had calculated the original estimated transfer amounts for the quarter using an economic model that assumed a higher rate of economic growth through calendar year 2000 than was actually the case. As a result, the downward adjustment was made, reducing the fiscal year 2001 distributions to the Highway Trust Fund by $1.2 billion, which contributed to the fiscal year 2003 negative RABA adjustment. Our past reports have identified errors and problems with Treasury's excise tax allocation process. However, Treasury has made and continues to make improvements to this process. On February 11, 2002, we issued a report on the results of procedures we performed related to the distributions of excise tax revenue to the Highway Trust Fund in fiscal year 2001. On the basis of this work, we believe the amounts distributed to the Highway Trust Fund for the first 9 months of fiscal year 2001, which were subject to IRS' quarterly excise tax certification process and which were adjusted on the basis of this process, were reasonable and were adequately supported according to available information. Additionally, we believe the March 2001 adjustment made by Treasury to reduce fiscal year 2001 excise tax distributions to the Highway Trust Fund by $1.2 billion was reasonable and adequately supported. IRS expects to deliver the results of its certifications for distributions of excise tax revenue collected during the period July 1, 2001, through September 30, 2001 to Treasury's Financial Management Service by March 20, 2002. Consequently, the distributions of fourth quarter fiscal year 2001 excise tax revenue were based solely on estimates prepared by OTA. We did not draw any conclusions about the reasonableness of the distributions made to the Highway Trust Fund for the fourth quarter of fiscal year 2001. One component of the look back portion of the RABA calculation is the comparison of actual fiscal year 2001 Highway Account receipts with projections of those receipts in TEA-21. The actual receipts were about $1.6 billion lower than the amounts contained in TEA-21. According to Treasury, the lower than expected highway excise tax receipts in fiscal year 2001 were due to several factors. Most importantly, the weakened economy contributed to a decline in highway excise taxes paid. All but one of the Highway Trust Fund receipt sources were lower in fiscal year 2001 than 2000. For example, tax revenue from the retail tax on trucks dropped 55 percent from fiscal year 2000 to fiscal year 2001. It is important to note that the tax is applied to the sale of new trucks only. As the economy weakened, large numbers of used trucks were placed on the market, which depressed prices and sales in the new heavy truck market. In addition to the economic downturn, the rise in the use of gasohol contributed to decreased Highway Account receipts. The amount of gasohol receipts allocated to the Highway Account rose by 17.5 percent between fiscal years 2000 and 2001, which Treasury believes is evidence of an ongoing substitution of gasohol fuels for gasoline. Because gasohol is taxed at a lower rate than gasoline and a portion of the tax on gasohol is transferred to the General Fund, increases in gasohol use and corresponding reductions in gasoline use decrease Highway Account revenues. While not the main factor, the look ahead portion of the RABA calculation also contributed to the overall negative RABA adjustment. As discussed earlier, the look ahead is the difference between TEA-21's projections for the next fiscal year to current projections from the president's budget, which are prepared by Treasury. Based on the general qualitative description Treasury provided us about its methodology and economic models used to develop Highway Trust Fund revenue projections, we have no reason to question the projections for fiscal year 2003. Treasury generally performs two forecasting exercises each year, including one for the president's budget. Treasury uses seven econometric models to forecast each highway excise tax revenue source, such as the tax on gasoline. These models seek to approximate the relationship between historical tax liability and current macroeconomic variables, such as the gross domestic product. This estimated relationship is the baseline, and Treasury uses it to project future excise tax liability, given current law and the administration's economic assumptions. After calculating future tax liability, Treasury forecasters convert the tax liability forecast to a tax receipts forecast using information on deposit rules, payment patterns, and actual collections. The administration's economic assumptions drive the projections made with each model. According to Treasury, receipts forecasting is a policy exercise conducted for the president to show the state of the Highway Trust Fund if the administration's economic assumptions were to come to fruition. Consequently, Treasury's forecasts incorporate economic assumptions formulated for the budget by the "Troika," which consists of the Council of Economic Advisors, the Office of Management and Budget, and Treasury. Because the goal is to provide a forecast consistent with these economic assumptions, the models use these assumptions directly as explanatory variables, or link other explanatory variables to the assumptions provided. Several of the administration's economic assumptions are publicly available, such as the gross domestic product and consumer price index. However, most Troika assumptions are not publicly available. Other variables specific to the Highway Trust Fund are included in the economic models. Treasury generally obtains this information from other federal agencies. For example, Treasury incorporates USDA's forecast of ethanol use in its gasohol model. However, according to Treasury, the forecasters must ensure that the addition of these other variables does not create inconsistencies between the projections and the administration's assumptions. It should also be noted that Treasury does not try to predict future regulatory or legislative changes at the federal or state levels that could affect Highway Trust Fund revenue but bases its projections on current law. Any legislative or regulatory changes that affect Highway Trust Fund revenue will affect the accuracy of the forecasts. Treasury continuously updates its models to incorporate legislative, economic, and other relevant changes--which are then reflected in the next forecasting exercise. According to Treasury officials, Treasury's modeling framework for projecting highway excise tax receipts has not changed in recent years. Treasury's framework consists of a series of econometric models that approximate the relationship between historical tax liability and current macroeconomic variables, which are then used to project future tax liability given current law and certain economic assumptions. Although the overall framework has remained consistent, Treasury officials noted that the specific economic models used to project receipts are continuously evolving to reflect current circumstances. For example, the models are constantly updated to incorporate the most current information on tax collections and reported tax liabilities, as well as enacted legislation. In addition to these routine changes, the models have occasionally undergone other modifications. Treasury identified 15 major changes to the models since 1998. These changes ranged from moving the highway-type tire tax from an annual model to a quarterly model and revising the ethanol forecast in the gasohol model to reflect the phasing out of methyl tertiary-butyl ether (MTBE) in certain states. According to Treasury, the identified changes were designed to improve the models' forecasting ability. Although Treasury does not use an independent reviewer to validate the models, Treasury officials noted several ways they validate them. First, the Director of Treasury's Office of Tax Analysis reviews the results of the model for accuracy and soundness at least twice a year. Second, Treasury officials compare the projected receipts with actual receipts to assess the validity of the models. In comparing the projected and actual receipts, Treasury forecasters try to determine the cause of any substantial differences and make changes to the model, as appropriate. Third, trust fund agencies, such as FHWA, receive the forecasts semiannually and may offer comments to Treasury on the projections. In order to help determine the reasonableness of Treasury's projection, we compared it with CBO's forecasts. This comparison does not raise any questions about the reasonableness of Treasury's projections. For example, despite different methodologies and assumptions, Treasury and CBO projections of Highway Account receipts for the budget window are very similar. (See fig. 1.) Both agencies forecast steady growth in receipts from fiscal years 2002 through 2012. For example, both Treasury and CBO project the average annual growth of highway-related excise taxes will be about 3 percent. In January 2002, the administration announced that the fiscal year 2003 RABA adjustment would be a negative $4.965 billion. The administration subsequently announced that an error had been made in calculating the RABA adjustment and that the correct amount was a negative $4.369 billion--a $600 million difference. The error, which was made in Treasury's allocation of projected highway tax revenues to various accounts rather than in its economic models, affected the look ahead part of the fiscal year 2003 RABA calculation. Specifically, it occurred in Treasury's allocation of projected revenues from gasohol sales to the General Fund, the Leaking Underground Storage Tank Trust Fund, and the Highway and Transit Accounts within the Highway Trust Fund. In short, the error resulted in the incorrect distribution of projected gasohol receipts among the funds. Because gasohol has six different blends--all with different tax rates and distributions--the gasohol allocations are complicated and require many "links" among several spreadsheets. With respect to gasohol, the Highway Account receipts are calculated after allocations for the other accounts-- the Mass Transit Account, the Leaking Underground Storage Tank Trust Fund, and the General Fund--have been calculated. This is because the Highway Account is a "catch-all" for taxes not already attributed to other accounts. A misalignment occurred between the different spreadsheets used to distribute gasohol tax revenues to the different accounts, which caused too much of the gasohol revenues to be transferred to the General Fund. Therefore, the error incorrectly lowered projected Highway Account revenue beginning with fiscal year 2002. According to a Treasury official, a number of factors contributed to the error, including tightened time constraints during this budget cycle for Treasury forecasters to calculate and review their projections for the fiscal year 2003 budget. Each forecaster is responsible for reviewing his/her own calculations. In hindsight, however, this official said that the internal quality checks his office made were insufficient, especially on the gasohol calculations, which are very complex. He noted that Treasury plans to take several steps to avoid such an error in the future, including requiring another Treasury forecaster to spot check the projections. The use of gasohol instead of gasoline affects the amount of Highway Account revenue for two reasons. First, gasohol is partially exempt from the standard gasoline excise tax. Second, 2.5 cents of the tax received on each gallon of gasohol sold is transferred to the General Fund. (See fig. 2.) Based on our ongoing work, our preliminary estimates show that the partial tax exemption resulted in $3.86 billion in revenue forgone by the Highway Account during fiscal years 1998 through 2001. We also estimate that the General Fund transfer caused a reduction of $2.15 billion in Highway Account revenue during the same period. Treasury projects that gasohol use will continue to rise steadily through fiscal year 2012. According to Treasury, such an increase will occur at the expense of gasoline as some states ban the use of MTBE as an oxygenate additive. Using Treasury's highway excise tax revenue projections, we estimate that the partial tax exemption will lower Highway Account revenue by a total of $13.72 billion from fiscal years 2002 through 2012. (See fig. 3.) We also estimate that the Highway Account will not receive $2.36 billion due to the General Fund transfer from fiscal years 2002 through 2005, when the transfer ends. In addition, if the amount of the transfer is not dedicated to the Highway Account following fiscal year 2005, we project that the Highway Account will forgo $4.56 billion from fiscal years 2006 through 2012. State or federal legislation or regulations that result in gasohol use above what is currently projected, such as a nationwide ban on MTBE, would increase the negative impact on the Highway Account absent other changes. According to USDA and ethanol industry officials, the partial tax exemption for gasohol is intended to create a demand for ethanol that will raise the price of ethanol at least to the point where producers can cover costs. These officials stated that if the partial tax exemption on ethanol was removed, the price of ethanol would no longer be competitive with gasoline and the demand would disappear. In this case, ethanol fuel production would, for the most part, not continue. Furthermore, ethanol industry officials we talked to warned that because a substantial amount of the corn grown in the United States is used for ethanol, the collapse of the ethanol industry would affect the corn and agriculture markets which could in turn affect the federal government's agricultural support payments. As the Congress considers the reauthorization of surface transportation programs, there are several ways it could restructure the RABA adjustment to reduce fluctuations in highway funding. Furthermore, industry officials have identified a number of possible ways to increase Highway Trust Fund revenues. Ultimately, the Congress and the administration must weigh the advantages and disadvantages of changing the RABA adjustment and/or Highway Trust Fund revenue streams. The discussion that follows is not intended to show support for any possible alternatives but instead to describe some of the ways highway funding could be increased. The RABA formula as defined by TEA-21 contains look back and look ahead components that tend to accentuate the impact of any shifts in Highway Account receipts. For example, the recent downturn in the economy is reflected in several elements of the fiscal year 2003 RABA calculation. First, the actual receipts for fiscal year 2001 were lower than expected. Second, the downturn caused a need to correct for optimistic projections of fiscal year 2001 receipts made in December 1999. Third, the fiscal year 2003 projections are lower than those contained in TEA-21 because the updated projections reflect the current economic conditions. There are several changes that could be made to reduce the potential for dramatic swings in funding for highway programs but maintain a tie to actual receipts credited to the Highway Account. For example, changes to the RABA adjustment that could smooth out the impact of significant funding changes would include (1) eliminating the look ahead part of the RABA calculation, (2) averaging the look back part of the calculation over 2 years, and (3) distributing the RABA adjustments over 2 years. In figure 4, we show the actual RABA adjustments under the current structure and the adjustments that would have been made using these three options from fiscal years 2000 through 2003. As shown, the three options appear to produce less dramatic shifts in funding than the current RABA mechanism over the past four years. However, we did not analyze how these options would perform against different trust fund scenarios or economic cycles in the future. Industry groups have proposed various ways to increase Highway Trust Fund revenue such as crediting the Highway Trust Fund for the interest earned on its balances, increasing the use of tolls, and/or establishing an indexing system to help ensure that gas tax revenues are linked to inflation. Although each of these actions would increase Highway Trust Fund revenues, we have not evaluated their fiscal or public policy implications. Another way to enhance Highway Trust Fund revenues would be to increase highway excise taxes. Although no tax increase is attractive, there are some equity arguments that support an increase in certain highway user taxes. For example, for some time FHWA has reported that heavy trucks (trucks weighing over 55,000 pounds) cause a disproportionate amount of damage to the nation's highways and have not paid a corresponding share for the cost of the pavement damage they cause. Currently, heavy vehicles are taxed at the rate of $100 per year plus $22 for every 1,000 pounds (or fraction thereof) they weigh over 55,000 pounds. However the tax is capped at $550. In 2000, we reported that the Joint Committee on Taxation estimated that raising the ceiling on this fee to $1900 could generate about $100 million per year. Mr. Chairman, this concludes my prepared remarks. I would be pleased to answer any questions you or other members of the Subcommittee may have. For questions regarding this testimony please contact JayEtta Z. Hecker on (202) 512-2834 or at [email protected]. Individuals making key contributions to this testimony included Nikki Clowers, Helen Desaulniers, Mehrzad Nadji, Stephen Rossman, Ron Stouffer, and James Wozny. To determine the reasonableness of the Revenue Aligned Budget Authority (RABA) calculation we relied in part on previous work done by GAO under an agreement with the Department of Transportation's Inspector General which resulted in a February 2002 report: Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes (GAO-02-379R). Under that agreement we (1) performed detailed tests of transactions that represent the underlying basis of the amounts distributed to the Highway Trust Fund, (2) reviewed the Internal Revenue Service's quarterly certifications of these amounts, and (3) reviewed the Office of Tax Analysis' process for estimating amounts distributed to the Highway Trust Fund in the fourth quarter of fiscal year 2001. We also interviewed knowledgeable Department of Treasury, Office of Management and Budget, and Department of Transportation officials who provided documentation and described the processes used to develop the calculation. We obtained from the Treasury's Office of Tax Analysis (OTA) a general description of its economic models, including key inputs and changes made to the models since 1998, which are used to estimate future Highway Trust Fund revenues. Additionally, we reviewed related OTA internal analyses and reports. However, we did not evaluate or certify Treasury's economic models that forecast future Highway Trust Fund revenues. We met with Congressional Budget Office (CBO) officials who described their process for projecting Highway Trust Fund revenues. CBO officials also provided their Highway Trust Fund revenue forecast, which we compared to Treasury's projections. To determine how the $600 million error in the initial RABA adjustment was made, we interviewed Treasury and DOT officials. We also reviewed Treasury's workpapers to determine the source and cause of the error.

The Highway Trust Fund "guarantees" specific annual funding levels for most highway programs on the basis of projected receipts to the fund. It also makes annual adjustments to these funding levels on the basis of actual receipts and revised projections of trust fund revenue. These adjustments are called the Revenue Aligned Budget Authority (RABA). GAO concludes that the fiscal year 2003 RABA calculation appears reasonable. Although the RABA adjustment is clearly severe, it reflects the many ways in which an economic downturn affects the calculation. In late January 2002, the administration announced that the fiscal year 2003 RABA adjustment would be a negative $4.965 billion. Within a few days of the announcement, the administration reported that an error had been made and the correct amount was a negative $4.369 billion--a $600 million difference. Treasury is taking steps to improve its internal controls in order to prevent this type of error from reoccurring. The use of ethanol blended fuel instead of gasoline reduces Highway Trust Fund revenue because it is partially exempt from the standard excise tax on gasoline and 2.5 cents of the tax received on each gallon of gasohol sold is transferred to the General Fund. Gasohol use is projected to rise and the impact of these tax provisions will grow as well. The RABA adjustment could be changed in several ways to help reduce fluctuations in highway funding. However, Congress and the administration must weigh the advantages and disadvantages of these and other ways to stabilize highway funding and increase Highway Trust Fund revenues.

Criminal enterprises generate enormous amounts of cash. To make them easier to conceal and transport, some criminal enterprises convert illicit cash proceeds into monetary instruments, such as traveler's checks, money orders, or cashier's checks. To combat this practice, Treasury, in implementing the requirements of BSA, requires financial institutions to report and maintain records of certain financial transactions. These reporting and recordkeeping requirements, which vary by the amount of the financial transaction, are intended to (1) assist law enforcement officials in criminal, tax, or regulatory investigations and proceedings and (2) help law enforcement officials identify suspicious and unusual financial transactions. To further assist law enforcement officials in their efforts to combat money laundering, financial institutions are urged by Treasury and federal financial industry regulators to develop an effective know-your-customer program. Know-your-customer programs are designed to encourage employees of financial institutions to become familiar with the banking practices of their customers so that they can recognize transactions that are outside the normal course of a customer's business practices and report them as suspicious to the appropriate federal oversight agencies. In implementing BSA requirements, Treasury requires financial institutions to file a currency transaction report for each deposit, withdrawal, exchange of currency, or other payment or transfer by, through, or to financial institutions, that involves more than $10,000 in currency. This requirement includes cashier's checks. Because concern existed that money launderers were making financial transactions in amounts of $10,000 or less to evade the BSA reporting requirements, Congress in 1988 amended the BSA to require financial institutions to capture, verify, and retain a record of the identity of the purchasers of cashier's checks and certain other monetary instruments for currency of $3,000 or more. The Secretary of the Treasury also determined that it would be useful to criminal investigators to require banks to retain (1) either the original or a copy of certain checks, including cashier's checks, exceeding $100 and (2) records prepared or received in the ordinary course of business that would be needed to reconstruct a customer's deposit account and to trace through the bank's processing system a check in excess of $100 deposited in an account. Treasury requires that these records be retained for 5 years and be made readily available to the Secretary of the Treasury upon request. In addition, after it had received inquiries from financial institutions about whether suspicious transactions should be reported and what information should be reported, the Department of the Treasury issued Administrative Ruling 88-1 on June 22, 1988. This ruling encouraged but did not require financial institutions to report transactions that might be "...relevant to a possible violation of the BSA or its regulations or indicative of money laundering or tax evasion" to the local office of the Internal Revenue Service's (IRS) Criminal Investigation Division (CID). Also in 1988, the Comptroller of the Currency Regulation 12 C.F.R. section 21.11 and corresponding regulations issued by the other bank regulatory agencies required financial institutions to report suspected money laundering and/or BSA violations and provide a copy of these reports to the local office of IRS' CID. A 1992 amendment to BSA prohibits financial institutions from notifying persons involved in suspicious transactions that the transaction had been reported to IRS. Table 1 summarizes the current recordkeeping and reporting requirements for cashier's checks. In 1990, Treasury developed a regulation to implement the 1988 amendment to BSA that required financial institutions to capture, verify, and retain information on the identity of purchasers of cashier's checks and other monetary instruments. After considering several alternative recordkeeping requirements, including a requirement that information be kept on copies of monetary instruments and be retrievable by copy, Treasury concluded that maintaining a log of the BSA-required information would be the most effective method of keeping the information. Imposing a specific requirement that financial institutions maintain the BSA-required information on copies of monetary instruments was viewed as too burdensome because, according to Treasury officials, it would require financial institutions to sift through thousands of documents located at various branches to comply with a Treasury request for purchaser information. Treasury also took into consideration that financial institutions keep different kinds of records for each type of monetary instrument and decided that a log would make the BSA information more easily accessible by both the financial institutions and the Treasury Department. Treasury's August 1990 regulation requiring the log did not specify the form in which the log was to be maintained. In addition, the 1990 regulation allowed for but did not require that a separate log be maintained for each type of monetary instrument. Treasury anticipated that it would request copies of logs by date of issuance rather than by customer name, account number, or type of monetary instrument. Subsequent to the institution of the log requirement, Treasury found that the BSA information that was being logged on the sale or exchange of cashier's checks for currency was seldom used by law enforcement officials and federal regulators to initiate or conduct money laundering investigations. Compliance with the log requirement was found to impose an expensive and time-consuming burden on the financial industry. As a result, in October 1994, Treasury rescinded the log requirement. Treasury now permits financial institutions to maintain the required BSA information in any format they choose, as long as the information can be readily retrieved at the request of the Secretary of the Treasury. Federal regulators, financial industry officials and advisory groups, and law enforcement officials with whom we spoke or who had expressed their views in published documents agreed that the rescinding of the log requirement that was associated with current BSA recordkeeping requirements and the renewal of emphasis on having financial institutions (1) develop effective know-your-customer programs and (2) report suspicious financial transactions, are sufficient requirements for financial institutions issuing cashier's checks. In addition, they agreed that imposing additional recordkeeping requirements, such as one that would specifically require financial institutions to retrieve copies of cashier's checks by customer name or account number, would not add to the effectiveness of the current BSA recordkeeping requirements. Federal regulators, financial industry officials and advisory groups, and law enforcement officials with whom we spoke or who had expressed their views in published documents supported Treasury's decision to rescind the log requirement for cashier's checks and other monetary instruments. Reasons cited included the time and effort it took to retrieve the required BSA information on specific purchasers, the limited usefulness of the data retrieved, and the expense associated with maintaining the data. In 1993, Treasury formed a money laundering task force to consider ways to reduce the regulatory burden of complying with BSA while enhancing the utility of the information collected. In 1994, the task force concluded that the BSA information that financial institutions were required to maintain in logs had been infrequently requested and used by law enforcement officials. In addition, the task force and representatives of the financial services industry found that compliance with the log requirement imposed an expensive and time-consuming burden on financial institutions when weighed against more immediate leads in the hands of law enforcement officials, such as reports of suspicious transactions that were being sent directly to IRS. Criminal investigators from IRS and the FBI said that, because of other leads and the ease of utilizing information obtained from direct reporting of suspicious criminal activities, including suspicious-transaction reports, the logged BSA data on the sale or exchange of monetary instruments were used infrequently. They said that the logged BSA information was used on a limited basis, primarily to build a stronger case against a suspect or for further investigation or research. Representatives of financial institutions said that they found the log requirement to be costly and burdensome. To avoid the requirement, some financial institutions prohibited the direct sale of monetary instruments for cash to both deposit and nondeposit customers. Under this policy, customers were required to deposit cash into an account from which a financial institution could then issue a withdrawal to pay for the monetary instrument. Many bankers had indicated their preference for policies prohibiting the sale of monetary instruments for cash because this lessened the possibility of errors and omissions on the logs and eliminated the additional paperwork created by the log requirement. The American Bankers Association estimated in October 1994 that the elimination of the log requirement could save the financial industry about $1 million a year in compliance costs and ease the administrative burden on financial institutions. Federal regulators, financial industry officials and advisory groups, and law enforcement officials with whom we spoke or who had expressed their views in published documents agreed that increased emphasis is currently being placed on developing effective know-your-customer programs and suspicious-transaction reporting, that banks are required to retain copies of certain monetary instruments, and that financial institutions are required to obtain purchaser identifying information. They further agreed that these requirements are sufficient for assisting law enforcement officials in their efforts to detect and further investigate the use of monetary instruments to launder money. Treasury consulted with a BSA advisory group composed of 30 representatives from the financial services industry, trades, businesses, and federal and state governments. Treasury concurred with the BSA advisory group's conclusion that financial institutions' resources could be more effectively used to assist law enforcement officials if more emphasis were placed on (1) developing effective know-your-customer programs and (2) reporting suspicious financial transactions to the appropriate regulatory agencies. The American Bankers Association also agreed with this conclusion. Treasury and federal financial regulators have increased their efforts to alert financial institutions to be more aware that the institutions may be misused by criminals who engage in financial transactions to conceal illegal proceeds and avoid federal currency transaction reporting requirements. Financial institutions are being encouraged to become more familiar with the banking practices of their customers--commonly referred to as the know-your-customer program--so that transactions that are outside the norm can be readily identified and reported to appropriate regulatory agencies as suspicious. Treasury expects to issue federal guidelines on developing know-your-customer programs and reporting suspicious transactions in 1995. In the absence of such guidelines, federal bank regulators and financial industry groups have for some time provided guidance to their members either in writing or through seminars that address the importance of know-your-customer programs and suspicious-transaction reporting. These guidelines and seminars provided tips to financial institutions for detecting the use of cashier's checks and certain other monetary instruments to launder money. Appendix II provides information on guidance provided by the three major bank regulatory agencies and on money laundering seminars held by financial industry groups to inform their members. Law enforcement officials responsible for combating money laundering activities with whom we spoke said that in light of the increased emphasis being placed on the development of know-your-customer programs and the reporting of suspicious transactions, no additional recordkeeping requirements are needed beyond those that are already in place. IRS and FBI criminal investigators said that they support the efforts of federal regulators to encourage financial institutions to place more emphasis on reporting suspicious transactions. These law enforcement officials said that current efforts to promote direct reporting of suspicious transactions would be more beneficial to them than searching through logs of information, because direct reporting would provide a more immediate and direct lead to criminal investigators. They also said that the increased emphasis on developing know-your-customer programs and reporting suspicious transactions, together with the ongoing requirement that financial institutions retain information on purchasers of monetary instruments, should improve law enforcement's ability to detect and further investigate the use of monetary instruments to launder money. Federal regulators, financial industry and advisory groups, and federal law enforcement officials with whom we spoke or who had expressed their views in published documents agreed that current recordkeeping requirements for cashier's checks--together with the renewed emphasis being placed on the development of effective know-your-customer programs and suspicious-transaction reporting requirements--are sufficient means for assisting law enforcement officials in their efforts to combat the use of cashier's checks and certain other monetary instruments to launder money. In June 1995, we requested comments on a draft of this report from the Secretary of the Treasury or his designee, the Commissioner of IRS or her designee, and the American Bankers Association. In written responses, the Director of Treasury's Financial Crimes Enforcement Network, the IRS Assistant Commissioner of Criminal Investigations, and the Senior Federal Counsel on Government Relations and Retail Banking of the American Bankers Association all agreed with the information presented and the conclusion reached. We are sending copies of this report to the Secretary of the Treasury, the Director of Treasury's Financial Crimes Enforcement Network, the Commissioner of Internal Revenue, the IRS Assistant Commissioner of Criminal Investigations, the Attorney General, the Chief of the FBI's Economic Crimes Unit, and other interested parties. We will also make copies available to others upon request. This report was prepared under the direction and guidance of Chas. Michael Johnson, Evaluator-in-Charge. Please contact me at (202) 512-8777 if you have any questions concerning this report. As agreed with the Committees, we limited the scope of our review to (1) identifying current recordkeeping requirements and (2) determining the views of federal government and financial industry officials on the need for additional recordkeeping requirements for financial institutions issuing cashier's checks. To familiarize ourselves with how cashier's checks are issued and to identify recordkeeping and reporting requirements imposed on financial institutions issuing cashier's checks, we reviewed pertinent provisions of the Bank Secrecy Act, relevant federal rules and regulations, and published material such as financial and legal industry reports on BSA compliance. We also interviewed officials from the Department of the Treasury's Financial Crimes Enforcement Network and IRS' Criminal Investigation Division (CID) to obtain their views on the level of compliance with these requirements and the need for additional requirements. We obtained the views of the Senior Federal Counsel on Government Relations and Retail Banking of the American Bankers Association on the cost and impact of current, previous, and proposed recordkeeping and reporting requirements for cashier's checks. We also discussed the use of these logs by law enforcement officials and obtained the American Bankers Association's views on whether additional recordkeeping and reporting requirements for cashier's checks are needed. We met with law enforcement officials of IRS' CID and the FBI's Economic Crimes Unit to ascertain what problems, if any, they may have with current, previous, and proposed recordkeeping and reporting requirements. We also discussed whether improvements are needed to assist them in their efforts to combat the use of cashier's checks and other monetary instruments to launder money. We consulted with officials from the Banking and Supervision units of the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) in Washington, D.C., to obtain their views on current, previous, and proposed recordkeeping and reporting requirements and to identify efforts undertaken by the banking industry to ensure compliance with BSA and regulatory requirements. We discussed steps taken by these bank regulators to combat the use of cashier's checks and other monetary instruments to launder money and reviewed relevant agency documents relating to detecting and deterring money laundering. We could not address the extent to which cashier's checks have been involved in money laundering schemes because no statistical data existed. We did our review in accordance with generally accepted government auditing standards from November 1994 through March 1995 at the Department of the Treasury in Washington, D.C.; at IRS' CID in Washington, D.C., and Alexandria, VA; at the FBI in Washington, D.C.; and at various financial and regulatory organizations in Washington, D.C. In the absence of standard know-your-customer guidelines from Treasury, federal bank regulators have issued guidance that addresses the importance of developing effective controls to detect and report, among other things, the suspected use of cashier's checks to launder money. For example, OCC has periodically reissued a pamphlet to national banks entitled Money Laundering: A Banker's Guide to Avoiding Problems. In a June 1993 update of this pamphlet, OCC reemphasized that know-your-customer policies are a bank's most effective weapon against being used unwittingly to launder money. The OCC pamphlet stated that knowing your customers includes requiring appropriate identification and being alert to unusual or suspicious transactions, including those involving cashier's checks or other monetary instruments. The OCC pamphlet also highlighted suspicious activities that bank employees should look for and included a discussion of ways bank customers may attempt to avoid BSA reporting requirements. In March 1991, FDIC provided guidance to state nonmember banks on reporting suspicious transactions. The guidance encouraged these banks to be alert to the possibility that they may be misused by persons who are intentionally attempting to evade the BSA reporting requirements or who are engaging in transactions that may involve money laundering. In January 1995, FRB provided guidance to its member banks outlining the importance of know-your-customer programs and the detection and reporting of suspicious transactions. FRB guidance to its members emphasized that it is imperative that financial institutions adopt know-your-customer guidelines or procedures to ensure the immediate detection and identification of suspicious activity at the institution. FRB's January 1995 guidance noted that an integral part of an effective know-your-customer policy is to have comprehensive knowledge of the transactions carried out by a customer in order to be able to identify transactions that are inconsistent. In addition, informative publications have been issued and various money laundering conferences and seminars have been held to discuss new developments and changes in the oversight of criminal activities to launder money. These efforts have involved federal regulators, law enforcement and financial industry groups, and trade associations. For example, the American Bankers Association, in conjunction with the American Bar Association's Criminal Justice Section, periodically holds Money Laundering Enforcement Seminars to highlight Treasury initiatives in the money laundering area. An October 1994 seminar, sponsored by the American Bankers Association and the American Bar Association, addressed a proposal for mandatory suspicious-transaction reporting and the need for banks to develop know-your-customer programs. The seminar also included a discussion on the use of monetary instruments to launder money. The American Bankers Association estimated that it alone had trained 75,000 to 100,000 bankers in the past 8 years through these seminars. The following are some examples highlighted in the guidance provided to financial institutions of activities that might be considered inconsistent with a customer's normal business activity: an account that shows frequent deposits of large bills for a business that generally does not deal in large amounts of cash; accounts with very large volumes of deposits in cashier's checks, money orders, and/or wire transfers when the nature of the account holder's business does not justify such activity; and deposits of numerous checks but rare withdrawals of currency for daily operations. The following are some examples of other customer activities that may trigger suspicious-transaction reports: a reluctance on the part of the customer to produce identification or provide personal background information when opening an account or purchasing monetary instruments above a specified threshold, a customer's taking back part of the currency to reduce the purchase to below $3,000 after becoming aware of the financial institution's recordkeeping requirement, and a customer's coming into the same institution on consecutive or near-consecutive business days to purchase cashier's checks in amounts of less than $3,000. 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. 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Pursuant to a legislative requirement and a congressional request, GAO provided information on: (1) the current recordkeeping requirements for cashier checks; and (2) whether federal government and financial industry officials believe that additional recordkeeping requirements should be imposed on those financial institutions issuing cashier checks. GAO found that the Bank Secrecy Act (BSA) requires financial institutions issuing or exchanging cashier's checks to: (1) file a currency transaction report for financial transactions over $10,000; (2) capture and retain purchaser information for transactions between $3,000 to $10,000; (3) retain copies of cashier's checks for amounts over $100; and (4) maintain a record of certain check transactions exceeding $100. In addition, GAO found that federal government and financial industry officials believe that the current recordkeeping and reporting requirements are sufficient, and imposing additional requirements would not add to the effectiveness of the current BSA recordkeeping requirements.

In 1990, we first designated DOE program and contract management as an area at high risk of fraud, waste, abuse, and mismanagement. In January 2009, to recognize the progress made at DOE's Office of Science, we narrowed the focus of the high-risk designation to two DOE program elements, NNSA and the Office of Environmental Management. In February 2013, our most recent high-risk update, we narrowed this focus to major projects (i.e., projects over $750 million) at NNSA and the Office of Environmental Management. DOE has taken some steps to address our concerns, including developing an order in 2010 (Order 413.3B) that defines DOE's project management principles and process for executing a capital asset construction project, which can include building or demolishing facilities or constructing remediation systems.NNSA is required by DOE to manage the UPF construction project in accordance with this order. The project management process defined in Order 413.3B requires DOE projects to go through five management reviews and approvals, called "critical decisions" (CD), as they move forward from project planning and design to construction to operation. The CDs are as follows: CD 0: Approve a mission-related need. CD 1: Approve an approach to meet a mission need and a preliminary cost estimate. CD 2: Approve the project's cost, schedule and scope targets. CD 3: Approve the start of construction. CD 4: Approve the start of operations. In August 2007, the Deputy Secretary of Energy originally approved CD 1 for the UPF with a cost range of $1.4 to $3.5 billion. In June 2012, the Deputy Secretary of Energy reaffirmed CD 1 for the UPF with a cost range of $4.2 to $6.5 billion and approved a phased approach to the project, which deferred significant portions of the facility's original scope. According to NNSA documents, this deferral was due, in part, to the project's multibillion dollar increased cost estimate and to accelerate the completion of the highest priority scope. In July 2013, NNSA decided to Table 1 shows the combine CD 2 and CD 3 for the first phase of UPF.UPF's phases, scope of work, cost estimate, as of June 2012, and proposed start of operations. However, the future status of the UPF project and the process by which enriched uranium operations at the Y-12 plant will be modernized are unclear. NNSA has recently decided to: (1) delay later UPF phases, (2) assess options other than the UPF for enriched uranium operations at the Y-12 plant, (3) change a key technological requirement for the UPF, and (4) develop a strategy for how NNSA will maintain the Y-12 plant's uranium capabilities into the future. Specifically: NNSA is delaying UPF Phase II and Phase III a minimum of 2 years. In a December 2013 testimony before the Defense Nuclear Facilities Safety Board, the NNSA Acting Administrator said that the agency does not expect to move out the facilities that house machining operations (Building 9215) as well as assembly and dismantlement operations (Building 9204-2E) until 2038 due primarily to budget constraints. NNSA previously estimated that these capabilities would be operational in the UPF no later than 2036. NNSA is currently evaluating alternatives to the UPF. In early January 2014, NNSA began to consider options other than the UPF for enriched uranium operations at the Y-12 plant because, according to the UPF Federal Project Director, the project is facing budget constraints, rising costs, and competition from other high-priority projects within NNSA--such as the planned B61 bomb and W78/88 warhead nuclear weapon life extension projects. NNSA has initiated a formal analysis of UPF alternatives--an analytical comparison of the operational effectiveness, costs, and suitability of proposed solutions to address a mission need. According to the UPF Federal Project Director, the analysis of alternatives, which is scheduled to be completed by April 15, 2014, will include a potential solution for replacing only uranium purification and casting capabilities (Building 9212) by July 2025 at a cost that does not exceed $6.5 billion. According to the NNSA Acting Administrator, NNSA does not plan to continue full operations in Building 9212, which has been operational for over 60 years, past 2025 because the building does not meet modern safety standards, and increasing equipment failure rates present challenges to meeting required production targets. While NNSA is undertaking the analysis of alternatives, the UPF project team is currently (1) delaying the start of approximately $300 million in site preparation and long lead procurement activities and (2) will no longer complete engineering work to have the UPF's design reach the 90 percent complete milestone by August 2014, as previously planned. NNSA is currently evaluating alternatives for a key uranium purification technology originally planned for UPF Phase I, which now may be part of UPF Phase II. In late January 2014, NNSA decided to consider alternatives from its baseline uranium purification technology--which was to be part of UPF Phase I scope and had been under development since 2005--to a new technology, according to the UPF Federal Project Director. NNSA believes the new technology will require less space in the UPF and be more efficient to operate. In early February 2014, NNSA directed the UPF contractor to suspend design efforts in two UPF processing areas impacted by the potential technology change. Furthermore, NNSA is now considering installing this new technology as part of UPF Phase II scope, pending the results of further analysis. NNSA is currently developing a Uranium Infrastructure Strategy for the Y-12 plant. In early February 2014, the NNSA Deputy Administrator for Defense Programs directed his staff to develop a Uranium Infrastructure Strategy, which establishes the framework of how NNSA will maintain the Y-12 plant's uranium mission capabilities into the future. Key aspects that are to be considered during the strategy's development include, among other things: (1) an evaluation of the uranium purification capabilities and the throughput needed to support requirements for life extension programs and nuclear fuel for the U.S. Navy; (2) an evaluation of the alternatives to the UPF that prioritizes replacement capabilities by risk to nuclear safety, security, and mission continuity; (3) an identification of existing infrastructure as a bridging strategy until replacement capability is available in new infrastructure. A draft of the strategy is due to the Deputy Administrator by early April 2014. To assess the maturity of new technologies, DOE and NNSA adopted the use of Technology Readiness Levels (TRL). DOE took this action in response to our March 2007 report that recommended that DOE develop a consistent approach to assess the extent to which new technologies have been demonstrated to work as intended in a project before starting construction.which is the least mature; through TRL 4, in which the technology is validated in a laboratory environment; to TRL 9--the highest maturity level, where the technology as a total system is fully developed, integrated, and functioning successfully in project operations. As shown in table 2, TRLs start with TRL 1, we found that DOE's TRL guidance was not always consistent with best practices followed by other federal agencies, as well as with our prior recommendations. Specifically, DOE's TRL guidance recommended that new technologies reach TRL 6--the level where a prototype is demonstrated in a relevant or simulated environment and partially integrated into the system--at the start of construction (CD 3). However, best practices followed by other federal agencies and our prior recommendations state that new technologies should reach TRL 7-- the level where a prototype is demonstrated in an operational environment, has been integrated with other key supporting subsystems, and is expected to have only minor design changes--at the start of construction. In our November 2010 report, we recommended that the Secretary of Energy evaluate where DOE's guidance for gauging the maturity of new technologies is inconsistent with best practices and, as appropriate, revise the guidance to be consistent with federal agency best practices. In September 2011, DOE issued its revised TRL guidance, but the guidance does not incorporate federal agency best practices and is not fully responsive to our recommendation. Specifically, DOE's revised TRL guidance continues to recommend that new technologies reach TRL 6 at the start of construction, while stating that reaching TRL 7 at the start of construction is a recognized best practice. In November 2010, we reported that NNSA was developing 10 advanced uranium processing and nuclear weapon components production technologies for the UPF. Since that time, NNSA eliminated 1 technology as the agency removed certain operations from the UPF. In April 2013, NNSA chartered an independent peer review team to examine various aspects of the UPF project, including assessing the current TRLs for new technologies. In an August 2013 report, the independent peer review team found that 6 of the 9 new technologies were not as mature as previously reported in the UPF contractor's May 2013 TRL assessment; the independent peer review report also stated that no fundamental technology show stoppers were identified. In addition, the independent peer review report contained multiple technology development related findings and recommendations, and NNSA and the UPF contractor developed a corrective action plan to address them. Table 3 provides a description of the new technologies, the phase in which each technology will be deployed, and the TRL assessment concluded by the UPF contractor in May 2013 and the UPF independent peer review in August 2013. Since our November 2010 report, we identified five additional risks associated with using new technologies in the UPF. Specifically: Integration risks for microwave casting technology. The August 2013 independent peer review team report raised concerns with microwave casting--a process that uses microwave energy to melt and cast uranium metal into various shapes--as it is planned to be integrated in the UPF's casting system.official, the casting system planned for the UPF will employ uranium processing technology, equipment, and steps that are substantially different than the casting system currently used at the Y-12 plant. For example, microwave casting in the UPF will use glovebox enclosures--a containment system of secured gloves attached to a box that allows workers to process nuclear material inside the box without risk of contamination. The independent review team found that the UPF's planned casting glovebox enclosures are: (1) large and somewhat complex, (2) have not had their functionality tested, and (3) have not been demonstrated with microwave casting. As such, the independent review team concluded that microwave casting has not been demonstrated in a relevant environment--a key requirement to reach TRL 6. Technology development risk for special casting technology. In 2012, the UPF project team determined that a different nuclear safety control was needed for special casting--a custom process for casting uranium metal into various shapes--as this process uses more uranium than the regular casting process. For special casting, the UPF contractor is developing a nuclear safety control called "entombment." The entombment control--which uses multiple parts, such as cylinders and an insulation material--would occupy void volume where molten uranium metal could otherwise collect in the event of an improper casting (i.e., mis-pour). However, a key insulation material planned for use in the entombment control failed an important series of performance tests in fiscal year 2013. According to UPF contractor representatives, this failure and the need to identify and test an alternative insulation material is now the project's most significant technology development risk and the primary reason why the special casting technology is currently assessed to be at TRL 3. Transition risks if NNSA switches to a new uranium purification technology. In 2005, NNSA decided to deploy the saltless direct oxide reduction technology--a process that converts uranium dioxide into a useable metal form--into the UPF. The August 2013 UPF independent peer review report concluded that an alternate technology called direct electrolytic reduction and electrolytic refining (DER/ER; currently assessed to be at TRL 3 and 4, respectively) could potentially reduce the UPF's operating costs and produce less radioactive waste compared with the saltless direct oxide reduction technology. In a December 2013 testimony before the Defense Nuclear Facilities Safety Board, the Acting NNSA Administrator stated that early research and development investments in the DER/ER technology are promising and NNSA is actively seeking to mature and deploy the technology into UPF to minimize future waste streams. NNSA is now considering installing this new technology as part of UPF Phase II scope, pending the results of further analysis, and directed the UPF contractor in February 2014 to suspend design efforts in two UPF processing areas impacted by this potential technology change. UPF contractor representatives told us that incorporating DER/ER into the UPF would require significant changes to the facility's design. For example, NNSA officials said that changing to DER/ER would require a complete redesign of the processing areas and their equipment and may require adding new support utilities and that the UPF facility would have to revise its nuclear safety analysis. In addition, the August 2013 UPF independent peer review report found that the UPF project team has not conducted any nuclear criticality studies or developed any nuclear safety controls for the DER/ER technology because the technology was not planned for use in UPF at the time. Assurance risks that the agile machining technology will work as intended before making key project decisions. As stated earlier, NNSA plans to approve a combined CD 2 (approved cost, schedule, and scope targets) and CD 3 (approve start of construction) milestone in for UPF Phase I, which includes the building exterior, all UPF processing areas, and all UPF support systems. In short, UPF Phase I will create key parameters that subsequent UPF phases must work within. Agile machining--a system combining multiple machining operations into a single process that fabricates metal into various shapes--is the key technology planned for UPF Phase II. The August 2013 independent UPF peer review assessed agile machining to be at TRL 4. In December 2013, NNSA decided to no longer fund agile machining technology development efforts because (1) agile machining is not considered a baseline technology for UPF Phase I as it is part of the deferred scope and (2) NNSA is considering combining agile machining development efforts with other machining development efforts used in at the Y-12 plant. According to NNSA officials, the UPF contractor has completed the design for the agile machining prototype, but it will be the responsibility of the UPF Phase II project to mature this technology. GAO-07-336. which requires the successful deployment of all new technologies planned for the UPF, including those scheduled for UPF Phase II. Risk that funding mechanism for UPF technology development activities may not be adequate to develop all new technologies. According to NNSA officials and UPF contractor representatives, NNSA has primarily funded UPF technology development activities from the Y-12 plant-directed research and development (PDRD) program, which requires projects from every part of the Y-12 plant to compete for funding. From fiscal year 2005 to fiscal year 2013, the $73 million in UPF technology development costs have been funded by non-UPF project sources, such as the PDRD program, instead of from the $1 billion specifically allotted to the UPF project, according to the UPF contractor Project Manager. UPF contractor representatives told us that NNSA made the decision to fund technology development activities from non-UPF project sources because some UPF technologies could be used for other operations at the Y-12 plant or at other nuclear weapon stockpile programs. However, NNSA did not select some UPF technology development projects identified as being priority by the UPF project team for PDRD funding. For example, in fiscal year 2013, 19 projects were considered priority by the UPF project team, but NNSA did not fund 3 of these projects. For fiscal year 2014, 19 projects were considered priority by the UPF project team, but NNSA did not fund 7 of these projects. In addition, one of the five UPF technology development risk reduction plans developed by the UPF contractor is to "obtain additional PDRD funding," but the effectiveness of this plan is unclear given that existing UPF technology development projects considered priority have not received funding. NNSA is currently taking some actions to address three of the five UPF technology risks we have identified. NNSA is currently developing plans and making programmatic decisions about the UPF that could address the other two risks but, it is still too soon to determine if these actions will sufficiently address these two risks. Specifically: Microwave casting technology. To address the risks with integrating microwave casting--a process that uses microwave energy to melt and cast uranium metal into various shapes--into the UPF's casting system, the UPF contractor plans to issue a request for proposal in March 2014 for the development of a prototype microwave casting furnace. UPF contractor representatives said that they have had preliminary discussions with two vendors about building the prototype. According to NNSA officials, the UPF contractor will be required to test the prototype in an integrated UPF configuration that includes glovebox enclosures. If completed, we believe these planned actions will help NNSA reduce this risk and identify further mitigation measures that may need to be taken. Special casting technology. For the entombment nuclear criticality safety control planned for special casting--a custom process for casting uranium metal into various shapes--UPF contractor representatives told us that they would like to have a replacement insulation material identified and successfully tested by June 2014. However, NNSA officials said that this June 2014 date is optimistic and may not be met. In addition, UPF contractor officials said they are currently conducting a formal analysis of alternatives for the entombment control. The UPF contractor expects to finish its analysis by the end of January 2014 and brief the results and potential impacts to senior NNSA management. If NNSA completes these planned actions, we believe that the agency may have taken appropriate actions to address this risk. DER/ER technology. According to the UPF Federal Project Director, in February 2014, the NNSA Deputy Administrator for Defense Programs directed NNSA's Production Office--the field office responsible for contractor oversight and management of the Y-12 plant--to: (1) create a technology development plan for DER/ER, (2) develop a preliminary cost estimate for DER/ER technology development, (3) identify existing facilities at the Y-12 plant where DER/ER could be deployed, and (4) use DER/ER in actual uranium operations no later than 2021. However, as noted above, the design of the two UPF processing areas impacted by the potential switch to DER/ER has been suspended. According to the UPF Federal Project Director, these areas are considered part of UPF's deferred scope which means that (1) the UPF will reserve space for DER/ER capabilities and ensure that all needed support utilities are available in the two processing areas and (2) it will be the responsibility for the UPF Phase II project team to install the DER/ER equipment into the UPF. Given the early stages of NNSA's planning, we believe that it is too soon to determine if these actions will address this technology transition risk. Agile machining technology. The UPF is to modernize and consolidate all enriched uranium operations at the Y-12 plant in three phases. Agile machining--a system that combines multiple machining operations for fabricating metal into various shapes into a single process--is the key technology planned for UPF Phase II. As stated above, NNSA decided in December 2013 to no longer fund agile machining technology development efforts (currently assessed at TRL 4) for multiple reasons. UPF contractor representatives told us that (1) they have completed the design of an agile machining prototype; (2) by the end of 2014, they will outline the actions needed to mature the technology to TRL 6; and (3) the UPF Phase II project team will have the responsibility to mature the technology. NNSA is currently evaluating alternatives to the UPF, and the outcome of this evaluation may require different agency actions to address this risk. If NNSA decides to continue with a UPF that includes machining operations, the agency will need to take action to address a recommendation from the August 2013 UPF independent peer review team. Specifically, the peer review team recommended that the UPF project fabricate and test an agile machining prototype before starting construction on the UPF. According to the peer review team, implementing this recommendation is a high-priority action and will help ensure the confident integration of the agile machining technology into UPF at a later date. However, if NNSA decides to construct a facility with only uranium purification and casting capabilities--which do not include machining capabilities--the agency will have to develop alternate plans that detail how machining capabilities will be modernized and how the agile machining technology will be matured. It is too soon to determine if the Uranium Infrastructure Strategy that NNSA is currently developing and scheduled to issue in draft form in early April 2014 will address this issue. Given that NNSA is: (1) currently evaluating potential UPF alternatives; (2) currently developing its Uranium Infrastructure Strategy; and (3) planning to conduct machining operations in its current facility, until at least 2038, we believe it is too early to tell if NNSA is taking appropriate action to address this risk. Technology development funding. The August 2013 UPF independent peer review report recommended that the UPF project fund more technology development activities from project funds instead of PDRD funds. In October 2013, the UPF contractor issued a corrective action plan to address the recommendations from the August 2013 UPF independent peer review. This corrective action plan: (1) lists planned and ongoing actions that the contractor and NNSA will take to address each recommendation, (2) provides an estimated date by which planned actions are to be completed, and (3) identifies which UPF contractor representative or NNSA official is responsible for completing the planned action. As part of this corrective action plan, the UPF Assistant Project Manager for Technology is responsible for determining which technology development activities should be funded directly with UPF project funds and is to prepare a cost estimate for those activities. The UPF Assistant Project Manager for Technology told us that he expects to complete the planned corrective action by the end of March 2014. Adding required technology development activities to the UPF's cost estimate may increase the project's cost estimate, but it may also improve the accuracy and comprehensiveness of the estimate. If NNSA completes these planned actions, we believe that the agency may have taken appropriate actions to address this risk. Enriched uranium operations at the Y-12 plant play a vital role in the national security of the United States by producing critical components for the nuclear weapons stockpile and by supplying fuel for the Navy. There is a clear need for NNSA to replace the old, deteriorating, and high- maintenance facilities at the Y-12 plant. NNSA is currently reevaluating the UPF project and may decide to construct a facility that is smaller and contains only select enriched uranium processing capabilities. Whether NNSA continues with the UPF project or chooses to undertake a smaller project, the facility will likely cost billions of dollars, and its ability to meet critical national security needs will depend on the successful development and deployment of new technologies. It is encouraging that NNSA has taken some steps to manage the development of these technologies. However, as we have detailed in this and other reports, we are concerned that, nearly a decade after the project started, the UPF project continues to face key technology-related risks, including the potential transition risks associated with NNSA's recent decision to consider alternatives to a new uranium purification technology. NNSA is in the process of making key programmatic decisions with the UPF and has some ongoing efforts that may address identified risks if fully and successfully implemented. We will continue to monitor NNSA's progress in addressing these risks as part of our UPF critical decisions reviews as directed by the Fiscal Year 2013 National Defense Authorization Act. In addition, NNSA has not taken action to address the two recommendations related to UPF technology development we made in our November 2010 report: (1) that NNSA ensure that new technologies reach the level of maturity called for by best practices prior to CDs being made on the UPF project and (2) that the agency report to Congress any decisions to approve cost and schedule performance baselines or to begin construction of UPF without first having ensured that project technologies are sufficiently mature. NNSA generally agreed with those recommendations, and we continue to believe that best practices followed by other federal agencies for managing technology development, particularly reaching TRL 7 at the start of construction, are important. By not fully incorporating these practices, NNSA may not be able to ensure that the UPF and its other projects can be completed on time and within budgets. We are not making any new recommendations in this report. We provided a draft of this report to NNSA for comment. In written comments (see Appendix I), the acting NNSA Administrator stated that NNSA's existing TRL guidance, which encourages the achievement of TRL 7 prior to the start of construction (CD 3), provides adequate protection against the premature commitment of resources while giving projects flexibility to make decisions between seeking TRL 6 and TRL 7. In addition, the acting NNSA Administrator stated the agency is closely overseeing and managing UPF's ongoing technology development efforts using on-site personnel and independent reviews to confirm reported progress while also keeping senior management informed of development efforts. We continue to believe that DOE should fully adhere to best practices in its technology development activities. DOE's guidance recognizes that achieving a TRL 7 at the start of construction is a best practice and DOE encourages--but does not require--projects to achieve this level of readiness. Achieving TRL 7--the level where a prototype is demonstrated in an operational environment, has been integrated with other key supporting subsystems, and is expected to only have minor design changes--does require more time, effort, and money than achieving TRL 6. However, TRL 7 is seen as a best practice because it provides greater assurance the new technologies will work as intended before making very significant resource investments in construction activities, which for the UPF will total billions of dollars. Notably, DOD follows best practices in this area and recommends projects reach TRL 7 before production and deployment, or the equivalent of beginning construction on a DOE project. Regarding NNSA's oversight of technology development efforts, it is clear that certain NNSA actions, such as the August 2013 UPF independent peer review, helped identify and respond to some technology development issues. However, since NNSA is currently considering alternatives to UPF and developing the Uranium Infrastructure Strategy for the Y-12 plant, it is too early to determine if the oversight and management actions cited by NNSA will be sufficient to fully address all the risks we identified. NNSA also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of NNSA, 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 members have any questions on matters discussed in this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. NNSA's attachment provided technical comments which we incorporated as appropriate in the final report. David C. Trimble, (202) 512-3841 or [email protected]. In addition to the individual named above, Jonathan Gill, Assistant Director; Patrick Bernard; Antoinette Capaccio; Will Horton; Katrina Pekar-Carpenter; Dr. Timothy Persons, and Ron Schwenn made key contributions to this report.

NNSA conducts enriched uranium activities--including producing components for nuclear warheads and processing nuclear fuel for the U.S. Navy--at the Y-12 National Security Complex in Tennessee. NNSA has identified key shortcomings in the Y-12 plant's current uranium operations, including rising costs due to the facility's age. In 2004, NNSA decided to build a more modern facility--the UPF--which will use nine new technologies that may make enriched uranium activities safer and more efficient. In November 2010, GAO reported on the UPF and identified risks associated with the use of new technologies ( GAO-11-103 ). The Fiscal Year 2013 National Defense Authorization Act mandated that GAO assess the UPF quarterly. This is the third report, and it assesses (1) additional technology risks, if any, since GAO's November 2010 report and (2) NNSA's actions to address any risks. GAO reviewed NNSA and contractor documents and interviewed NNSA officials and contractor personnel. GAO is not making any new recommendations. However, NNSA should continue actions to address the two recommendations--which NNSA generally agreed with--in GAO's November 2010 report related to ensuring that technologies reach optimal levels of maturity prior to critical project decisions. In commenting on a draft of this report, NNSA said its current technology maturation guidance is adequate. GAO has identified five additional risks since its November 2010 report ( GAO-11-103 ) associated with using new technologies in the National Nuclear Security Administration's (NNSA) Uranium Processing Facility (UPF), which is to be built in three interrelated phases. These risks and the steps that NNSA is taking to address them include the following: Technology integration risks . An August 2013 UPF independent peer review team concluded that the microwave casting technology--a process that uses microwave energy to melt and form uranium into various shapes--has not been demonstrated in a relevant environment, which is a requirement to reach a key technology maturity milestone. To address this risk, NNSA officials said they plan to accelerate the procurement and environmental testing of a microwave casting prototype. Technology development risks . A key insulation material planned as a nuclear safety control during uranium casting failed a series of performance tests in fiscal year 2013. According to UPF contractor representatives, this risk is now the project's most significant technological risk. To address this risk, these representatives said they are trying to identify a replacement insulation material and exploring the use of a different safety control. Technology transition risks . NNSA is currently evaluating an alternative technology to the UPF's baseline uranium purification technology, which has been under development since 2005. The alternative technology may generate less radioactive waste and may be more efficient to operate than the baseline technology. If NNSA switches technologies, NNSA officials said that the UPF contractor (1) will have to redesign the processing area and equipment; (2) may have to add utilities; and (3) will have to revise the UPF's nuclear safety analysis, creating the potential for further project risks. Performance assurance risks . NNSA stopped development efforts on a key machining technology, which is part of the UPF's second phase. As a result, NNSA may not have optimal assurance that the technology will work as intended before starting construction. However, in January 2014, NNSA began (1) reevaluating alternatives to the UPF that may not include machining operations and (2) developing a uranium infrastructure strategy, which is a framework for how NNSA will maintain all uranium capabilities into the future. It is too soon to determine if the draft uranium strategy, scheduled to be issued in April 2014, will outline actions to address this risk. Funding risk . Instead of using UPF project funds, NNSA has primarily funded UPF technology development activities from a limited research and development program. As a result of budget constraints in this program, for fiscal year 2014, 7 of the 19 technology projects the UPF contractor considered priority were not funded. Per a corrective action plan recently developed, the UPF Assistant Project Manager for Technology is responsible for determining which technology development activities should be funded directly with UPF project funds and is to prepare a cost estimate for those activities. This official said he expects to complete these estimates in March 2014.

A component of DHS, the Coast Guard is a multimission military service that serves as the principal federal agency responsible for maritime safety, security, and environmental stewardship. In addition to being one of the five Armed Services of the United States, the Coast Guard serves as a law enforcement and regulatory agency with broad domestic authorities. In its most recent Posture Statement, the Coast Guard reported having nearly 49,900 full-time positions--about 42,600 military and 7,300 civilians. In addition, the service reported that it has about 8,100 reservists who support the national military strategy or provide additional operational support or surge capacity during times of emergency, such as natural disasters. The Coast Guard also reported that it utilizes the services of approximately 29,000 volunteer auxiliary personnel who conduct a wide array of activities, ranging from search and rescue to boating education. The Coast Guard has responsibilities that fall under two broad mission categories--homeland security and non-homeland security. Within these categories, the Coast Guard's primary activities are further divided into 11 statutory missions, as shown in table 1. For each of these 11 missions, the Coast Guard has developed performance measures to communicate agency performance and provide information for the budgeting process to Congress, other policymakers, and taxpayers. Each year, the Coast Guard undergoes a process to assess performance and establish performance targets for the subsequent year. In May 2009, the Coast Guard published its most recent performance report, which presents the service's accomplishments for fiscal year 2008. To help carry out its missions, the Coast Guard has a large-scale acquisition program, called Deepwater, under way to modernize its fleet. The Deepwater program now includes projects to build or modernize five classes each of vessels and aircraft, as well as to procure other capabilities such as improved command, control, communications, computer, intelligence, surveillance, and reconnaissance systems. To carry out these acquisitions, the Coast Guard awarded a contract in June 2002 to Integrated Coast Guard Systems (ICGS), a joint venture formed by Lockheed Martin Corporation and Northrop Grumman Ship Systems, to serve as a systems integrator. However, in April 2007, the Coast Guard acknowledged it had relied too heavily on contractors. This reliance, among other concerns, contributed to an inability to control costs. As a result, the Coast Guard initiated several major changes to the acquisition approach to Deepwater, the key one being that the Coast Guard would take over the lead role in systems integration from ICGS. The Coast Guard's budget request for fiscal year 2010 is $9.73 billion, which is approximately $393 million (or 4.2 percent) more than the service's enacted budget for fiscal year 2009 (see table 2). These calculations do not include either the supplemental funding of $242.5 million that the Coast Guard reported receiving in fiscal year 2009 or the $240 million provided by the Recovery Act (discussed below). When the supplemental and the Recovery Act funding are taken into account and added to the fiscal year 2009 enacted budget, the calculations reflect a decrease of about 1 percent from fiscal year 2009 to fiscal year 2010. Of the $9.73 billion requested for fiscal year 2010, about $6.6 billion, or approximately 67 percent, is for operating expenses (OE). The OE account is the primary appropriation that finances the Coast Guard's activities, including operating and maintaining multipurpose vessels, aircraft, and shore units. In comparing the 2010 budget request to the 2009 enacted budget, funding for the OE account represents an increase of $361 million (or about 6 percent). The next two largest accounts in the fiscal year 2010 budget request--each with funding at about $1.4 billion--are the acquisition, construction, and improvements account (AC&I) and the retired pay account. Collectively, these two accounts represent about 28 percent of the Coast Guard's total budget request for fiscal year 2010. In terms of percentage increases in comparing the 2010 budget request to the 2009 enacted budget, the retired pay account reflects the highest percentage increase (about 10 percent) of all accounts. According to the Coast Guard, some of the key initiatives for fiscal year 2010 include increasing the number of marine inspectors and investigative officers, and supporting financial management improvements, among others. Furthermore, as a result of the emergence of the U.S. Global Positioning System (a space-based system of satellites) as an aid to navigation, the long-range radio-navigation system known as LORAN-C (a terrestrial-based system operated by the Coast Guard) is expected to be terminated in fiscal year 2010. This termination, according to the Coast Guard, is projected to result in a savings of $36 million in fiscal year 2010 and additional savings of $154 million over the following 4 years. Although the Coast Guard receives funding by appropriation account rather than by individual missions, the Coast Guard provides an estimated comparison of homeland security versus non-homeland security funding as part of its annual budget request. Based on these estimates, the Coast Guard's fiscal year 2010 budget request for homeland security missions represents approximately 36 percent of the service's overall budget, with the non-homeland security funding representing approximately 64 percent. However, as a multimission agency, the Coast Guard notes that it may conduct multiple mission activities simultaneously. For example, a multimission asset conducting a security escort is also monitoring safety within the harbor and could potentially be diverted to conduct a search and rescue case. As a result, it is difficult to accurately detail the level of resources dedicated to each mission. Figure 1 shows the Coast Guard's estimated funding levels for fiscal year 2010 by each statutory mission. In addition to the Coast Guard's enacted budget for fiscal year 2009, the Coast Guard has received $240 million of funding under the Recovery Act. According to the Coast Guard, the service's Recovery Act funds are to be allocated as follows: $142 million is to be used to fund bridge alteration projects in four states--the Mobile Bridge in Hurricane, Alabama; the EJ&E Bridge in Devine, Illinois; the Burlington Bridge in Burlington, Iowa; and the Galveston Causeway Railroad Bridge in Galveston, Texas. $88 million in Recovery Act funds is to support shore infrastructure projects--construction of personnel housing, boat moorings, and other improvements--in Alaska, Delaware, North Carolina, Oregon, Virginia, and Washington. $10 million is to help upgrade or replace worn or obsolete components on the Coast Guard's fleet of 12 High Endurance Cutters. The 40-plus-year-old cutters benefiting from the Recovery Act-funded projects are based in Kodiak, Alaska; Alameda and San Diego, California; Honolulu, Hawaii; Charleston, South Carolina; and Seattle, Washington. While the Coast Guard's budget has increased considerably since 2003, the long-term budget outlook for the agency is uncertain. From fiscal year 2003 through fiscal year 2009, the Coast Guard's budget increased an average of 5.5 percent per year. However, this administration's current budget projections indicate that the DHS annual budget is expected to remain constant or decrease over the next 10 years. It is important to note that these budget projections are nominal figures, which are not adjusted or normalized for inflation. Thus, if inflationary pressures arise in future years, budgetary resources available to DHS could be further strained. Given the uncertainty of future budgets, it remains important for the Coast Guard to ensure that limited resources are utilized most effectively to successfully manage existing challenges and emerging needs. For example, as we reported in March 2008, affordability of the Deepwater program has been an ongoing concern for many years, and will continue to be a major challenge to the Coast Guard given the other demands upon the agency for both capital and operations spending. The increasing demand for Coast Guard resources in the arctic region also presents an emerging challenge that will need to be balanced against competing priorities. For example, two of the Coast Guard's three polar icebreakers are more than 30 years old and, and in 2008 the Coast Guard estimated that it could cost between $800 million to $925 million dollars per ship to procure new replacement ships. Such needs could pose challenges to the Coast Guard in an era of increased budget constraints. Each year, the Coast Guard conducts a process of performance evaluation, improvement planning, and target setting for the upcoming year. According to the Coast Guard, this process helps ensure that the performance measures and associated targets adequately represent desired Coast Guard mission outcomes, are reflective of key drivers and trends, and meet applicable standards for federal performance accounting. In addition, as part of a larger DHS effort, the Coast Guard conducted a more comprehensive evaluation of its performance measures in fiscal year 2008. This evaluation process included input on potential improvements to the Coast Guard's performance measures from the DHS Office of Program Analysis and Evaluation and us. Consequently, the Coast Guard initiated a number of changes to its performance reporting for fiscal year 2008 to better capture the breadth of key mission activities and the results achieved. Our review of the Coast Guard's performance reporting for fiscal year 2008 indicates that the Coast Guard revised or broadened several existing measures. As a result, the Coast Guard reported on a total of 21 primary performance measures for fiscal year 2008--3 homeland security mission measures and 18 non- homeland security mission measures. This represents a substantial change from previous years, in which the Coast Guard reported on a single performance measure for each of the service's 11 statutory missions (see app. I for a list of the primary performance measures and reported performance results for fiscal years 2004 through 2008). One of the principal changes involved the disaggregation of existing measures into several distinct component measures. For example, in prior years, the marine safety mission was assessed using one primary measure--the 5- year average annual mariner, passenger, and recreational boating deaths and injuries. However, the Coast Guard reported on six different measures for the marine safety mission in fiscal year 2008--annual deaths and injuries for each of three separate categories of individuals (commercial mariners, commercial passengers, and recreational boaters) as well as 5- year averages of each of these three categories. As indicated in table 3, the Coast Guard reported meeting 15 of its 21 performance targets in fiscal year 2008. Also, table 3 shows that the Coast Guard reported meeting all performance targets for 5 of the 11 statutory missions--ports, waterways, and coastal security; drug interdiction; marine environmental protection; other law enforcement; and ice operations. Regarding the drug interdiction mission, for example, the fiscal year goal was to achieve a removal rate of at least 28 percent for cocaine being shipped to the United States via non- commercial means. The Coast Guard reported achieving a removal rate of 34 percent. For another 3 of the 11 statutory missions--aids to navigation, search and rescue, and marine safety--the Coast Guard reported partially meeting performance targets. For each of these missions, the Coast Guard did not meet at least one performance target among the suite of different measures used to assess mission performance. For example, regarding the search and rescue mission, which has two performance goals, the Coast Guard reported that one goal was met (saving at least 76 percent of people from imminent danger in the maritime environment), but the other goal (saving at least 87 percent of mariners in imminent danger) was narrowly missed, as reflected by a success rate of about 84 percent. For the other 3 statutory missions--defense readiness, migrant interdiction, and living marine resources--the Coast Guard reported that it did not meet fiscal year 2008 performance targets. However, for these missions, the Coast Guard reported falling substantially short of its performance target for only one mission--defense readiness. Although performance for this mission rose slightly--from 51 percent in fiscal year 2007 to 56 percent in fiscal year 2008--the Coast Guard's goal was to meet designated combat readiness levels 100 percent of the time. However, the Coast Guard remains optimistic that the relevant systems, personnel, and training issues--which are being addressed in part by the Deepwater acquisition program--will result in enhanced capability for all missions, including defense readiness. Yet, the Coast Guard further noted in its annual performance report that it is reviewing the defense readiness metrics to determine what potential changes, if any, need to be made. In comparison, the Coast Guard met targets for 6 of its 11 statutory missions in fiscal year 2007. The overall reduction in the number of missions meeting performance targets in fiscal year 2008 is largely because of the inability of the Coast Guard to meet its performance target for the migrant interdiction mission. However, this may be attributed, in part, to the new measure used for the migrant interdiction mission for fiscal year 2008. Regarding the three statutory missions whose performance targets were not met, the Coast Guard's reported performance generally remained steady in fiscal year 2008 compared with previous years, and the Coast Guard was relatively close to meeting its performance targets. For example, for the migrant interdiction and living marine resources missions, the Coast Guard reported achieving over 96 and 98 percent of the respective performance targets. The Coast Guard faces a number of different management challenges that we have identified in prior work. Highlighted below are four such challenges that the Coast Guard faces as it proceeds with efforts to modernize its organization, address shifting workforce needs, manage the Deepwater acquisition program, and mitigate operational issues caused by delays in the Deepwater program. The Coast Guard is currently undertaking a major effort--referred to as the modernization program--which is intended to improve mission execution by updating the service's command structure, support systems, and business practices. The modernization program is specifically focused on transforming or realigning the service's command structure from a geographically bifurcated structure into a functionally integrated structure--as well as updating mission support systems, such as maintenance, logistics, financial management, human resources, acquisitions, and information technology. The Coast Guard has several efforts under way or planned for monitoring the progress of the modernization program and identifying needed improvements. For example, the Coast Guard has established timelines that identify the sequencing and target dates for key actions related to the modernization program consistent with project management principles. Our prior work has shown that such action-oriented goals along with associated timelines and milestones are critical to successful organizational transformation efforts and are necessary to track an organization's progress toward its goals. However, as we reported in June 2009, the Coast Guard's efforts to develop applicable performance measures to evaluate results of the modernization program remain in the early stages. For example, the Coast Guard has begun to identify key internal activities and outputs required for mission execution within the realigned organizational structure. This effort, expected to be completed in summer 2009, is intended as a preliminary step before identifying associated business metrics that can be used to evaluate how the modernization program has impacted the delivery of core services and products. However, Coast Guard officials were still in the process of developing a specific time frame for the estimated completion of this next step. As outlined in the Government Performance and Results Act of 1993 and Standards for Internal Control in the Federal Government, performance measures are important to reinforce the connection between long-term strategic goals and the day-to-day activities of management and staff. In April 2008, to evaluate aspects of the modernization program and identify potential improvements, the Coast Guard engaged the National Academy of Public Administration (NAPA) to conduct a third-party, independent review. After completing its review, NAPA provided a report to the Coast Guard in April 2009. The report recognized that the Coast Guard's planned organizational realignment "makes logical sense" and that the service's leadership "is collectively engaged" to improve mission execution and support-related business processes. NAPA cautioned, however, that the Coast Guard remains in the early stages of its organizational transformation. To help mitigate potential implementation risks and facilitate a successful modernization process, NAPA recommended, among other steps, that the Coast Guard develop a clear quantifiable business case for modernization, measurement tools, and a process of metrics assessment to track modernization progress and the effects on mission execution. Similar to GAO's findings, NAPA concluded that one of the key challenges faced by the Coast Guard is the development of adequate measures to assess the progress and outcomes of the modernization program. NAPA noted that such measures are important to ensure that the impacts of modernization are aligned with intended objectives and that they provide an opportunity to "course-correct" as necessary. NAPA further noted that the development of appropriate measurement tools will help to provide quantifiable support for the modernization business case and facilitate stakeholder buy-in. After receiving NAPA's report, the Coast Guard established a new organizational entity--the Coast Guard Enterprise Strategy, Management and Doctrine Oversight Directorate. Among other functions, this directorate is to be responsible for strategic analysis, performance management, and ongoing coordination of change initiatives within the modernization effort and beyond. Generally, it has been noted by Congress and supported by our past reviews that the Coast Guard faces significant challenges in assessing personnel needs and providing a workforce to meet the increased tempo of maritime security missions as well as to conduct traditional marine safety missions such as search and rescue, aids to navigation, vessel safety, and domestic ice breaking. Workforce planning challenges are further exacerbated by the increasingly complex and technologically advanced job performance requirements of the Coast Guard's missions. Workforce planning challenges include managing the assignments of military personnel who are subject to being rotated among billets and multiple missions. As we have previously reported, rotation policies can affect, for example, the Coast Guard's ability to develop professional expertise in its personnel and to retain qualified personnel as they progress in their careers. In October 2008, the Coast Guard received congressional direction to develop a workforce plan that would identify the staffing levels necessary for active duty and reserve military members, as well as for civilian employees, to carry out all Coast Guard missions. The workforce plan is to include (1) a gap analysis of the mission areas that continue to need resources and the type of personnel necessary to address those needs; (2) a strategy, including funding, milestones, and a timeline for addressing personnel gaps for each category of employee; (3) specific strategies for recruiting individuals for hard-to-fill positions; and (4) any additional authorities and resources necessary to address staffing requirements. In response, the Coast Guard plans to provide Congress with a workforce plan this summer. As part of our ongoing work for the House Transportation and Infrastructure Committee, we plan to review the Coast Guard's workforce plan. The scope of our work includes assessing whether the Coast Guard's workforce plan comports with the parameters set out by DHS guidanceand contains the elements that we previously reported as being essential for effective workforce plans. Our scope will also include assessing the Coast Guard's related workforce initiatives, such as the Sector Staffing Model and the Officer Specialty Management System. As an example of its workforce planning challenges, the Coast Guard cites continued difficulties in hiring and retaining qualified acquisition personnel--challenges that pose a risk to the successful execution of the service's acquisition programs. According to Coast Guard human capital officials, the service has funding for 855 acquisition-program personnel (military and civilian personnel) but has filled 717 of these positions, leaving 16 percent of the positions unfilled, as of April 2009. The Coast Guard has identified some of these unfilled positions as core to the acquisition workforce, such as contracting officers and specialists, program management support staff, and engineering and technical specialists. In addition, the Coast Guard has begun to address several workforce planning challenges raised by Congress related to its marine safety mission. In November 2008, the Coast Guard published the U.S. Coast Guard Marine Safety Performance Plan FY2009-2014, which is designed to reduce maritime casualties, facilitate commerce, improve program processes and management, and improve human resource capabilities. The Coast Guard recognized that marine safety inspectors and investigators need increased competency to fulfill this mission. The plan sets out specific objectives, goals, and courses of action to improve this competency by building capacity of inspectors and investigators, adding civilian positions, creating centers of expertise specific to marine safety, and expanding opportunities for training in marine safety. As noted, the challenge for the Coast Guard is to successfully implement this plan, along with the others we have described above. In addition to workforce planning challenges, the Coast Guard faces other acquisition-related challenges in managing the Deepwater program. The Coast Guard has taken steps to become the systems integrator for the Deepwater program and, as such, is responsible for planning, organizing, and integrating the individual assets into a system-of-systems to meet the service's requirements. First, the Coast Guard has reduced the scope of work performed by ICGS and has assigned those functions to Coast Guard stakeholders. For example, in March 2009, the Coast Guard issued a task order to ICGS limited to tasks such as data management and quality assurance for assets currently under contract with ICGS. The Coast Guard has no plans to award additional orders to ICGS for systems integrator functions when this task order expires in February 2011. Second, as part of its system integration responsibilities, the Coast Guard has initiated a fundamental reassessment of the capabilities, number, and mix of assets it needs to fulfill its Deepwater missions by undertaking a "fleet mix analysis." The goals of this study include validating mission performance requirements and revisiting the number and mix of all assets that are part of the Deepwater program. According to the Coast Guard, it hopes to complete this study later this summer. Third, at the individual Deepwater asset level, the Coast Guard has improved and begun to apply the disciplined management process found in its Major Systems Acquisition Manual, which requires documentation and approval of acquisition decisions at key points in a program's life-cycle by designated officials at high levels. However, as we reported in April 2009, the Coast Guard did not meet its goal of complete adherence to this process for all Deepwater assets by the second quarter of fiscal year 2009. For example, key acquisition management activities--such as operational requirements documents and test plans--are not in place for assets with contracts recently awarded or in production, placing the Coast Guard at risk of cost overruns or schedule slippages. In the meantime, as we reported in April 2009, the Coast Guard continues with production of certain assets and award of new contracts in light of what it views as pressing operational needs. Since the establishment of the $24.2 billion baseline estimate for the Deepwater program in 2007, the anticipated cost, schedules, and capabilities of many of the Deepwater assets have changed, in part because of the Coast Guard's increased insight into what it is buying. Coast Guard officials stated that the original baseline was intended to establish cost, schedule, and operational requirements as a whole, which were then allocated to the major assets comprising the Deepwater program. As a result, the baseline figure did not reflect a traditional cost estimate, which generally assesses costs at the asset level, but rather the overall anticipated costs as determined by the contractor. However, as the Coast Guard has assumed greater responsibility for management of the Deepwater program, it has begun to improve its understanding of costs by developing its own cost baselines for individual assets using traditional cost estimating procedures and assumptions. As a result of these revised baselines, the Coast Guard has determined that some of the assets it is procuring may cost more than anticipated. As we reported in April 2009, information showed that the total cost of the program may grow by $2.1 billion. As more baselines for other assets are approved by DHS, further cost growth may become apparent. These cost increases present the Coast Guard with additional challenges involving potential tradeoffs associated with quantity or capability reductions for Deepwater assets. In addition, our April 2009 testimony noted that while the Coast Guard plans to update its annual budget requests with asset-based cost information, the current structure of its budget submission to Congress does not include certain details at the asset level, such as estimates of total costs and total numbers to be procured. In our previous reports on the Deepwater program, we have made a number of recommendations to improve the Coast Guard's management of the program. The Coast Guard has implemented or is in the process of implementing these recommendations. Other management challenges associated with the Deepwater program have operational or mission performance implications for the Coast Guard. Our prior reports and testimonies have identified problems with management and oversight of the Deepwater program that have led to delivery delays and other operational challenges for certain assets-- particularly (1) patrol boats and their anticipated replacements, the Fast Response Cutters and (2) and the National Security Cutters. The Coast Guard is working to overcome these issues, as discussed below. As we reported in June 2008, under the original (2002) Deepwater implementation plan, all 49 of the Coast Guard's 110-foot patrol boats were to be converted into 123-foot patrol boats with increased capabilities as a bridging strategy until their replacement vessel (the Fast Response Cutter) became operational. Conversion of the first eight 110-foot patrol boats proved unsuccessful, however, and effective November 2006, the Coast Guard decided to remove these vessels from service and accelerate the design and delivery of the replacement Fast Response Cutters. The removal from service of the eight converted patrol boats in 2006 created operational challenges by reducing potential patrol boat availability by 20,000 annual operational hours. For example, fewer patrol boats available on the water may affect the level of deterrence provided as part of homeland security missions and reduce the Coast Guard's ability to surge during periods of high demand, such as may occur during missions to interdict illegal drugs and undocumented migrants. To mitigate the loss of these patrol boats and their associated operational hours in the near term, the Coast Guard implemented a number of strategies beginning in fiscal year 2007. For example, the Coast Guard began using the crews from the eight patrol boats removed from service to augment the crews of eight other patrol boats, thereby providing two crews that can alternate time operating each of the eight patrol boats (i.e., double-crewing). According to Coast Guard officials, additional strategies employed by the Coast Guard that are still in use include increasing the operational hours of 87-foot patrol boats and acquiring four new 87-foot patrol boats, among others. To help fill the longer-term patrol boat operational gap, Coast Guard officials are pursuing the acquisition of a commercially available Fast Response Cutter. The first of these cutters is scheduled to be delivered in early fiscal year 2011, and the Coast Guard intends to acquire a total of 12 by early fiscal year 2013. While the contract is for the design and production of up to 34 cutters, the Coast Guard plans to assess the capabilities of the first 12 Fast Response Cutters before exercising options for additional cutters. Regarding National Security Cutters, the first vessel (National Security Cutter USCGC Bertholf) was initially projected for delivery in 2006, but slipped to August 2007 after design changes made following the terrorist attacks of September 11, 2001, and was again delayed until May 2008 because of damage to the shipyard caused by Hurricane Katrina. Based on the results of our ongoing review, the USCGC Bertholf will likely be 1 year behind schedule when it is certified as fully operational, scheduled for the fourth quarter of fiscal year 2010. Further, the eighth and final National Security Cutter was to be fully operational in 2016 but is currently projected to be fully operational by the fourth quarter of calendar year 2018. The Coast Guard has not yet acquired the unmanned aircraft and new small boats that are to support the National Security Cutters. The Coast Guard plans to draft operational specifications for the unmanned aircraft in 2010, and to acquire new small boats that are expected to be deployed with the first National Security Cutter by the end of calendar year 2010. After the unmanned aircraft is selected, the Coast Guard must contract for the acquisition and production of the unmanned aircraft, accept delivery of it, and test its capabilities before deploying it with the National Security Cutter--activities that can take several years. Delays in the delivery of the National Security Cutters and the associated support assets are expected to lead to a projected loss of thousands of anticipated cutter operational days for conducting missions through 2017, and may prevent the Coast Guard from employing the full capabilities of the National Security Cutters and the support assets for several years. Given the enhanced capabilities that the Coast Guard believes the National Security Cutters have over existing assets, a loss in operational days could negatively affect the Coast Guard's ability to more effectively conduct missions, such as enforcement of domestic fishing laws, interdiction of illegal drugs and undocumented migrants, and participation in Department of Defense operations. To address these potential operational gaps, the Coast Guard has decided to continue to rely on its aging fleet of High Endurance Cutters and to use existing aircraft and small boats to support the National Security Cutters. However, because the High Endurance Cutters are increasingly unreliable, the Coast Guard plans to perform a series of upgrades and maintenance procedures on selected vessels. However, before this work begins, the Coast Guard plans to conduct an analysis on the condition of the High Endurance Cutters and complete a decommissioning schedule. As a result, work on the first selected High Endurance Cutter is not scheduled for completion until 2016. Until the Coast Guard has acquired new unmanned aircraft and small boats, the Coast Guard plans to support the National Security Cutters with the small boats and manned aircraft it currently uses to support the High Endurance Cutter. We will continue to assess this issue as part of our ongoing work and plan to issue a report on the results later this summer. Madam Chair and Members of the Subcommittee, this completes my prepared statement. I will be happy to respond to any questions that you or other Members of the Subcommittee may have. For information about this statement, please contact Stephen L. Caldwell, Director, Homeland Security and Justice Issues, at (202) 512-9610, or [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs may be found on the last page of this statement. Other individuals making key contributions to this testimony include Danny Burton, Christopher Conrad, Katherine Davis, Christoph Hoashi-Erhardt, Paul Hobart, Dawn Hoff, Lori Kmetz, Ryan Lambert, David Lutter, Brian Schwartz, Debbie Sebastian, and Ellen Wolfe. This appendix provides a detailed list of performance results for the Coast Guard's 11 statutory missions for fiscal years 2004 through 2008 (see table 4). Coast Guard: Observations on the Genesis and Progress of the Service's Modernization Program. GAO-09-530R. Washington, D.C.: June 24, 2009. Coast Guard: Administrative Law Judge Program Contains Elements Designed to Foster Judges' Independence and Mariner Protections Assessed Are Being Followed. GAO-09-489. Washington, D.C.: June 12, 2009. Coast Guard: Update on Deepwater Program Management, Cost, and Acquisition Workforce. GAO-09-620T. Washington, D.C.: April 22, 2009. Coast Guard: Observations on Changes to Management and Oversight of the Deepwater Program. GAO-09-462T. Washington, D.C.: March 24, 2009. Maritime Security: Vessel Tracking Systems Provide Key Information, but the Need for Duplicate Data Should Be Reviewed. GAO-09-337. Washington, D.C.: March 17, 2009. Coast Guard: Change in Course Improves Deepwater Management and Oversight, but Outcome Still Uncertain. GAO-08-745. Washington, D.C.: June 24, 2008. Coast Guard: Strategies for Mitigating the Loss of Patrol Boats Are Achieving Results in the Near Term, but They Come at a Cost and Longer Term Sustainability Is Unknown. GAO-08-660. Washington, D.C.: June 23, 2008. Status of Selected Aspects of the Coast Guard's Deepwater Program. GAO-08-270R. Washington, D.C.: March 11, 2008. Coast Guard: Observations on the Fiscal Year 2009 Budget, Recent Performance, and Related Challenges. GAO-08-494T. Washington, D.C.: March 6, 2008. Coast Guard: Deepwater Program Management Initiatives and Key Homeland Security Missions. GAO-08-531T. Washington, D.C.: March 5, 2008. Maritime Security: Coast Guard Inspections Identify and Correct Facility Deficiencies, but More Analysis Needed of Program's Staffing, Practices, and Data. GAO-08-12. Washington, D.C.: February 14, 2008. Maritime Security: Federal Efforts Needed to Address Challenges in Preventing and Responding to Terrorist Attacks on Energy Commodity Tankers. GAO-08-141. Washington, D.C.: December 10, 2007. Coast Guard: Challenges Affecting Deepwater Asset Deployment and Management and Efforts to Address Them. GAO-07-874. Washington, D.C.: June 18, 2007. Coast Guard: Observations on the Fiscal Year 2008 Budget, Performance, Reorganization, and Related Challenges. GAO-07-489T. Washington, D.C.: April 18, 2007. Port Risk Management: Additional Federal Guidance Would Aid Ports in Disaster Planning and Recovery. GAO-07-412. Washington, D.C.: March 28, 2007. Coast Guard: Status of Efforts to Improve Deepwater Program Management and Address Operational Challenges. GAO-07-575T. Washington, D.C.: March 8, 2007. Maritime Security: Public Safety Consequences of a Terrorist Attack on a Tanker Carrying Liquefied Natural Gas Need Clarification. GAO-07-316. Washington, D.C.: February 22, 2007. Coast Guard: Preliminary Observations on Deepwater Program Assets and Management Challenges. GAO-07-446T. Washington, D.C.: February 15, 2007. Coast Guard: Coast Guard Efforts to Improve Management and Address Operational Challenges in the Deepwater Program. GAO-07-460T. Washington, D.C.: February 14, 2007. Homeland Security: Observations on the Department of Homeland Security's Acquisition Organization and on the Coast Guard's Deepwater Program. GAO-07-453T. Washington, D.C.: February 8, 2007. Coast Guard: Condition of Some Aids-to-Navigation and Domestic Icebreaking Vessels Has Declined; Effect on Mission Performance Appears Mixed. GAO-06-979. Washington, D.C.: September 22, 2006. Coast Guard: Non-Homeland Security Performance Measures Are Generally Sound, but Opportunities for Improvement Exist. GAO-06-816. Washington, D.C.: August 16, 2006. Coast Guard: Observations on the Preparation, Response, and Recovery Missions Related to Hurricane Katrina. GAO-06-903. Washington, D.C.: July 31, 2006. Maritime Security: Information-Sharing Efforts Are Improving. GAO-06-933T. Washington, D.C.: July 10, 2006. United States Coast Guard: Improvements Needed in Management and Oversight of Rescue System Acquisition. GAO-06-623. Washington, D.C.: May 31, 2006. Coast Guard: Changes to Deepwater Plan Appear Sound, and Program Management Has Improved, but Continued Monitoring Is Warranted. GAO-06-546. Washington, D.C.: April 28, 2006. Coast Guard: Progress Being Made on Addressing Deepwater Legacy Asset Condition Issues and Program Management, but Acquisition Challenges Remain. GAO-05-757. Washington, D.C.: July 22, 2005. Coast Guard: Station Readiness Improving, but Resource Challenges and Management Concerns Remain. GAO-05-161. Washington, D.C.: January 31, 2005. Maritime Security: Better Planning Needed to Help Ensure an Effective Port Security Assessment Program. GAO-04-1062. Washington, D.C.: September 30, 2004. Maritime Security: Partnering Could Reduce Federal Costs and Facilitate Implementation of Automatic Vessel Identification System. GAO-04-868. Washington, D.C.: July 23, 2004. Coast Guard: Relationship between Resources Used and Results Achieved Needs to Be Clearer. GAO-04-432. Washington, D.C.: March 22, 2004. Contract Management: Coast Guard's Deepwater Program Needs Increased Attention to Management and Contractor Oversight. GAO-04-380. Washington, D.C.: March 9, 2004. Coast Guard: Comprehensive Blueprint Needed to Balance and Monitor Resource Use and Measure Performance for All Missions. GAO-03-544T. Washington, D.C.: March 12, 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The U.S. Coast Guard, a component of the Department of Homeland Security (DHS), conducts 11 statutory missions that range from marine safety to defense readiness. To enhance mission performance, the Coast Guard is implementing a modernization program to update its command structure, support systems, and business practices, while continuing the Deepwater program--the acquisition program to replace or upgrade its fleet of vessels and aircraft. This testimony discusses the Coast Guard's (1) fiscal year 2010 budget, (2) mission performance in fiscal year 2008, the most recent year for which statistics are available; and (3) challenges in managing its modernization and acquisition programs and workforce planning. This testimony is based on GAO products issued in 2009 (including GAO-09-530R and GAO-09-620T) and other GAO products issued over the past 11 years--with selected updates in June 2009--and ongoing GAO work regarding the Coast Guard's newest vessel, the National Security Cutter. Also, GAO analyzed budget and mission-performance documents and interviewed Coast Guard officials. The Coast Guard's fiscal year 2010 budget request totals $9.7 billion, an increase of 4.2 percent over its fiscal year 2009 enacted budget. Of the total requested, about $6.6 billion (or 67 percent) is for operating expenses--the primary appropriation account that finances Coast Guard activities, including operating and maintaining multipurpose vessels, aircraft, and shore units. This account, in comparing the 2010 budget request to the 2009 enacted budget, reflects an increase of $361 million (about 6 percent). The next two largest accounts in the 2010 budget request, at about $1.4 billion each, are (1) acquisition, construction, and improvements and (2) retired pay--with each representing about 14 percent of the Coast Guard's total request. The retired pay account--with an increase of about $125 million in the 2010 budget request compared to the 2009 enacted budget--is second only to the operating expenses account in reference to absolute amount increases, but retired pay reflects the highest percentage increase (about 10 percent) of all accounts. Regarding performance of its 11 statutory missions in fiscal year 2008, the Coast Guard reported that it fully met goals for 5 missions, partially met goals for 3 missions, and did not meet goals for 3 missions. One of the fully met goals involved drug interdiction. Specifically, for cocaine being shipped to the United States via non-commercial means, the Coast Guard reported achieving a removal rate of about 34 percent compared to the goal of at least 28 percent. Search and rescue was a mission with partially met goals. The Coast Guard reported that it met one goal (saving at least 76 percent of people from imminent danger in the maritime environment) but narrowly missed a related goal (saving at least 87 percent of mariners in imminent danger) by achieving a success rate of about 84 percent. For missions with unmet goals, the Coast Guard reported falling substantially short of performance targets for only one mission--defense readiness. The Coast Guard reported meeting designated combat readiness levels 56 percent of the time compared to the goal of 100 percent. The Coast Guard continues to face several management challenges. For example, GAO reported in June 2009 that although the Coast Guard has taken steps to monitor the progress of the modernization program, development of performance measures remains in the early stages with no time frame specified for completion. Also, as GAO reported in April 2009, although the Coast Guard has assumed the lead role for managing the Deepwater acquisition program, it has not always adhered to procurement processes, and its budget submissions to Congress do not include detailed cost estimates. GAO also reported that the Coast Guard faces challenges in workforce planning, including difficulties in hiring and retaining qualified acquisition personnel. Further, GAO's ongoing work has noted that delays associated with the Coast Guard's newest vessel, the National Security Cutter, are projected to result in the loss of thousands of cutter operational days for conducting missions through 2017. The Coast Guard is working to manage this operational challenge using various mitigation strategies.

Congress passed the Employee Retirement Income Security Act of 1974 (ERISA) to protect the interests of participants and beneficiaries of private sector employee benefit plans. Before the enactment of ERISA, few rules governed the funding of defined benefit pension plans, and participants had no guarantee that they would receive promised benefits. ERISA established PBGC to insure private sector plan participants' benefits and to encourage the continuation and maintenance of private sector defined benefit pension plans by providing timely and uninterrupted payment of pension benefits. PBGC is a wholly owned government corporation--that is, the federal government does not share ownership interests with nonfederal entities, and PBGC is subject to requirements under the Government Corporation Control Act of 1945, as amended, such as annual budgets, audits, and management reports. According to public administration experts, a government corporation is appropriate for the administration of government programs that are predominately of a business nature, produce revenue and are potentially self-sustaining, involve a large number of business-type transaction with the public, and require greater budget flexibility than a government department or agency. The United States government is not liable for any obligation or liability incurred by PBGC. The corporation is funded through insurance premiums from employers that sponsor insured pension plans, as well as assets from terminated pension plans and investment income. PBGC insures certain private sector defined benefit plans through its single-employer and multiemployer insurance programs. Through its single-employer insurance program, PBGC paid nearly $4.1 billion in benefits to 622,000 participants and beneficiaries across the United States in fiscal year 2006 (see fig. 1). The geographic breakdown of PBGC-insured participants largely matches the overall population. Appendix II includes information on PBGC's single-employer plans by each U.S. state and territory, as shown in figure 1. PBGC is governed by a board of directors that consists of the Secretaries of the Treasury, Labor, and Commerce, with the Secretary of Labor serving as chair of the board. Prior to the passage of the Pension Protection Act of 2006, ERISA provided the Secretary of Labor with responsibility for administering PBGC's operations, personnel, and budget. The Secretary has historically delegated the responsibility for administering PBGC to an executive director. The Pension Protection Act replaced the chair of the board as PBGC's administrator with a Senate- confirmed director. The corporation is also aided by a seven-member Advisory Committee appointed by the President to represent the interest of labor, employees, and the general public. This committee has an advisory role, but has no statutory authority to set PBGC policy or conduct formal oversight. PBGC also has an Office of Inspector General that reports to the board through the chair. With 22 staff, the Office of Inspector General generally conducts audits, inspections, and investigations of PBGC's programs and operations in order to promote program administration effectiveness and deter waste, fraud, and abuse of PBGC resources. PBGC's board has taken steps to improve its governance structure by revising the corporation's bylaws. PBGC also contracted with a consulting firm to assist the board in its review of alternative corporate governance structures. However, the board consists of three cabinet secretaries, a fact that limits their ability to provide policy direction and oversight. PBGC may also face additional challenges as the board members, their representatives, and director will all likely change with the upcoming presidential transition, thus limiting the corporation's institutional knowledge. PBGC has taken steps to improve its policy direction and oversight through the revision of its bylaws. In our July 2007 report, we recommended PBGC's board of directors establish formal guidelines that articulate the authorities of the board, the Department of Labor, other board members, and their respective representatives. As part of its May 2008 bylaw revision, the board of directors more clearly defined the roles and responsibilities of its members, representatives, and director. For example, the new bylaws state that the board is responsible for establishing and overseeing the policies of the corporation. The new bylaws explicitly outline the board's responsibilities, which include approval of policy matters significantly affecting the pension insurance program or its stakeholders; approval of the corporation's investment policy; and review of certain management and Inspector General reports. In addition, the new bylaws explicitly define the role and responsibilities of the director and the corporation's senior officer positions. See appendix III to view PBGC's new bylaws. Our July 2007 report also asked Congress to consider restructuring the board of directors to appoint additional members of diverse backgrounds who possess knowledge and expertise useful to PBGC's responsibilities and can provide the attention needed for strong corporate oversight. In response to these findings, PBGC contracted with a consulting firm to review governance models and provide a background report to assist the board in its review of alternative corporate governance structures. The consulting firm's final report describes the advantages and disadvantages of the corporate board structures and governance practices of other government corporations and select private sector companies, and concludes that there are several viable alternatives for PBGC's governance structure and practices. Our July 2007 report found that PBGC's board has limited time and resources to provide policy direction and oversight and has not established procedures and mechanisms to monitor PBGC operations. Although board members have met more frequently since 2003, the three cabinet secretaries who compose the board have numerous other responsibilities. Because of their responsibilities and the small size of the board, it is difficult for the board to establish and manage oversight mechanisms, such as the use of standing committees--which are common mechanisms used by both government and private corporate boards. According to board officials, the board representatives, assisted by their staff, undertake some of the oversight functions that could be conducted by standing committees. Other government corporations, such as the Federal Deposit Insurance Corporation (FDIC), the Overseas Private Investment Corporation (OPIC), and the National Railroad Passenger Corporation (Amtrak), have established standing committees to conduct certain oversight functions. For example, FDIC's board of directors established standing committees, such as the Case Review Committee and the Audit Committee, to conduct certain oversight functions. Instead, PBGC's board continues to rely on the Inspector General and PBGC's management oversight committees to ensure that PBGC is operating effectively. However, our prior work found that while the board requires the Inspector General to brief it at its semiannual meetings, there were no formal protocols requiring the Inspector General to routinely meet with the board or its representatives and staff. Consequently, when the board and its representatives likely change, it is unclear whether the board would be aware of this informal protocol. Further, we reported that the board relies on PBGC's executive committees and working groups for monitoring and reviewing PBGC's operations. However, these committees and working groups are neither independent of the PBGC director nor required to formally report all matters to the board. PBGC may also be exposed to challenges as the board, its representatives, and director will likely change with the upcoming presidential transition in January 2009, thus limiting institutional knowledge of the challenges facing the corporation. As we noted in 2007, because PBGC's board is composed of cabinet secretaries, PBGC board members, their representatives, and the director typically change with each administration. Other government corporations' authorizing statutes-- such as OPIC's--have established board structures with staggered terms for their directors, possibly avoiding gaps in their organization's institutional knowledge. PBGC management has experienced partial leadership transitions in recent years, and in anticipation of the forthcoming complete leadership change, PBGC is developing additional materials to include in its official transition package for newly appointed officials. This new information includes information on standards of ethical conduct, appointments, compensation levels, and information on presidential transitions. While PBGC typically provides newly appointed members, representatives, and directors with information on its operations and financial position, PBGC's Office of Inspector General and our work recently identified additional financial and operational challenges facing the corporation. This additional information could help the new board members and their representatives better understand the vulnerabilities and challenges facing the corporation. Congressional oversight of PBGC in recent years has ranged from formal congressional hearings to the use of its support agencies, such as GAO, the Congressional Budget Office (CBO), and the Congressional Research Service (CRS). However, unlike some other government corporations, PBGC does not have certain reporting requirements for providing additional information to Congress. In general, our prior work has shown that congressional oversight is designed to fulfill a number of purposes, including but not limited to ensuring executive compliance with legislative intent; improving the efficiency, effectiveness, and economy of government operations; evaluating program performance; and conducting investigations. Since 2002, PBGC officials have testified 19 times before various congressional committees--mostly on broad issues related to the status of the private sector defined benefit pension policy and its effect on PBGC (see table 1). For example, in 2005, the PBGC director testified before the House Committee on Transportation and Infrastructure's Subcommittee on Aviation regarding pension challenges facing the airline industry. The director's testimony discussed the possible effects such defaults would have on the defined benefit pension industry and the financial position of the corporation. Congress also recently began exercising oversight of PBGC through the confirmation process of PBGC's director. With the passage of the Pension Protection Act of 2006, PBGC's director now must be confirmed by the Senate. During the confirmation hearing conducted in 2007, members expressed concerns about key defined benefit pension policy issues and PBGC's financial condition, as well as sought the nominee's thoughts on addressing weaknesses in PBGC's governance structure, such as the concerns we raised about the corporate governance practices. Beyond formal congressional hearings, PBGC staff told us that they frequently discuss pension policy matters with congressional staff. In addition, PBGC must annually submit reports to Congress on its prior fiscal year's financial and operational matters, which include information on PBGC's financial statements, internal controls, and compliance with certain laws and regulations. For example, the Pension Protection Act of 2006 requires that PBGC provide a comparison of the average return on investment earned with respect to asset investments by the corporation, which PBGC includes in its annual report. Through its support agencies--GAO, the Congressional Budget Office, and the Congressional Research Service--Congress has also provided oversight and reviewed PBGC. Specifically, Congress has asked GAO to conduct assessments of policy, management, and the financial condition of PBGC. For example, we conducted more than 10 reviews of PBGC over the past 5 years, including assessments related to PBGC's 2005 corporate reorganization and weaknesses in its governance structure, human capital management, and contracting practices. Our work also raised concerns about PBGC's financial condition and the state of the defined benefit industry. In addition, CBO has published nine specific reports on PBGC since 2005. For example, in April 2008, CBO reported that PBGC's investment policy is likely to produce higher returns over the long run, but noted the new strategy increases the risk that PBGC will not have sufficient assets to cover retirees' benefit payments when the economy and financial markets are weak. Further, CRS has published eight studies related to PBGC since 2006. Appendix IV includes a list of selected GAO, CBO, and CRS reports and testimonies related to PBGC. Some government corporations have additional reporting requirements for notifying Congress of significant actions. The Millennium Challenge Corporation is required to formally notify the appropriate congressional committees 15 days prior to the allocation or transfer of funds related to the corporation's activities. The Commodity Credit Corporation is subject to a similar requirement, which obliges the Secretary of Agriculture to alert the Committee on Agriculture, Nutrition, and Forestry of the Senate and the Committee on Agriculture of the House of Representatives prior to making adjustments to a certain price support program. The Overseas Private Investment Corporation is required to submit a detailed report to the Committee on Foreign Relations of the Senate and the Committee on Foreign Affairs of the House of Representatives at least 60 days prior to issuing, among other things, political risk insurance for losses due to business interruption for the first time. These examples demonstrate how Congress has required additional reporting requirements for certain activities conducted by government corporations. While PBGC generally has no requirements to formally notify Congress prior to taking significant financial or operational actions, PBGC officials said that they informally notify Congress prior to certain policy shifts. For example, in fiscal year 2008, PBGC officials met with congressional staff before modifying the investment policy to decrease the corporation's fixed-income asset investments. In addition to its annual reporting requirements, PBGC is required to report proposals for certain premium rate revisions, including reasons for such revisions, to specific congressional committees; however, these premium rate revisions are not considered effective until 30 days after enactment of a law approving them. Like other government corporations, PBGC has an advisory committee. PBGC's advisory committee is charged with advising the corporation on its policies and procedures related to the corporation's appointment of trustees in termination proceedings, investments of monies, whether terminated plans should be liquidated immediately or continued in operation, and any other matters the corporation may request. Unlike PBGC's advisory committee, the advisory boards or committees of other government corporations--such as the Export-Import Bank and FDIC-- are subject to the Federal Advisory Committee Act and some submit formal reports to their board chair and directors (see table 2). In contrast, PBGC's advisory committee is not subject to the Federal Advisory Committee Act. According to PBGC officials, the corporation is exempt because of the proprietary nature of its work. PBGC's advisory committee typically reports only to the director, although representatives of PBGC's board members frequently attend advisory committee meetings and officials said that the committee can submit concerns to the board if it believes it is warranted. Beyond reporting to the chairman of its board, the Export-Import Bank's advisory committee is also required to submit an annual report to Congress on the extent to which the Export-Import Bank is providing competitive financing to expand U.S. exports, along with suggestions for improvements. In addition to government corporations, some government agencies with retirement-related responsibilities--such as the Social Security Administration (SSA), the Railroad Retirement Board, and the Federal Retirement Thrift Investment Board--have advisory committees as part of their governance structures, which annually report to their respective overseeing bodies. For example, when Congress established SSA as a separate and distinct agency from the Department of Health and Human Services, it also established an independent seven-member bipartisan Advisory Board to advise the President, Congress, and the commissioner of Social Security on respective policy issues. With more than 44 million Americans insured by PBGC, it is essential that the corporation is soundly governed and efficiently managed to guarantee that retirement income will be available to all those covered. Despite PBGC's efforts to improve its bylaws, the three-member board of directors is still one of the smallest and least diverse of any government corporation. Other government corporations' governance structures include oversight mechanisms, such as standing committees, and additional reporting requirements to conduct certain oversight functions and assist their boards of directors. While PBGC's board should be restructured, additional reporting requirements, like some government corporations have, may not be appropriate for PBGC given the proprietary nature of its financial work; thus, any reporting changes would need to be carefully considered. The limitations of the board structure will become even more apparent in the coming months as the board, its representatives, and the corporation's director will likely be replaced with a new presidential administration. Because board members and their representatives serve by virtue of their positions in the federal government, there is no assurance that these individuals will have the needed expertise to understand the corporation's business or financial vulnerabilities. Without adequate information and preparation, this transition could limit not only the progress made by the current board, its representatives, and director, but may also curtail the corporation's ability to insure and deliver retirement benefits to millions of Americans that rely on the corporation. To ensure that recently identified management and financial challenges facing PBGC are shared with those newly appointed, we recommend that PBGC provide Office of Inspector General and GAO reports on the corporation's financial and management challenges to the newly appointed board members, board representatives, and director so that they can take appropriate action as needed. We obtained written comments on a draft report from PBGC's director, which are reproduced in appendix V. In addition, the Departments of the Treasury, Labor, and Commerce provided joint technical comments, which were incorporated into the report where appropriate. In response to our draft report, the PBGC director stated that PBGC prepares substantial in-depth briefing materials on its operational issues for incoming administrations. The director agreed with our recommendation, stating that PBGC will ensure that the transition materials provided to those newly appointed will also include pertinent PBGC Office of Inspector General and GAO reports. Further, the director stated that PBGC will continue to work in concert with the board to provide oversight information necessary to address the important issues that they confront in providing pension security to Americans. We are sending copies of this report to the Secretaries of the Treasury, Labor, and Commerce, as well as the PBGC director and other interested parties. We will also make copies available to others on request. If you or your staff has any questions concerning this report, please contact me on (202) 512-7215 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. To identify the steps that the Pension Benefit Guaranty Corporation (PBGC) has taken to improve its governance structure, we reviewed our work issued in July 2007, as well as collected and reviewed documents related to PBGC's bylaws, which were last published in May 2008. We reviewed reports on PBGC's organizational structure and financial condition. We also identified provisions of the Employee Retirement and Income Security Act of 1974, the Pension Protection Act of 2006, and chapter 91 of the U.S. Code, which is commonly known as the Government Corporation Control Act (GCCA), that outline the authority of PBGC's board of directors as well as the administrative responsibilities of PBGC's director. To understand the board of directors', their representatives', and PBGC's director's role, we reviewed documentation related to the board members' activities to identify what types of actions the board members had considered and taken. To determine how Congress exercises oversight of PBGC, we identified the number of times PBGC officials testified before Congress since 2002, and reviewed the issues discussed at each formal hearing. Further, we reviewed the work of the Congressional Budget Office, the Congressional Research Service, PBGC's Office of Inspector General, and our work on PBGC's financial and management challenges. To determine the oversight mechanisms and reporting requirements that exist at other government corporations, we collected information on select federal government corporations that we identified in our July 2007 work, which are listed under the Government Corporation Control Act of 1945, as amended, and have similar missions or designations to those of PBGC. We reviewed information on the following government corporations: Commodity Credit Corporation, Export-Import Bank of the United States, Federal Crop Insurance Corporation, Federal Deposit Insurance Corporation, Federal Financing Bank, Federal Prison Industries (UNICOR), Financing Corporation, Government National Mortgage Association, Millennium Challenge Corporation, National Railroad Passenger Corporation (Amtrak) Overseas Private Investment Corporation, Resolution Funding Corporation, Saint Lawrence Seaway Development Corporation, Tennessee Valley Authority, and United States Postal Service. We also reviewed government agencies with retirement-related responsibilities to determine what other oversight mechanisms may exist; the agencies include the Social Security Administration, the Railroad Retirement Board, and the Federal Retirement Thrift Investment Board. Moreover, we met with officials from PBGC and the Department of Labor. Pension Benefit Guaranty Corporation: Some Steps Have Been Taken to Improve Contracting, but a More Strategic Approach Is Needed. GAO-08-871. Washington, D.C.: August 2008. PBGC Assets: Implementation of New Investment Policy Will Need Stronger Board Oversight. GAO-08-667. Washington, D.C.: July 2008. Pension Benefit Guaranty Corporation: A More Strategic Approach Could Improve Human Capital Management. GAO-08-624. Washington, D.C.: June 2008. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Pension Benefit Guaranty Corporation: Governance Structure Needs Improvements to Ensure Policy Direction and Oversight. GAO-07-808. Washington, D.C.: July 6, 2007. PBGC's Legal Support: Improvement Needed to Eliminate Confusion and Ensure Provision of Consistent Advice. GAO-07-757R. Washington, D.C.: May 18, 2007. Private Pensions: Questions Concerning the Pension Benefit Guaranty Corporation's Practices Regarding Single-Employer Probable Claims. GAO-05-991R. Washington, D.C.: September 9, 2005. Private Pensions: The Pension Benefit Guaranty Corporation and Long- Term Budgetary Challenges. GAO-05-772T. Washington, D.C.: June 9, 2005. Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance Program Faces Significant Long-Term Risks. GAO-04-90. Washington, D.C.: October 2003. Pension Benefit Guaranty Corporation Single-Employer Insurance Program: Long-Term Vulnerabilities Warrant 'High Risk' Designation. GAO-03-1050SP. Washington, D.C.: July 23, 2003. Pension Benefit Guaranty Corporation: Statutory Limitation on Administrative Expenses Does Not Provide Meaningful Control. GAO-03-301. Washington, D.C.: February 2003. GAO Forum on Governance and Accountability: Challenges to Restore Public Confidence in U.S. Corporate Governance and Accountability Systems. GAO-03-419SP. Washington, D.C.: January 2003. A Review of the Pension Benefit Guaranty Corporation's New Investment Strategy. April 24, 2008. Effect of H.R. 2830 on the Net Economic Costs of the Pension Benefit Guaranty Corporation. December 29, 2005. The effect on the 10-year net costs to the Pension Benefit Guaranty Corporation (PBGC) of enacting S. 1783, the Pension Security and Transparency Act of 2005. October 11, 2005. A Guide to Understanding the Pension Benefit Guaranty Corporation. September 2005. The Risk Exposure of the Pension Benefit Guaranty Corporation. September 2005. Testimony on Multiemployer Pension Plans. June 28, 2005. Testimony on the Pension Benefit Guaranty Corporation: Financial Condition, Potential Risks, and Policy Options. June 15, 2005. Testimony on Estimating the Costs of the Pension Benefit Guaranty Corporation. June 9, 2005. Testimony on Defined-Benefit Pension Plans: Current Problems and Future Challenges, June 7, 2005. Baird Webel. Insurance Guaranty Funds. RL32175. February 27, 2008. John J. Topoleski. Pension Benefit Guaranty Corporation: A Fact Sheet. 95-118. January 29, 2008. Patrick Purcell. Summary of the Pension Protection Act of 2006. RL33703. May 1, 2007. William Klunk. The Pension Benefit Guaranty Corporation and the Federal Budget. RS22650. April 24, 2007. William Klunk. The Financial Health of the Pension Benefit Guaranty Corporation (PBGC). RL33937. March 23, 2007. Jennifer Staman and Erika Lunder. The Pension Benefit Guaranty Corporation and Single-Employer Plan Terminations. RS22624. March 14, 2007. Jennifer Staman and Erika Lunder. Pension Protection Act of 2006: Summary of the PBGC Guarantee and Related Provisions. RS22513. December 20, 2006. Neela K. Ranade and Paul J. Graney. Defined Benefit Pension Reform for Single-Employer Plans. RL32991. January 26, 2006. The following team members made key contributions to this report: Blake Ainsworth, Assistant Director; Jason Holsclaw, Analyst-in-Charge; Susannah Compton; William King; Matthew Lee; Charlie Willson; and Craig Winslow.

The Pension Benefit Guaranty Corporation (PBGC) insures the pension benefits of 44 million private sector workers and retirees in over 30,000 employer-sponsored pension plans. In July 2007, GAO reported that PBGC's governance structure needed improvements, and asked Congress to consider expanding the board of directors to include additional members. GAO also recommended that the board develop policies and mechanisms consistent with corporate governance practices, and develop formal guidelines to clarify the roles and responsibilities of the board chair, members, their representatives, and the director. On the basis of that work, this report addresses (1) the steps PBGC has taken to improve policy direction and oversight and (2) how Congress applies oversight to PBGC and what other oversight mechanisms exist for government corporations. GAO reviewed PBGC's new corporate bylaws and the structure and reporting requirements of selected government corporations. GAO also interviewed PBGC and Department of Labor officials. Although PBGC's board has strengthened the corporation's governing bylaws, the three-member board of directors is still limited in its ability to provide policy direction and oversight to PBGC. In implementing our earlier recommendation, the board revised the corporation's bylaws to more clearly define the roles and responsibilities of PBGC's board members, representatives, director, and senior management. PBGC also contracted with a consulting firm to provide a background report to assist the board in its review of alternative corporate governance structures, including restructuring the board of directors as GAO suggested in 2007. However, because of its small size, the board has not been able to develop procedures and mechanisms to monitor PBGC's operations, such as standing committees, which are mechanisms used by other government corporations. PBGC may also be exposed to challenges as the board, its representatives, and the director will likely change with the upcoming presidential transition in January 2009. While PBGC management has experienced a partial leadership change in recent years and provides operational and financial information to those newly appointed, PBGC Inspector General and GAO reports have recently identified additional financial and operational challenges facing the corporation. This additional information could help the new board members better understand the vulnerabilities and challenges facing the corporation. PBGC is subject to routine congressional oversight, but certain other government corporations have other types of reporting requirements in place--such as congressional notifications and reporting protocols for their advisory committees--to ensure effective communication exist between the corporations and Congress. Congressional oversight of PBGC in recent years has ranged from formal committee hearings to investigations and studies conducted by its congressional support agencies. For example, since 2002, PBGC officials have testified 19 times before several different committees on issues such as the status of its financial condition. Further, GAO, the Congressional Budget Office, and the Congressional Research Service have issued a variety of reports and testimonies on PBGC financial and operational matters. However, PBGC does not have reporting requirements applied to other government corporations for providing additional information to Congress. For example, the Millennium Challenge Corporation and the Commodity Credit Corporation are required to notify Congress prior to conducting certain financial transactions. The advisory committee of the Federal Deposit Insurance Corporation formally reports to its board of directors, while the Export-Import Bank of the United States' advisory committee formally reports to its board and Congress each year on matters related to their respective organizations. In addition, the advisory boards of other government entities with retirement-related responsibilities--such as the Social Security Administration, the Railroad Retirement Board, and the Federal Retirement Thrift Investment Board--provide reports to their overseeing bodies.

Over 1 million American Indians and Alaskan Natives are eligible for federally funded health care. The Indian Health Service (IHS), an agency of the U.S. Public Health Service, Department of Health and Human Services (HHS), serves as the principal federal agency for providing health care services to this population. IHS' goal is to raise the health status of American Indians and Alaskan Natives to the highest possible level. This is to be accomplished primarily through direct delivery of health care services and assisting tribes in developing and operating their own health care programs. In fiscal year 1994, IHS operated with a budget of about $1.9 billion and was authorized 15,441 full-time equivalent employee positions. Of the total number of positions, about 60 percent or 9,400 are directly involved in the delivery of health care. This includes about 5,500 health care professionals, such as physicians, nurses, and physical therapists. The remaining 40 percent is composed of administrative, technical, and management employees, some of whom administer the contract health services program. Administratively, IHS is organized into 12 area offices with headquarters in Rockville, Maryland (see app. I). The area offices are responsible for overseeing the delivery of health care services to American Indians and Alaskan Natives by the 144 service units. The service units are responsible for providing health care. IHS provides direct health care services at no cost to eligible American Indians and Alaskan Natives in 41 hospitals and 114 outpatient facilities. Tribes and tribal groups operate another 8 hospitals and 351 outpatient facilities funded by IHS. IHS and tribally operated hospitals are generally small, with 80 percent of them having 50 or fewer beds. IHS' three largest hospitals are in Phoenix, Arizona; Gallup, New Mexico; and Anchorage, Alaska. The type and scope of direct health care services vary by facility and depend on the availability of staff, equipment, and financial resources. Most IHS and tribal hospitals do not provide nonprimary care services, such as cardiology, ophthalmology, and orthopedics. In fiscal year 1993, IHS facilities had a workload of over 69,000 inpatient admissions and 5.5 million outpatient visits. Health care services that IHS cannot provide in its hospitals and outpatient facilities are purchased from the private sector through the contract health services program. In fiscal year 1993, the Congress appropriated $328 million for this program and in fiscal year 1994, $350 million. These funds are used to obtain care from non-IHS hospitals and providers for (1) patients needing medical services beyond the scope and capability of IHS hospitals and clinics or in emergency situations and (2) American Indians and Alaskan Natives living in IHS areas that do not have direct care medical services. To receive such funding, an individual must (1) be eligible for direct care from the IHS, (2) reside within a designated contract health services delivery area, and (3) be either a member of, or have close social and economic ties with, the tribe located on the reservation. However, some IHS areas, such as California and Portland (which covers Oregon, Washington, and Idaho), do not have any IHS hospitals and refer all American Indians and Alaskan Natives for all inpatient services to non-IHS facilities. Contract health services funds are used to purchase medical services based on a priority system and specific authorization guidelines established by headquarters. The Congress annually appropriates funds for these services as a separate category within the IHS clinical services budget. IHS distributes these funds to area offices primarily based on past funding history. The area offices then distribute the funds to the service units. IHS has historically had difficulty recruiting and retaining physicians to staff its hospitals and outpatient facilities. To compensate for physician shortages, IHS often contracts with companies that supply locum tenens physicians, who are temporary physicians hired to fill vacancies for a specific period of time. In addition, these physicians temporarily replace staff who are in training, sick, or on vacation. For 9 months of fiscal year 1993, IHS estimated that this service cost $16.4 million. As U.S. citizens, American Indians and Alaskan Natives are eligible to participate in Medicare and Medicaid on the same basis as any other citizen. In fiscal year 1993, third-party sources reimbursed IHS service units for more than $145 million for direct care services provided to this population. IHS policy requires that third-party payers be used before it will assume responsibility for payment of services rendered by non-IHS providers. Thus, American Indians and Alaskan Natives who receive health care under the contract health services program and who are eligible for Medicaid, Medicare, or have private insurance must first use these resources to pay for their medical care. IHS will assume responsibility, as funding permits, for any remaining balance for the care received. Health care services provided by IHS to American Indians and Alaskan Natives are not a federal health care entitlement. Rather, the Health Care Improvement Act (25 U.S.C. 1602), which authorizes IHS to provide health care services to American Indians and Alaskan Natives, depends on appropriations from the Congress. Thus, IHS provides health care services only to the extent that funds and resources are made available. American Indian and Alaskan Native leaders have consistently maintained that health care is part of the trust obligation the United States has with the Indian people and that IHS is responsible for providing for all of the health care needs of this population. Tribal leaders do not believe that IHS is providing this level of service and in 1994, during hearings on health care reform, brought this issue before the Congress. In those hearings, tribal leaders stated that they want assurance that their members will receive basic and adequate health care coverage. These leaders also said that if the health care problems of American Indians and Alaskan Natives are not addressed in their early stages of development, the result will be an increase in serious illnesses. The health status of this population is worse than that of the general population. For example, the death rate from tuberculosis for American Indians and Alaskan Natives is six times higher than for other Americans and three times higher for diabetes. Furthermore, diabetes is now so prevalent that in many tribes 20 percent of the members have the disease. Diabetes can cause other medical problems, such as (1) eye complications that can lead to blindness, (2) kidney problems that may require dialysis or a kidney transplant to sustain life, and (3) vascular problems that can lead to amputation of a leg. However, these complications can be delayed or prevented with early diagnosis and appropriate treatment, usually by a specialist. Concerned about American Indians' and Alaskan Natives' access to health care and the quality of the medical services they receive, the Ranking Minority Member of the Human Resources and Intergovernmental Relations Subcommittee, House Committee on Government Reform and Oversight, asked us in April 1993 to review the quality of medical care received. In subsequent discussions with subcommittee staff, we agreed to focus our review on two areas: IHS' efforts to ensure that temporary physicians working in IHS facilities are qualified and competent to perform assigned duties, and what happens when requested medical services are delayed. We performed work at IHS headquarters, the Oklahoma area office, and at Ada and Claremore, Oklahoma, IHS hospitals. We selected these sites because both hospitals indicated they had problems with temporary physicians. We selected the following companies for our review because they had contracts with the hospitals we visited: Harris, Kovacs, Alderman Locum Tenens, Inc., Atlanta, Georgia; Medical Doctor Associates, Norcross, Georgia; Jackson and Coker Locum Tenens, Inc., Atlanta, Georgia; and EmCare, Dallas, Texas. To identify IHS facilities that used temporary physicians and determine the cost of their services, we surveyed IHS facilities (see app. II). To address the issue of how IHS ensures that temporary physicians working in IHS facilities are qualified and competent to perform the work assigned to them, we (1) reviewed IHS' policies and procedures for credentialing and privileging temporary physicians, (2) obtained and analyzed fiscal year 1993 contracts that IHS facilities had with locum tenens companies, (3) reviewed the credentials files of temporary physicians at two IHS hospitals, and (4) interviewed officials at four locum tenens companies that IHS had contracts with and discussed each company's policies and procedures for credentialing physicians. At the hospitals we visited, we reviewed minutes of 1993 meetings of quality assurance committees to determine whether the quality of care being provided by temporary physicians was ever questioned. When we identified problems, we reviewed the medical records of the patients involved and discussed the care with IHS staff physicians. We also interviewed an official of the Federation of State Medical Boards (FSMB) to discuss dissemination of physician performance and disciplinary information obtained from FSMB's data bank. To determine what happened to patients who did not receive health care services at the time they were requested, we reviewed a list prepared by the hospitals of all denials and deferrals for fiscal year 1993 at the two hospitals we visited. From this list, we selected 20 files and tracked whether these patients eventually received care from either IHS or elsewhere and interviewed the IHS and non-IHS clinicians who provided this care. We also interviewed tribal leaders and health advocates from the Chickasaw and Choctaw Nations and the Sisseton-Wahpeton Sioux and Oglala Sioux Tribes; and interviewed Oklahoma, Navajo, and Aberdeen area office staff and non-IHS health care providers. We reviewed and analyzed documents related to their contract health services budgets, eligibility requirements for receipt of care, medical priorities for funding, and program operations. At IHS headquarters, we analyzed contract health services management reviews of selected area and service unit programs and interviewed IHS officials who were knowledgeable about the program. We performed our work between April 1993 and October 1994 in accordance with generally accepted government auditing standards. IHS has a difficult time retaining enough qualified physicians. To help meet the constant need for physicians to fill vacancies at various facilities and to supplement current medical staff, IHS service units enter into contracts with private companies that supply temporary physicians, known as locum tenens physicians, who provide services in IHS facilities. However, neither IHS' policy nor most of its service units' contracts with locum tenens companies explicitly requires that an examination be done of all medical licenses that a temporary physician may have before deciding whether the physician is allowed to treat IHS patients. Furthermore, the contracts do not require that locum tenens companies provide IHS with all information they may have on all licenses a physician may hold. Instead, IHS requires only that a physician have a medical license without restrictions to practice medicine. Furthermore, IHS' own credentialing review process for temporary physicians is often not done in a timely manner. As a result, IHS has unknowingly allowed physicians with performance problems or disciplinary actions taken or pending against their licenses for offenses such as gross and repeated malpractice and unprofessional misconduct to work in IHS hospitals and treat patients. At the two IHS hospitals we visited, we found that 7 of the 50 temporary physicians referred to IHS had prior histories of performance or disciplinary problems. In some cases, IHS officials did not know of these problems when the hospital accepted the physician for work because of incomplete credentials information. IHS does not have a formal system to help its facilities share information on the performance of temporary physicians. At one hospital, IHS officials concluded that a temporary physician misdiagnosed and inappropriately treated a patient, which may have contributed to the patient's death. The IHS facility notified the locum tenens company of the incident and told them that it did not want further services from this physician. However, the IHS facility took no action to alert other IHS facilities. IHS estimated that for 9 months of fiscal year 1993, it spent about $16.4 million on contracts with locum tenens companies. We estimated that during fiscal year 1993 IHS obtained the services of more than 300 temporary physicians working in such areas as family practice, internal medicine, emergency room care, pediatrics, and obstetrics and gynecology. These physicians were needed because of vacancies and short-term absences of physicians who were on vacation, in training, or sick. While facilities in each of IHS' 12 area offices use temporary physicians, 5 areas--Oklahoma, Aberdeen, Navajo, Phoenix, and Alaska--accounted for most of the funds expended for temporary physicians' services. Collectively, the 5 areas serve about 67 percent of IHS' user population and, as table 2.1 shows, accounted for 84 percent of the $16.4 million spent during fiscal year 1993 on temporary physicians' services as of July 1993. IHS facilities generally do not include a requirement in their contracts with locum tenens companies to (1) verify all licenses that a physician may hold, (2) inform IHS of the status of all licenses, and (3) provide all performance and disciplinary data that they may have on a temporary physician. Furthermore, IHS' credentials and privileges policy requires only that a physician have an active state medical license with no restrictions to practice medicine. As a result, IHS does not always obtain complete credentials information and is not always aware of temporary physicians with performance or disciplinary problems. At the two locations we visited, 5 locum tenens companies provided 50 temporary physicians in fiscal year 1993. We reviewed the credential files of 21 of these physicians and found that 7 had prior performance or disciplinary problems. This information had not been provided to the IHS facility that had contracted for each physician's services. IHS officials at these locations told us that they did not specifically request the companies to provide all available data because they were under the impression that the contracts with locum tenens companies require disclosure of performance and disciplinary information. IHS contracts with locum tenens companies generally specify the length of time physician services are required; the type of specialty needed, such as emergency room physician; the diagnostic and procedural skills needed; and the minimum professional qualifications that a physician must meet. To determine whether a physician meets the minimum qualifications, contract terms also require that the locum tenens companies submit the following credentialing information to an IHS facility: (1) evidence that the physician has a medical degree, (2) a copy of the physician's current medical license, (3) evidence of liability insurance, (4) a signed IHS application for appointment to the medical staff, (5) a request for clinical privileges, and (6) a statement of health. Other minimum qualifications vary by IHS facility and by the type of specialty requested. Locum tenens company officials told us that they will perform whatever physician verification of professional qualifications and requirements are necessary to meet the terms of the contract. But most IHS contracts do not (1) contain explicit requirements that locum tenens companies obtain and disclose information on actions taken against any medical licenses held by a physician or (2) require that locum tenens companies obtain and provide IHS with any information on ongoing or pending investigations involving temporary physicians. Three of the four locum tenens companies we visited routinely use FSMB's disciplinary data bank to determine if any information has been reported on a physician's performance. The FSMB data bank provides historical information from all state medical licensing boards about whether a physician's medical license has action taken against it and the nature and date of the action. However, the FSMB data bank does not contain information on ongoing or pending investigations against a medical license. This information must be obtained from the individual state medical licensing boards, which all the locum tenens companies we visited contact to verify medical licenses. Locum tenens companies query the FSMB data bank electronically and often receive results in a day. Thus, they quickly become aware of any performance problems that a temporary physician had in the past. However, the FSMB contract with locum tenens companies precludes the companies from providing detailed information on a physician's performance to a third party, such as IHS. A company can, however, inform a third party that a physician had a performance or disciplinary action taken against a medical license. Thus, IHS can obtain an indication that a performance problem may exist if it asks for such information from a contractor. One of the IHS facilities that we visited does obtain this information. Because of prior problems that this facility encountered with temporary physicians and locum tenens companies, it contractually requires locum tenens companies to query FSMB and inform it as to whether a physician had performance or disciplinary action taken against a license. Because temporary physicians do not always disclose complete information on their past performance, IHS officials at this facility believe that it is especially critical that they check the status of each medical license. The following example shows the importance of checking all medical licenses that a physician may have. At one IHS facility, a temporary physician worked as an internist from June 21 to July 15, 1993. The locum tenens company provided the hospital with a curriculum vitae on June 17, 1993. The physician's application for appointment to the medical staff at the IHS facility indicated that the physician was licensed to practice medicine in three states and that the physician was never censured or reprimanded by a licensing board. The locum tenens company provided copies of two state medical licenses. On June 21, 1993, the IHS credentialing official called the licensing board in one of these two states and learned that the physician's license was in good standing. Upon further review of the physician's curriculum vitae, the credentialing official noticed that the physician had practiced for 15 years in one of the three states where he was licensed. However, neither the company nor the physician had provided IHS with a copy of this license. The credentialing official contacted that state's medical licensing board on July 14, 1993, and learned that the physician had two actions taken against this license in April 1992. According to the state licensing board's report, the physician was fined $3,000 and ordered to attend 50 hours of continuing medical education for failure to keep written medical records justifying the course of treatment of a patient, altering medical records, and failing to practice medicine with an acceptable level of care, skill, and treatment in properly diagnosing a patient's heart condition. The physician left the IHS facility after his contractual obligation ended on July 15, 1993. The Joint Commission on the Accreditation of Healthcare Organizations (JCAHO) requires all entities that seek accreditation to perform a credentialing review on each physician it employs. This requirement is designed to protect a patient from being treated by an unqualified or incompetent physician. IHS follows JCAHO's accrediting requirements and requires each of its facilities to conduct a credentials review that consists of (1) verifying with a state medical licensing board that a physician has an active, unrestricted medical license; (2) verifying training with the medical school, internship, or residency program, and professional affiliations, such as board certification; (3) obtaining information to evaluate the physician's suitability for appointment to the medical staff, such as explanations of past performance problems, disciplinary actions taken against a physician's license, or malpractice suits that involved the physician; (4) checking with references to verify clinical competence, judgment, character, and ability to get along with people; and (5) obtaining information on physical and mental health status. IHS procedures also require that a physician's credentials be verified before the physician is allowed to provide medical services to a patient. However, if time does not permit a full credentialing review before a physician reports for duty, an IHS facility director can grant temporary privileges to practice medicine. The decision to grant temporary privileges to a physician is based on the clinical director's review and approval of the physician's application for appointment to the medical staff and his or her request for clinical privileges. But the credentialing official is still expected to perform a full review of a physician's credentials. IHS credentialing officials told us that sometimes they cannot conduct a full credentials review before a temporary physician treats patients because of the short period between the time when an IHS facility contracts for physician services and the time when a physician reports to the facility. As a result, a temporary physician can treat patients and leave a facility before a complete credentials review has been performed. An incomplete credentialing process can result in a health care facility unknowingly allowing an incompetent physician to provide medical care to patients, thereby placing the facility and patients at risk. The short time frames were evident in the 43 contracts we reviewed; 37 were awarded less than 2 weeks before the facility acquired physician services, not enough time for a facility to confirm credentials information before a temporary physician begins work. Furthermore, temporary physicians often perform work and are gone before the credentials check is completed. The credentials check can take 30 days to complete. The average time from when a contract was awarded to the date services began was 7 days. The length of time IHS facilities needed the services of temporary physicians varied, with many periods of service ranging from 21 to 32 days. In addition, locum tenens companies often use more than one physician to fulfill a contract. For example, a company sent 10 different temporary physicians to staff 1 position for 1 month. When multiple physicians are used to fulfill a contract, credentialing becomes an even more time-consuming and complicated process. An official from one locum tenens company told us that temporary physicians tend to be transient and fall into one of three categories: (1) new physicians who do not know where they want to practice medicine and want to explore different settings before starting a practice, (2) physicians over 40 years old who no longer want to maintain a private practice and want to travel to different locations, and (3) physicians with performance or disciplinary problems who move from place to place to escape detection. Physicians in the latter category are identified primarily through state medical licensing boards although not all performance problems are reported to the boards. At present, IHS facilities do not have a formal mechanism to share information on the performance of temporary physicians who have worked in the IHS system. As a result, a poorly performing physician can move from one IHS location to another with little chance of being detected. The importance of sharing information among IHS facilities is highlighted by the following example. A temporary physician examined a patient in the emergency room. The patient was complaining of chest and abdominal pain that the physician diagnosed as constipation. He prescribed a laxative for the patient and sent him home. The patient returned to the emergency room about an hour later saying his pain had worsened. The temporary physician reexamined him, reaffirmed the diagnosis of constipation, and told him to go home again. However, the emergency room nursing supervisor noticed from the patient's medical chart that he had a history of heart disease and that his condition had deteriorated since his first visit. Therefore, she ordered an electrocardiogram be performed on the patient and notified the full-time IHS internal medicine physician of the patient's condition. The IHS staff physician ordered that the patient be admitted to the intensive care unit to determine whether the patient was having a heart attack. The nurse admitted the patient immediately, but he died of a cardiac arrest 15 minutes after being admitted. The IHS facility's chief of the emergency department deemed that the care this physician provided was unacceptable and informed the locum tenens company of his performance problems. The company removed the physician from its active list of applicants. However, the IHS facility did not inform other facilities of this individual's performance. As a result, the physician could find work at another IHS facility under contract with a different locum tenens company. American Indian and Alaskan Native patients should have reasonable assurance that every physician who treats them in an IHS facility is qualified to do so. Thus, except for emergencies, we do not believe that IHS should allow physicians to work within the IHS system until a complete examination of all medical licenses has been performed and IHS service unit officials are informed of the results. Furthermore, locum tenens companies under contract with IHS need to be required to provide all information they have available to them on a temporary physician that could potentially adversely affect the care provided to patients. Current IHS policy does not explicitly require that all medical licenses be verified. However, a review of all medical licenses can reduce the risk of patients receiving substandard care from temporary physicians who may have had prior performance problems. IHS facilities can benefit from sharing information about the performance of temporary physicians. Better communication among facilities is needed to identify and track temporary physicians' performance, both good and bad, while working with IHS. Such an information sharing network would be of substantial benefit to IHS personnel responsible for conducting credentialing checks and could reduce duplicative credentialing checks. We recommend that the Assistant Secretary for Health, Public Health Service, ensure that the Director of IHS take the following actions: Revise IHS' credentials and privileges policy to explicitly state that the status of all state medical licenses, both active and inactive, be verified. Develop standard provisions to include in contracts with locum tenens companies that require a company to verify and inform IHS of the status of all state medical licenses, both active and inactive. Establish a system that will facilitate the dissemination of information among IHS facilities on the performance of temporary physicians who provide services in IHS. In commenting on a draft of this report, the U.S. Public Health Service agreed with our findings and recommendations. Its response is reprinted in appendix VI. The Public Health Service stated that IHS plans to revise its policy on personal services contracts to make it consistent with its policy guidance on the credentials and privileges review process of medical staff. This revision will require the verification of all medical licenses, both active and inactive, for all physicians--including temporary physicians whether hired directly by IHS or through locum tenens companies. The policy guidance on personal services contracts will also be revised to require locum tenens companies to verify and inform IHS of adverse actions taken on all medical licenses. In addition, IHS is developing an electronic bulletin board to share personnel information among area offices and services units. The bulletin board will include a component on credentialing activities, such as performance information on temporary physicians. The Public Health Service also pointed out that in verifying state medical licenses, many states will not release information on matters under investigation. While this may be true in general, many state medical licensing boards will disclose whether an investigation is being conducted on a particular physician. If state boards are queried, the clinical director of the IHS facility can be alerted that a problem may exist and that follow-up with the physician in question may be warranted. IHS facilities cannot meet all of the health care needs of American Indians and Alaskan Natives. Recognizing this, the Congress annually appropriates funds for care to be administered by non-IHS providers under contract with IHS. But the funds cover only 75 percent of the need for these services. Because of the limited funds, IHS prioritizes the care that it will pay for. The result is reduced access to contract medical services for American Indians and Alaskan Natives. In fiscal year 1993, IHS denied or deferred 82,675 requests for contract medical services. IHS is now implementing staff reductions as required by the Federal Workforce Restructuring Act of 1994. An official in IHS' Office of Administration and Management does not believe that these reductions will significantly affect either the delivery of medical services or planned expansion programs in fiscal years 1995 and 1996 if IHS' appropriation for fiscal year 1996 is not reduced and medical services can be purchased through contracts with health care providers. However, he is concerned about how scheduled staff reductions after fiscal year 1996 may affect IHS' delivery of medical services and its expansion program. Few IHS service units are able to provide a full range of medical services to American Indians and Alaskan Natives. Thus, IHS utilizes non-IHS providers to deliver services that cannot be provided in-house. This is done with contract health services funds. For example, only 4 of IHS' 144 service units have hospitals that are equipped and staffed to provide comprehensive medical services such as intensive care, inpatient surgery, high-risk obstetrics, and specialty medical services such as ophthalmology (see apps. III and IV for sizes of hospitals). Forty-five service units have inpatient hospitals that do not provide a full range of medical services, such as inpatient surgical services and obstetrical deliveries. Eighty-four service units have no inpatient IHS hospital and provide services at outpatient facilities. And 11 service units have no IHS medical facilities at all. IHS distributes contract health services funds among its 12 area offices based primarily on the level of funding that the area received in previous years. This system of allocating funds does not take into account current data on the number of American Indians and Alaskan Natives in each area who rely on IHS for health care services, the health care needs of the population, or the health care services available within each area. In fiscal years 1991 and 1992, appropriations for contract health services increased about 6 percent each year. However, an IHS official told us that the cost for contract health services rose over 11 percent from 1991 to 1992. Furthermore, according to IHS, the total funds available for contract health services covered only 75 percent of the need for this type of service. Table 3.1 shows the amount of contract health services funds available to area offices and the eligible population of each area for fiscal year 1993. IHS has developed medical priorities guidelines that are used by all facilities to determine what care will receive the highest priority for available contract health services funds (see app. V). Emergent and urgent care--such as emergency room care, life-threatening injuries, obstetrical deliveries, and neonatal care--is given the highest priority for funding and is generally funded. However, other care is given a lesser priority and is not always funded. Preventive care, such as screening mammograms, is next on the priority list. Third on the priority list are primary and secondary care services, such as specialty consultations in pediatrics and orthopedics. The lowest priority is for chronic tertiary and extended care services, such as skilled nursing facility and rehabilitation care. Using medical priority guidelines, IHS service units denied or deferred 82,675 requests for contract health services in fiscal year 1993. This represents a 76 percent increase over denials and deferrals reported in fiscal year 1990. A request for funding is denied when the patient's care does not fall within the medical priorities for which funds are available and the patient informs the contract health services staff that he or she intends to obtain medical care regardless of whether IHS will pay for it. If the medical care does not fall within medical priorities and a patient is willing to wait until funding may become available, the care is deferred. Of the 70,540 requests that were deferred, 43 percent were for preventive care, such as eye examinations. The remaining deferrals were for acute and chronic primary, secondary, and tertiary care, such as coronary bypass surgery and hip replacement surgery. Some of the patients whose initial requests were deferred may have ultimately received care from IHS or others, but IHS does not have data readily available on the extent to which this has occurred. The following is an example of a case where the patient requested funding for medical care from the contract health services program, but had her request deferred because her condition was not of a sufficiently high priority to receive immediate funding. As a result, care was delayed for 6 months until the patient's condition deteriorated to the point where the problem was critical and immediate care was required. The 73-year-old woman was diagnosed with severe circulatory problems in her left leg in January 1993 at an IHS hospital. The physician assistant who saw the patient thought she should be referred to a vascular surgeon in the community for surgical treatment. The physician assistant did not believe that the patient was in immediate danger, that is, was not in danger of losing her leg within 48 hours. However, he did believe that care was needed to prevent further deterioration. This case was presented to the hospital's contract health services committee on January 25, 1993, to determine whether her care was a high enough priority to be funded. Contract health services staff deferred her care because the funds available only allowed the service unit to treat the more seriously ill patients with more urgent medical conditions than hers. Although the woman was covered by Medicare, she could not afford to pay the $338 that Medicare would not cover. Had she been able to pay the $338, she could have received immediate care from a non-IHS provider. Once a month for the next 6 months, the patient returned to the IHS hospital clinic for care. After each visit, her case was referred to the contract health services committee and her care was deferred each time because it did not fall within medical priorities. In July 1993, the patient's referral was approved by contract health services because her condition had deteriorated to such an extent that she was in immediate danger of losing her left leg. IHS contract health services funds then paid the costs not covered by Medicare that the patient could not afford to pay. Table 3.2 shows the number of cases that were denied and deferred in fiscal year 1993 by area office. IHS officials stated that the number of deferrals and denials only document part of the unmet need. Deferrals and denials only track those who have requested services. There is no way to track the number of American Indians and Alaskan Natives who do not use the IHS system because they know that their care will be deferred. The Navajo and Oklahoma areas accounted for 69 percent of the total denials and deferrals in fiscal year 1993. These areas have 13 IHS hospitals ranging in size from 11 to 107 beds and 49 outpatient facilities that provide medical services to approximately 488,395 American Indians. This represents about 41 percent of all American Indians and Alaskan Natives who have used IHS services within the last 3 years. The hospitals and outpatient facilities in these areas do not have the staff or equipment to provide all of the health care services needed. As a result, contract health services funds are being relied upon to provide care that IHS does not have the capacity to provide. But if the care needed is not a high priority, it does not get funded. For example, in fiscal year 1993 in the Navajo area, 16,503 requests for eye examinations or eyeglasses were not funded because of insufficient contract health services funds. Officials in both area offices told the Public Health Service that they need more funds to meet the needs of their populations. IHS has requested increased funding for the contract health services program, but HHS has not approved the level of increases that IHS has requested. Furthermore, the dollars available for health services to all areas are limited and any increase in funds to one IHS area would likely result in a decrease in funds to another IHS area. The Federal Workforce Restructuring Act of 1994 requires executive agencies to reduce staff. In a September 1994 meeting with the Office of Management and Budget (OMB), the Secretary of HHS requested a waiver of this requirement for IHS. The Secretary stated that IHS needed time to plan and implement a restructuring program that would consolidate some of IHS' area offices to reduce IHS' workforce without drastically affecting delivery of health services. OMB did not approve the waiver but did agree to give IHS time to implement staff reductions in a way to minimize the impact on IHS' delivery of medical services and its planned expansion program. IHS has 15,425 staff for fiscal year 1995. Beginning in fiscal year 1996, this number will decrease annually until a staffing level of 14,083 is reached in fiscal year 1999. An official in IHS' Office of Administration and Management told us that when supplemented by contract physicians, IHS' staffing levels in fiscal years 1995 and 1996 will be adequate to meet the staffing requirements of both its current health facilities and those that are scheduled to open in these years. However, in his opinion, if IHS' fiscal year 1996 appropriation is reduced, the agency will not be able to adequately staff its present facilities and the new facilities scheduled to open in fiscal years 1995 and 1996. If the agency is not able to adequately staff its new facilities, it will be unable to provide services such as physical therapy, respiratory therapy, radiology, optometry, and community health services, according to IHS officials. These services will have to be sought from non-IHS providers in the community with contract health services funds. As a result, more medical services could be denied and deferred. This official also told us that he is concerned that the staffing reductions in fiscal year 1997 and beyond could affect IHS' delivery of medical services and its planned expansion program. In fiscal year 1997, IHS plans to open and staff a large medical center in Anchorage, Alaska, to replace its old hospital. Additionally, IHS must staff new or expanded services in eight other facilities.

Pursuant to a congressional request, GAO provided information on American Indians' access to quality health care services, focusing on the: (1) Indian Health Service's (IHS) efforts to ensure that temporary physicians working in IHS facilities are qualified and competent to perform assigned duties; and (2) extent that medical services are delayed under the IHS Contract Health Services Program. GAO found that: (1) IHS patients may be receiving substandard care because IHS is not always aware of temporary physicians who have had performance or disciplinary problems; (2) although IHS requires that temporary physicians possess a current medical license without restrictions, it fails to verify all of the physicians' current or prior licenses; (3) most IHS facilities have contracts with companies that are not required to inform IHS of the status of their physicians' licenses; (4) IHS facilities do not possess a network to share information on the performance of its temporary physicians; (5) although IHS can purchase specialized medical services from non-IHS providers under the Contract Health Services program, preventive care is not always funded; and (6) IHS is implementing legislatively required staff reductions, however, officials are unsure of how these reductions will impact future medical services or expansion programs if appropriations are reduced as well.

Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business and is especially important for government agencies, where maintaining the public's trust is essential. While the dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet have enabled agencies such as SEC to better accomplish their missions and provide information to the public, the changes also expose federal networks and systems to various threats. For example, the Federal Bureau of Investigation has identified multiple sources of cyber threats, including foreign nation states engaged in information warfare, domestic criminals, hackers and virus writers, and disgruntled employees working within an organization. Concerns about these threats are well founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, and steady advances in the sophistication and effectiveness of attack technology. For example, the number of incidents reported by federal agencies to the United States Computer Emergency Readiness Team (US- CERT), has increased dramatically over the past 3 years, increasing from 3,634 incidents reported in fiscal year 2005 to 13,029 incidents in fiscal year 2007 (a 259 percent increase). Without proper safeguards, systems are vulnerable to individuals and groups with malicious intent who can intrude and use their access to obtain or manipulate sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Our previous reports and reports by federal inspectors general describe persistent information security weaknesses that place federal agencies at risk of disruption, fraud, or inappropriate disclosure of sensitive information. Accordingly, we have designated information security as a governmentwide high-risk area since 1997, a designation that remains in force today. Recognizing the importance of securing federal agencies' information systems, Congress enacted the Federal Information Security Management Act (FISMA) in December 2002 to strengthen the security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program to provide information security for the information and systems that support the operations and assets of the agency, using a risk- based approach to information security management. Following the stock market crash of 1929, Congress passed the Securities Exchange Act of 1934, establishing SEC to enforce securities laws, regulate the securities markets, and protect investors. To carry out its responsibilities and help ensure that securities markets are fair and honest, SEC issues rules and regulations that promote adequate and effective disclosure of information to the investing public. The commission also oversees the registration of other key participants in the securities industry, including stock exchanges, broker-dealers, clearing agencies, depositories, transfer agents, investment companies, and public utility holding companies. SEC is an independent, quasi-judicial agency that operates at the direction of five commissioners appointed by the President and confirmed by the Senate. In fiscal year 2008, SEC received a budget authority of $906 million and had a staff of 3,511 employees. In addition, the commission collected $569,000 in filing fees and about $434 million in penalties and disgorgements. To support its financial operations and store the sensitive information it collects, SEC relies extensively on computerized systems interconnected by local and wide-area networks. For example, to process and track financial transactions, such as filing fees paid by corporations, disgorgements and penalties from enforcement activities, and procurement activities, SEC relies on several enterprise database applications--Momentum; Phoenix; Electronic Data Gathering, Analysis, and Retrieval (EDGAR); and Fee Momentum--and a general support system network that allows users to communicate with the database applications. The database applications provide SEC with the following capabilities: Momentum is used to record the commission's accounting transactions, to maintain its general ledger, and to maintain some of the information SEC uses to produce financial reports. Phoenix contains and processes sensitive data relating to penalties, disgorgements, and restitution on proven and alleged violations of securities and futures laws. EDGAR performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others that are required to file certain information with SEC. Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency. The general support system is an integrated client-server system composed of local- and wide-area networks and is organized into distinct subsystems based along SEC's organizational and functional lines. The general support system provides services to internal and external customers who use them for their business applications. It also provides the necessary security services to support these applications. Under FISMA, the Chairman of SEC has responsibility for, among other things, (1) providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency's information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency chief information officer (CIO) the authority to ensure compliance with the requirements imposed on the agency. FISMA requires the CIO to designate a senior agency information security officer who shall carry out the CIO's information security responsibilities. SEC has corrected or mitigated 18 of the 34 security control weaknesses that we had reported as unresolved at the time of our prior audit report in 2008. For example, it has adequately validated electronic certificates from connections to its physically secured the perimeter of the operations center, monitored unusual and suspicious activities at its operations center, and removed network system accounts and data center access rights from separating employees. In addition, SEC has made progress in improving its information security program. For example, the commission has developed, documented, and implemented a policy on remedial action plans to help ensure that deficiencies are mitigated in an effective and timely manner, and provided individuals with training for incident handling. These efforts constitute an important step toward strengthening the agencywide information security program mandated by FISMA. While SEC has made important progress in strengthening its information security controls, it has not completed actions to correct or mitigate 16 of the previously reported weaknesses. For example, SEC has not adequately documented access privileges for the EDGAR application, always implemented patches on vulnerable workstations and enterprise database servers, or always sufficiently protected passwords. Failure to resolve these issues could leave sensitive data vulnerable to unauthorized disclosure, modification, or destruction. In addition to the 16 previously reported weakness that remain uncorrected, we identified 23 new weaknesses in controls intended to restrict access to data and systems, as well as weaknesses in other information security controls, that continue to jeopardize the confidentiality, integrity, and availability of SEC's financial and sensitive information and information systems. Previously reported and newly identified weaknesses hinder the commission's ability to perform vital functions and increase the risk of unauthorized disclosure, modification, or destruction of financial information. A key reason for these weaknesses was that SEC did not fully implement key activities of its information security program. A basic management objective for any organization is to protect the resources that support its critical operations and assets from unauthorized access. Organizations accomplish this by designing and implementing controls that are intended to prevent, limit, and detect unauthorized access to computer resources (e.g., data, programs, equipment, and facilities), thereby protecting them from unauthorized disclosure, modification, and loss. Specific access controls include identification and authentication, authorization, cryptography, audit and monitoring, and physical security. Without adequate access controls, unauthorized individuals, including outside intruders and former employees, can surreptitiously read and copy sensitive data and make undetected changes or deletions for malicious purposes or personal gain. In addition, authorized users can intentionally or unintentionally modify or delete data or execute changes that are outside of their span of authority. A computer system must be able to identify and authenticate the identities of users so that activities on the system can be linked to specific individuals. When an organization assigns unique user accounts to specific users, the system is able to distinguish one user from another--a process called identification. The system must also establish the validity of a user's claimed identity by requesting some kind of information, such as a password, that is known only by the user--a process known as authentication. Furthermore, SEC policy requires the implementation of automated identification and authentication mechanisms that enable the unique identification of individual users and systems. SEC did not consistently enforce identification and authentication controls for its users and systems. For example, it did not always securely configure the snmp community string (similar to a password) used to monitor and manage network devices; remove the default vendor account for a remote network service, which could allow access to the network service without the need to provide a password; restrict multiple database administrators from sharing the same log-on application ID to a powerful database account; and uniquely identify individual accounts on network switches for https login. As a result, increased risk exists that users will not be uniquely identified before they access the SEC network, and SEC will not be able to hold them accountable in the event of a security incident. Authorization is the process of granting or denying access rights and privileges to a protected resource, such as a network, system, application, function, or file. A key component of granting or denying access rights is the concept of "least privilege." Least privilege is a basic principle for securing computer resources and data that means that users are granted only those access rights and permissions that they need to perform their official duties. To restrict legitimate users' access to only those programs and files that they need in order to do their work, organizations establish access rights and permissions. "User rights" are allowable actions that can be assigned to users or to groups of users. File and directory permissions are rules that are associated with a particular file or directory, regulating which users can access it--and the extent of that access. To avoid unintentionally giving users unnecessary access to sensitive files and directories, an organization must give careful consideration to its assignment of rights and permissions. In addition, SEC policy requires that each user or process be assigned only those privileges or functions needed to perform authorized tasks and that approval of such privileges be documented. Furthermore, SEC policy states that only services that are absolutely necessary are allowed to have a remote connection. SEC did not always sufficiently restrict system access and privileges to only those users that needed access to perform their assigned duties. For example, SEC did not always remove excessive user privileges on its financial systems, properly document or maintain approval of user access privileges to the restrict unnecessary remote access to database servers, and limit users' privileges so that users do not monopolize database system resources during critical times of the day. As a result, increased risk exists that users could gain inappropriate access to computer resources, circumvent security controls, and deliberately or inadvertently read, modify, or delete critical financial information. In addition, SEC's financial information may not be available when it is needed. Cryptography underlies many of the mechanisms used to enforce the confidentiality and integrity of critical and sensitive information. A basic element of cryptography is encryption. Encryption can be used to provide basic data confidentiality and integrity by transforming plaintext into ciphertext using a special value known as a key and a mathematical process known as an algorithm. The National Security Agency recommends encrypting network services. If encryption is not used, user ID and password combinations are susceptible to electronic eavesdropping by devices on the network when they are transmitted. Although SEC has implemented a network topology that employs extensive switching and limits eavesdropping to only the network segment accessible by the potential eavesdropper, it did not always ensure that information transmitted over the network was adequately encrypted. While the eavesdropping risk on the SEC network is reduced by its topology, nonetheless, increased risk exists that individuals could capture user IDs and passwords and use them to gain unauthorized access to network devices. To establish individual accountability, monitor compliance with security policies, and investigate security violations, it is crucial to determine what, when, and by whom specific actions have been taken on a system. Organizations accomplish this by implementing system or security software that provides an audit trail for determining the source of a transaction or attempted transaction and monitoring users' activities. To be effective, organizations should (1) configure the software to collect and maintain a sufficient audit trail for security-relevant events; (2) generate reports that selectively identify unauthorized, unusual, and sensitive access activity; and (3) regularly monitor and take action on these reports. SEC also requires the enforcement of auditing and accountability by configuring information systems to produce, store, and retain audit records of system, application, network, and user activity. SEC did not adequately configure several database systems to enable auditing and monitoring of security-relevant events. For example, it did not configure one database to record successful log-ons or security violations for unauthorized modification of data, and three databases to safeguard log data against loss. As a result, there is increased likelihood that unauthorized activities or policy violations would not be detected. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. These controls involve restricting physical access to computer resources, usually by limiting access to the buildings and rooms in which the resources are housed, and periodically reviewing access rights granted to ensure that access continues to be appropriate based on criteria established for granting it. At SEC, physical access control measures (such as guards, badges, and locks, used either alone or in combination) are vital to protecting its computing resources and the sensitive data it processes from external and internal threats. Although SEC has strengthened its physical security controls, certain weaknesses reduced its effectiveness in protecting and controlling physical access to sensitive work areas. For example, on multiple occasions SEC employees entered electronically secured interior spaces by following another employee through an open door instead of using their badges to obtain access. In addition, physical security standards have been drafted but have not been approved by management. As a result, increased risk exists that unauthorized individuals could gain access to sensitive computing resources and data and inadvertently or deliberately misuse or destroy them. In addition to having access controls, an organization should have policies, procedures, and control techniques in place to appropriately segregate computer-related duties. Segregation of duties refers to the policies, procedures, and organizational structure that help ensure that one individual cannot independently control all key aspects of a process or computer-related operation and thereby gain unauthorized access to assets or records. Often segregation of incompatible duties is achieved by dividing responsibilities among two or more organizational groups. Dividing duties among two or more individuals or groups diminishes the likelihood that errors and wrongful acts will go undetected because the activities of one individual or group will serve as a check on the activities of another. Inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, and computer resources damaged or destroyed. In addition, SEC policy requires that each user or process be assigned only those privileges or functions needed to perform authorized tasks. SEC did not adequately segregate incompatible computer-related duties and functions. For example, a financial services branch chief could perform multiple incompatible duties such as creating, modifying, and deleting security organizations, roles, and security categories. At the same time, he could perform financial operations such as creating, approving, and changing invoices. These conditions existed, in part, because SEC lacked implementation guidelines for assigning incompatible duties among personnel administering its computer applications environment. In addition, although SEC has logically separated many of its networked devices, it did not always adequately separate network management traffic from general network traffic. As a result, general users could gain inappropriate access and intentionally or inadvertently disrupt network operations. As a consequence, increased risk exists that users could perform unauthorized system activities without detection. Configuration management is another important control that involves the identification and management of security features for all hardware and software components of an information system at a given point and systematically controls changes to that configuration during the system's life cycle. An effective configuration management process includes procedures for (1) identifying, documenting, and assigning unique identifiers (for example, serial number and name) to a system's hardware and software parts and subparts, generally referred to as configuration items; (2) evaluating and deciding whether to approve changes to a system's baseline configuration; (3) documenting and reporting on the status of configuration items as a system evolves; (4) determining alignment between the actual system and the documentation describing it; and (5) developing and implementing a configuration management plan for each system. In addition, establishing controls over the modification of information system components and related documentation helps to prevent unauthorized changes and ensure that only authorized systems and related program modifications are implemented. This is accomplished by instituting policies, procedures, and techniques that help make sure all hardware, software, and firmware programs and program modifications are properly authorized, tested, and approved. SEC has implemented several elements of a configuration management process. Specifically, it has documented policies and procedures for assigning unique identifiers and naming configuration items so that they can be distinguished from one another and for requesting changes to configuration items. SEC has also developed a change request process and an enterprise-level change control board to review changes. However, SEC has not adequately implemented key configuration management controls over the information system components associated with the upgrade to Momentum. Specifically, it did not always document, evaluate, or approve changes to a system's baseline. For example, it did not consistently document test plans; adequately document or approve changes to the requirements, design, and scripts; establish or maintain configuration baselines; or apply up-to-date patches on its database servers that support processing of financial data. In addition, SEC did not document and report on the status of configuration items as Momentum evolved, nor did it conduct configuration audits to determine the alignment between the actual system and the documentation describing it. Furthermore, SEC did not (1) develop a configuration management plan for Momentum, (2) assign a manager or team to conduct these activities, and (3) use adequate tools to implement the process. As a result, increased risk exists that authorized changes will not be made and unauthorized changes will be made to the Momentum system. SEC has made important progress in implementing its information security program. For example, SEC has provided individuals with training for incident handling and developed, documented, and implemented a policy on remedial action plans to ensure that deficiencies are mitigated in an effective and timely manner. However, a key reason for the information security weaknesses is that it has not effectively or fully implemented key program activities. Until all key elements of its information security program are fully and consistently implemented, SEC will not have sufficient assurance that new weaknesses will not emerge and that financial information and financial assets are adequately safeguarded from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. FISMA requires the CIO to designate a senior agency information security officer who shall have information security duties as that official's primary duty and head an office with the mission and resources to assist in ensuring agency compliance with the provisions of the act. This officer will be responsible for carrying out the CIO's information security responsibilities, including developing and maintaining a departmentwide information security program, developing and maintaining information security policies and procedures, and providing training and oversight to security personnel. However, although SEC appointed an acting senior agency information security officer from April to July 2008, the position has been vacant for the past 8 months. According to an SEC official, a vacancy announcement has not yet been posted for this position. Without a senior security officer to provide direction for an agencywide security focus, SEC is at increased risk that its security program will not be adequate to ensure the security of its highly interconnected computer environment. FISMA and its implementing policies require agencies to develop, document, and implement periodic assessments of the risk and magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems. The National Institute of Standards and Technology (NIST) also states that a risk assessment report should be presented as a systematic and analytical approach to assessing risk so that senior management will understand the risks and allocate resources to reduce and correct potential losses. SEC policy states that security risk assessment involves the identification and evaluation of IT security risks. This process identifies IT security-related risks to information and information systems, considers the probability of occurrence, and measures their potential impact. The SEC Office of IT Security Group is responsible for periodically reviewing the risk assessments to ensure that all aspects of risk and applicable IT security requirements have been adequately addressed. SEC did not provide full information for management oversight of risks associated with the Momentum application. For example, the SEC security testing and evaluation for Momentum identified numerous configuration management vulnerabilities that affect other areas such as access controls, separation of duties, and inappropriate administrative roles assigned to individuals. Several of these vulnerabilities in the security testing and evaluation were not reported in the risk assessment summary for the Momentum application for management attention. As a result, SEC management may not be fully aware of all risks or the magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems that support their operations and assets. FISMA and its implementing policies require periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices performed with a frequency depending on risk, but no less than annually; this should include testing of management, operational, and technical controls for every system identified in the agency's required inventory of major information systems. This type of oversight is a fundamental element of a security program because it demonstrates management's commitment to the program, reminds employees of their roles and responsibilities, and identifies areas of noncompliance and ineffectiveness. Analyzing the results of security reviews provides security specialists and business managers with a means of identifying new problem areas, reassessing the appropriateness of existing controls, and identifying the need for new controls. FISMA requires that the frequency of tests and evaluations be based on risks and occur no less than annually. However, SEC did not sufficiently conduct periodic testing and evaluation of controls. For example, SEC did not test and evaluate the effectiveness of security controls for the general support system supporting Momentum and EDGAR in fiscal year 2008. In addition, the scope and depth of security testing and evaluation that were performed were not comprehensive and often did not identify control weaknesses. To illustrate, SEC did not test or assess the effectiveness of a key subsystem used to develop financial statements, and an independent contractor tested only 4 of 65 security roles in Momentum, severely limiting the scope of the testing. In addition, control tests conducted by SEC on Momentum did not identify vulnerabilities in the following controls: (1) configuration management, (2) separation of duties, (3) audit and monitoring, and (4) access controls; in contrast our tests identified vulnerabilities in these controls. As a result, there is heightened risk that SEC cannot be assured that Momentum and EDGAR meet requirements and perform as intended. According to NIST, security certification and accreditation of information systems and subsystems are important activities that support a risk management process and are an integral part of an agency's information security program. Security certification consists of conducting a security control assessment and developing the security documents. Security accreditation is the official management decision given by a senior agency official to authorize the operation of an information system and to explicitly accept the risk it may present to agency operations, agency assets, or individuals based on the implementation of an agreed-upon set of security controls. Required by Office of Management and Budget (OMB) Circular A-130, appendix III, security accreditation provides a form of quality control and challenges managers and technical staffs at all levels to implement the most effective security controls possible on an information system, given mission requirements and technical, operational, and cost/schedule constraints. After certification, a security accreditation package with security documents is provided to the authorizing official with the essential information for the official to make a credible, risk- based decision on whether to authorize operation of the information system. The security accreditation package includes the security plan, risk assessment, contingency plan, security assessment report, and plan of action and milestones. SEC did not certify and accredit a key intermediary subsystem that supports the production of its financial statements. In preparing its financial statements, SEC regularly used this intermediary subsystem to process transactions before loading the financial data into the Momentum application. The subsystem encompassed (1) an application tool to handle transactions of disgorgement data between the Phoenix and Momentum applications; (2) spreadsheets to record, calculate, maintain, and report financial transactions from various accounts; and (3) a third-party tool used for manipulating, sorting, and merging financial data. SEC did not certify or accredit the subsystem or include it as part of the security certification and accreditation process for Phoenix and Momentum. For example, the subsystem was not described in a security plan, risk assessment, contingency plan, security assessment report, or plan of action and milestone. Without certification and accreditation of the intermediate subsystem, possible security weaknesses may go undetected and management may not be alerted to potential vulnerabilities. SEC has made progress in correcting or mitigating previously reported weaknesses. However, information security weaknesses--both old and new--continue to impair the agency's ability to ensure the confidentiality, integrity, and availability of financial and sensitive information. These weaknesses represent a significant deficiency in internal controls over the information systems and data used for financial reporting. A key reason for these weaknesses is that the agency has not yet fully implemented critical elements of its agencywide information security program. Until SEC (1) mitigates known information security weaknesses in access controls and other information system controls and (2) fully implements a comprehensive agencywide information security program that includes filling the security officer position, adequately reporting risks, conducting effective system security tests, and certifying and accrediting an intermediary subsystem, its financial information will remain at increased risk of unauthorized disclosure, modification, or destruction, and its management decisions may be based on unreliable or inaccurate information. To assist the commission in improving the implementation of its agencywide information security program, we recommend that the SEC Chairman direct the CIO to take the following four actions: designate a senior agency information security officer who will be responsible for managing SEC's information security program, provide full information for management oversight of information security conduct comprehensive periodic testing and evaluation of the effectiveness of security controls for the general support system and key financial applications, and certify and accredit subsystems that support the production of SEC's financial statements. In a separate report with limited distribution, we are also making 32 recommendations to enhance SEC's access controls and configuration management practices. In providing written comments on a draft of this report, the SEC Chairman agreed with our recommendations and reported that the agency is on track to address our new findings and to complete remediation of prior year findings. She stated that strong internal controls are one of SEC's highest priorities and that it is committed to proper stewardship of the information entrusted to it by the public. The Chairman's written comments are reprinted in appendix II. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Banking, Housing, and Urban Affairs; the Senate Committee on Homeland Security and Governmental Affairs; the House Committee on Financial Services; and the House Committee on Oversight and Government Reform. We are also sending copies to the Secretary of the Treasury, the Director of the Office of Management and Budget, and other interested parties. In addition, this report will be available at no charge on our Web site at http://www.gao.gov. If you have any questions about this report, please contact Gregory C. Wilshusen at (202) 512-6244 or Dr. Nabajyoti Barkakati at (202) 512-4499. We can also be reached by e-mail at [email protected] or [email protected]. Contacts for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals who made key contributions to this report are listed in appendix III. The objectives of our review were (1) to determine the status of the Securities and Exchange Commission's (SEC) actions to correct or mitigate previously reported information security weaknesses and (2) to determine whether controls over key financial systems were effective in ensuring the confidentiality, integrity, and availability of financial and sensitive information. This review was performed for the purpose of supporting the opinion developed during our audit of SEC's internal controls over the preparation of its 2008 financial statements. To determine the status of SEC's actions to correct or mitigate previously reported information security weaknesses, we identified and reviewed its information security policies, procedures, practices, and guidance. We reviewed prior GAO reports to identify previously reported weaknesses and examined the commission's corrective action plans to determine which weaknesses it had reported were corrected. For those instances where SEC reported that it had completed corrective actions, we assessed the effectiveness of those actions by reviewing the appropriate documents and interviewing the appropriate officials. To determine whether controls over key financial systems were effective, we tested the effectiveness of selected information security controls. We concentrated our evaluation primarily on the controls for financial applications, enterprise database applications, and network infrastructure--Momentum; Phoenix; Electronic Data Gathering, Analysis, and Retrieval (EDGAR); Fee Momentum; and the general support system--that directly or indirectly support the processing of material transactions reflected in the agency's financial statements. Our evaluation was based on our Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information. Using National Institute of Standards and Technology (NIST) standards and guidance and SEC's policies, procedures, practices, and standards, we evaluated controls by testing the complexity and expiration of password settings on selected servers to determine if strong password management was enforced; analyzing users' system authorizations to determine whether users had more permissions than necessary to perform their assigned functions; observing methods for providing secure data transmissions across the network to determine whether sensitive data were being encrypted; observing whether system security software was logging successful testing and observing physical access controls to determine if computer facilities and resources were being protected from espionage, sabotage, damage, and theft; inspecting key servers and workstations to determine whether critical patches had been installed or were up to date; examining access privileges to determine whether incompatible functions were segregated among different individuals; and observing end user activity pertaining to the process of preparing SEC financial statements. Using the requirements identified by the Federal Information Security Management Act (FISMA), the Office of Management and Budget (OMB), and NIST, we evaluated SEC's implementation of its security program by reviewing SEC's risk assessment process and risk assessments for three key systems that support the preparation of financial statements to determine whether risks and threats were documented consistent with federal guidance; analyzing SEC's policies, procedures, practices, and standards to determine their effectiveness in providing guidance to personnel responsible for securing information and information systems; analyzing security plans to determine if management, operational, and technical controls were in place or planned and that security plans were updated; examining training records for personnel with significant security responsibilities to determine if they received training commensurate with those responsibilities; analyzing security testing and evaluation results for three key systems to determine whether management, operational, and technical controls were tested at least annually and based on risk; examining remedial action plans to determine whether they addressed vulnerabilities identified in security testing and evaluations; and examining contingency plans for three key systems to determine whether those plans had been tested or updated. We also discussed, with key security representatives and management officials, whether information security controls were in place, adequately designed, and operating effectively. We conducted this audit from July 2008 to March 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contacts named above, David B. Hayes and William F. Wadsworth (Assistant Directors), Angela M. Bell, Mark J. Canter, Kirk J. Daubenspeck, Patrick R. Dugan, Mickie E. Gray, Sharon S. Kitrell, Lee A. McCracken, Stephanie Santoso, Duc M. Ngo, Tammi L. Nguyen, Henry I. Sutanto, Edward R. Tekeley and Jayne L. Wilson made key contributions to this report.

In carrying out its mission to ensure that securities markets are fair, orderly, and efficiently maintained, the Securities and Exchange Commission (SEC) relies extensively on computerized systems. Effective information security controls are essential to ensure that SEC's financial and sensitive information is protected from inadvertent or deliberate misuse, disclosure, or destruction. As part of its audit of SEC's financial statements, GAO assessed (1) the status of SEC's actions to correct previously reported information security weaknesses and (2) the effectiveness of SEC's controls for ensuring the confidentiality, integrity, and availability of its information systems and information. To do this, GAO examined security policies and artifacts, interviewed pertinent officials, and conducted tests and observations of controls in operation. SEC has made important progress toward correcting previously reported information security control weaknesses. Specifically, it has corrected or mitigated 18 of 34 weaknesses previously reported as unresolved at the time of our prior audit. For example, SEC has adequately validated electronic certificates from connections to its network, physically secured the perimeter of its operations center and put in place a process to monitor unusual and suspicious activities, and removed network system accounts and data center access rights from separating employees. In addition, the commission has made progress in improving its information security program. To illustrate, it has developed, documented, and implemented a policy on remedial action plans to ensure that deficiencies are mitigated in an effective and timely manner, and provided individuals with training for incident handling. Nevertheless, SEC has not completed actions to correct 16 previously reported weaknesses. For example, it did not adequately document access privileges granted to users of a key financial application, and did not always implement patches on vulnerable workstations and enterprise database servers. In addition to the 16 previously reported weakness that remain uncorrected, GAO identified 23 new weaknesses in controls intended to restrict access to data and systems, as well as weaknesses in other information security controls, that continue to jeopardize the confidentiality, integrity, and availability of SEC's financial and sensitive information and information systems. The commission has not fully implemented effective controls to prevent, limit, or detect unauthorized access to computing resources. For example, it did not always (1) consistently enforce strong controls for identifying and authenticating users, (2) sufficiently restrict user access to systems (3) encrypt network services, (4) audit and monitor security-relevant events for its databases, and (5) physically protect its computer resources. SEC also did not consistently ensure appropriate segregation of incompatible duties or adequately manage the configuration of its financial information systems. A key reason for these weaknesses is that the commission has not yet fully implemented its information security program to ensure that controls are appropriately designed and operating as intended. Specifically, SEC has not effectively or fully implemented key program activities. For example, it has not (1) filled the vacancy for a senior agency information security officer, (2) fully reported or assessed risks, (3) sufficiently tested and evaluated the effectiveness of its information system controls, and (4) certified and accredited a key intermediary subsystem. Although progress has been made, significant and preventable information security control deficiencies create continuing risks of the misuse of federal assets, unauthorized modification or destruction of financial information, inappropriate disclosure of other sensitive information, and disruption of critical operations.

Assistants-at-surgery, who serve as members of surgical teams, perform tasks under the direction of surgeons and aid them in conducting operations. These tasks may include making initial incisions ("opening"), exposing the surgical site ("retracting"), stemming blood flow ("hemostasis"), surgically removing veins and arteries to be used as bypass grafts ("harvesting"), reconnecting tissue ("suturing"), and completing the operation and reconnecting external tissue ("closing"). Some of these tasks, like retraction, are relatively simple, while others, such as harvesting, are more complex. An assistant-at-surgery may perform one or more simple or complex tasks during an operation. Tasks performed by others on the surgical team differ from those performed by assistants-at-surgery. Scrub staff work within the sterile field--the area within the operating room that is kept free from harmful microorganisms--passing instruments, sponges, and other items directly to the surgeon and assistant-at-surgery who work within the sterile field. Circulators work outside the sterile field, responding to the needs of team members within the sterile field. Anesthesiologists, or anesthetists, who administer and monitor anesthesia, painkillers, and other drugs, are also present during an operation. Decisions by a hospital or surgeon to use an assistant-at-surgery depend on the complexity of the operation and medical condition of the patient. Physician associations, such as the ACS and the American Society of General Surgeons, maintain that the surgeon should be responsible for determining if an assistant-at-surgery is needed, although some hospitals require the use of an assistant for certain surgical procedures. Hospitals that employ assistants-at-surgery may assign them to a procedure without consulting the surgeon performing the procedure. Since 1994, the ACS, with other surgical specialty organizations, has conducted studies to determine which surgical procedures require physicians as assistants-at-surgery. These studies classify surgical procedures as "almost always," "sometimes," or "almost never" requiring an assistant-at-surgery. The 2002 study classifies approximately 5,000 surgical procedures, about 1,750 of which are designated as "almost always" requiring a physician to serve as an assistant-at-surgery. A small number of surgical procedures have accounted for the majority of the assistant-at-surgery services paid for under the Medicare physician fee schedule: In 2002, 100 procedures accounted for almost 75 percent of the assistant-at-surgery services that Medicare paid under the physician fee schedule. ACS designated 81 of these procedures as "almost always" requiring a physician as an assistant-at-surgery, and the remaining 19 procedures were designated as "sometimes" requiring a physician as an assistant. Medicare pays for medically necessary services, including those performed by assistants-at-surgery, for eligible elderly and disabled patients provided by health professionals and institutions meeting certain requirements. Part A, or Hospital Insurance, pays for inpatient hospital care, care provided by certain other health care facilities, and some home health care. Part B, or Supplementary Medical Insurance, includes payment for the services and items provided by physicians, certain other nonphysician health professionals, suppliers, outpatient hospital departments, and home health care agencies. Medicare makes payments to hospitals under part A through the hospital inpatient PPS for assistants-at-surgery. A fixed payment is made for all the inpatient hospital services, including assistant-at-surgery services, that a hospital provides to a beneficiary with a given diagnosis or receiving a particular type of surgery. Payments under the hospital inpatient PPS reflect the average bundle of services that beneficiaries with a particular diagnosis receive as inpatients in similar hospitals. The hospital's payment for a bundle of services is the same regardless of whether an assistant-at- surgery is used or who provides the assistant-at-surgery services. Prospective payment systems, such as the hospital inpatient PPS, are designed to promote efficiency: because the payment for a particular bundle of services is almost always the same, regardless of the services a particular patient receives, hospitals are discouraged from providing unnecessary services. Providing additional services would not increase their payments. Consequently, PPS payments to the hospital are sometimes less and sometimes more than the cost of providing care. Payments are also made under the hospital inpatient PPS to teaching hospitals for providing GME to the residents employed by the hospital. In 2001, about 20 percent of the approximately 5,800 U.S. hospitals were considered teaching hospitals. In 2003, surgical residents comprised about 20 percent of all residents at these hospitals. There were about 7,500 residents in general surgery and about 13,000 more surgical residents training for specialties, such as orthopedics, all of whom were required to serve as assistants-at-surgery as part of their training. In addition to these surgical residents, some nonsurgical residents have surgical rotations during which they serve as assistants-at-surgery. Medicare makes part B payments to assistants-at-surgery under the physician fee schedule when assistant services are performed by a physician or by a nonphysician health professional authorized to receive such payment. In 2002, these payments totaled about $158 million, less than 2 percent of the $10.5 billion Medicare paid to surgeons for surgical procedures that year. Medicare also makes global payments to surgeons under the physician fee schedule that cover the surgery and some pre- and postoperative services that the surgeons and their employees perform. Assistant-at-surgery services are not included in this bundle of services. Generally, the amount Medicare pays under the physician fee schedule is based on the resources needed to perform a service: the physician's time and skill, practice expenses that include the costs of staff, equipment, and supplies, and the cost of liability insurance. While a surgeon's global fee for a surgical procedure is set to reflect the resources required to perform the service, payments under the physician fee schedule for assistant-at- surgery services are not; they are calculated as a fixed percentage of the surgeon's global fee. The percentage varies depending on the profession of the assistant-at-surgery. The Medicare physician fee schedule pays physicians more than nonphysician health professionals for assistant-at- surgery services (see table 1). Medicare sets requirements that various health care institutions, suppliers, and professionals must meet to be paid by the program. Institutions, such as hospitals, must meet conditions of participation (CoP)--health and safety rules used to ensure quality of care. Until 1986, HCFA specified some requirements for assistant-at-surgery services in its hospital CoP. Hospitals were required to have physicians serve as assistants-at-surgery for procedures "with unusual hazard to life," while "nurses, aides, or technicians having sufficient training to properly and adequately assist'' could assist at "lesser operations." In a broad revision of the hospital CoP in 1986, the agency eliminated these requirements: it said the purpose of the revisions to the surgical services section, which had included the assistant-at-surgery requirements, was to "delete the overly prescriptive details" about the operation of surgical services. CMS retains requirements for other surgical team members, including scrub and circulating staff. CMS also establishes regulatory requirements for the health professions eligible to receive payment under the Medicare physician fee schedule. Members of that profession can be paid for providing covered services, including assistant-at-surgery services. Although CMS's rules include the minimum requirements that these professionals must meet to receive payment for services, there are no specific requirements to receive assistant-at-surgery payments in Medicare regulations. General requirements include education, licensure, and certification; no surgical education or experience is mandated. For example, physician assistants must graduate from an accredited physician assistant education program, pass the National Commission on Certification of Physician Assistants certification examination, and be licensed to practice as a physician assistant, but do not have to have experience as an assistant-at-surgery. Members of a wide range of health professions serve as assistants-at- surgery. Hospitals employ residents, international medical graduates, and all the types of nonphysician health professionals who perform the role. Hospital employees likely serve as assistants-at-surgery for a majority of the procedures for which the ACS says an assistant is "almost always" necessary. The number of assistant-at-surgery services performed by physicians and paid for under the physician fee schedule has declined, while the number of such services performed by nonphysician health professionals eligible to receive payment under the physician fee schedule has increased. Physicians, residents in training for licensure or board certification in a physician specialty, several different kinds of nurses, and members of several other health professions serve as assistants-at-surgery (see table 2). Surgical associations state that surgeons or residents are preferred as assistants-at-surgery, but surgeons are often not available to assist at surgery. Hospitals employ the gamut of health professionals who serve as assistants-at-surgery to perform the role. Some hospitals tend to hire assistants-at-surgery from a particular health profession, sometimes offering training courses in assistant services for that profession, to ensure that the hospital has a sufficient number of assistants. To encourage surgeons to use their operating rooms, hospitals may (1) employ assistants-at-surgery, eliminating the need for the surgeons to hire their own assistants, or (2) arrange for health professionals in independent practice to serve as assistants. While teaching hospitals use residents as assistants-at-surgery, these hospitals may also hire nonphysician health professionals to perform the role. In a recent survey of neurosurgery residency program directors, nearly all cited the need to hire nonphysician health professional staff, such as physician assistants, in response to the weekly 80-hour work limit for residents. Teaching hospitals with other surgical specialty programs may also need to hire nonphysician health professionals as assistants-at- surgery because of the limit on resident hours. Because hospitals are not required to keep records on the use of assistants-at-surgery to receive Medicare payment under the inpatient PPS, the number and cost of such services provided by all hospital employees are unknown. Still, hospital employees likely serve as assistants-at-surgery for the majority of the surgeries performed on Medicare patients. In 2002, Medicare made payments under the physician fee schedule to assistants- at-surgery about 36 percent of the time that the program made payments to surgeons for the surgical procedures that ACS designated in its most recent study as "almost always" requiring an assistant-at-surgery. Since the remaining 64 percent of those surgical procedures were likely to have had assistants-at-surgery, hospital employees would likely have performed this role. In its final regulation revising the physician fee schedule for 2000, HCFA relied upon the results of the American Hospital Association's (AHA) National Hospital Panel Survey that found that only 11 percent of responding hospitals said it was a regular practice for physicians to bring their own staff to the hospital to serve as assistants-at-surgery or to perform other functions. A representative of the AHA told us that most assistants-at-surgery, including residents and nonphysician staff, are hospital employees. The percentage of assistant-at-surgery services paid to physicians under the physician fee schedule has declined, and the percentage of these services paid to nonphysician health professionals has increased, particularly since enactment of the Balanced Budget Act of 1997 (BBA). The act raised the amount paid for assistant-at-surgery services to these nonphysician health professionals under the physician fee schedule, extended billing by clinical nurse specialists and nurse practitioners to urban areas (such billing had been limited to rural areas), and allowed physician assistants to contract with surgeons to be an assistant without having to be employees of the surgeon. The number of assistant-at- surgery services paid for under the physician fee schedule and provided by nonphysician health professionals increased more than 200 percent from 1997 through 2002, while the number of services provided by physicians serving as assistants declined about 23 percent. During this period, the percentage of Medicare-paid assistant-at-surgery services performed by nonphysician health professionals increased by 25 percentage points (see fig. 1). The amount paid to nonphysicians for these services has also increased. Prior to 1987, nonphysicians could not be paid as assistants-at-surgery. In 1997, nonphysicians were paid only $16 million for assistant-at-surgery services; in 2002, they were paid about $54 million. In comparison, physicians were paid $295 million for assistant-at-surgery services in 1986; $166 million in 1997; and $104 million in 2002. There is no widely accepted set of standards for the education and experience required to serve as an assistant-at-surgery. The health care professions whose members provide assistant-at-surgery services have varying educational requirements. No state licenses all the types of health professionals who serve as assistants-at-surgery. And the licenses they issue typically attest to the completion of broad-based health care education, making them of limited value in determining which health professionals have the education and experience to serve as an assistant- at-surgery. Furthermore, the certification programs developed by the various nonphysician health professional groups whose members assist at surgery differ. We found that there was insufficient information about the quality of care provided by assistants-at-surgery--either generally or by members of specific health professions--to assess the adequacy of the requirements for a particular profession. The health professions whose members serve as assistants-at-surgery have varying educational requirements (see table 3). For example, a licensed practical nurse typically completes a 1-year educational program, while a clinical nurse specialist must have a master's of science degree in nursing. In some cases, experience can substitute for education: orthopedic physician assistants may have associate degrees or certificates from military or nondegree programs or 5 years of experience working for an orthopedic surgeon. While state licenses for health professionals, including those eligible for payment as assistants-at-surgery under the physician fee schedule, typically have "scopes of practice" that include assistant-at-surgery services, education and experience as an assistant are not necessarily required to obtain a license: the licenses for these health professions attest to the completion of broad-based health care education, which may not include courses in surgery. No state licenses all the health professions whose members assist at surgery in its jurisdiction. For example, orthopedic physician assistants and surgical assistants are licensed in only a few states. Only one state, Texas, has a specific assistant-at-surgery license. Members of different health professions may qualify for this license, which requires surgical education and experience. Nevertheless, a license is not required to serve as an assistant-at-surgery in Texas. Certification programs for assistants-at-surgery generally require completion of a certain level of education or experience and passage of an examination. Each certification program created by a group of nonphysician health professionals for its members who serve as assistants-at-surgery has different requirements (see table 4). Certification programs for some nonphysician health professions not eligible for payment under the physician fee schedule are for a wide range of surgical services; others are specific to a particular type of surgery. For example, a CRNFA, in addition to being licensed as a registered nurse and earning a bachelor's degree in nursing, must obtain certification as an operating room nurse, complete an approved program, have 2,000 hours of experience as an assistant-at-surgery, and pass an examination. For a surgical technologist to receive certification as an assistant-at-surgery, he/she must have a surgical technologist certification, complete an approved program or have 2 years of experience as an assistant, and pass the examination. Certifications for those who are eligible for payment under the physician fee schedule as an assistant-at-surgery are typically for a broad range of services and are not specifically surgery-related. For example, the American Nurses Credentialing Center awards certifications to nurse practitioners for acute, adult, family, gerontological, pediatric, adult psychiatric and mental health, and family psychiatric and mental health care. While some national physician and accreditation organizations say assistants-at-surgery should have to meet some requirements, there is no consensus about what those requirements should be. For example, ACS has stated that when surgeons or residents are unavailable to serve as assistants-at-surgery, nonphysician health professionals should be allowed to perform the role if they meet the "national standards" for their health profession or have "additional specialized training." Similarly, the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), a private organization that accredits health care organizations, including hospitals, requires hospitals to credential their staff (i.e., establish requirements, such as licensure, certification, and experience for physicians and certain nonphysician health professionals) and ensure that those requirements are used when personnel decisions are made. But JCAHO does not suggest the type or length of education or experience to be used in credentialing hospital staff who serve as assistants-at-surgery. We found little evidence about the quality of care provided by assistants- at-surgery. Our February 2003 search of relevant literature maintained by the National Library of Medicine found only six articles dealing with the quality of care provided by assistants-at-surgery. None of the articles compares the quality of assistant-at-surgery services provided by one nonphysician health profession with that provided by another nonphysician health profession or physicians, and only one deals specifically with the influence of assistants on surgical outcomes. There are three flaws in Medicare's policies for paying assistants-at- surgery that prevent the payment system from meeting the program's goals of making appropriate payment for medically necessary services by qualified providers. First, because Medicare pays for assistant-at-surgery services under both the hospital inpatient PPS and the physician fee schedule, and hospital payments for surgical care are not adjusted when an assistant receives payment under the physician fee schedule, Medicare may be paying too much for some hospital surgical care. Second, paying a health professional under the Medicare physician fee schedule to be an assistant-at-surgery, instead of including this payment in an all-inclusive payment, gives neither the hospital nor the surgeon an incentive to use an assistant only when one is medically necessary. Third, the distinctions between those health professionals eligible for payment as an assistant-at- surgery under the physician fee schedule and those who are not eligible are not based on surgical education or experience as an assistant. Criteria for determining who should be paid as assistants-at-surgery under the physician fee schedule do not exist. However, hospitals are responsible under health and safety rules to provide quality care for their patients. Medicare's policy of paying hospitals for the services associated with inpatient surgical care that may include assistant-at-surgery services and also paying physicians and certain nonphysician health professionals for those services is flawed. When Medicare pays under the hospital inpatient PPS and under the physician fee schedule for assistant-at-surgery services delivered to a particular patient, Medicare may pay too much for the assistant services because the hospital is not paid less when the assistant receives payment under the physician fee schedule. In addition, a hospital that uses an assistant-at-surgery who is eligible for payment under the physician fee schedule has a financial advantage in the form of lower labor costs over a hospital that uses assistants who cannot be paid under the physician fee schedule. Given the discretion that hospitals and surgeons have in determining when and how an assistant-at-surgery is used, it is especially important that Medicare's payment policy create incentives to help ensure that assistant services are provided for Medicare patients only when medically necessary. Allowing physician fee schedule payments to certain assistants-at-surgery, however, creates an incentive for hospitals to use them, rather than those who cannot be paid under the fee schedule. Because neither the hospital nor the surgeon incurs a cost when an assistant-at-surgery is paid under the physician fee schedule, neither has a financial incentive to use an assistant only when one is necessary. The lack of this incentive is of concern because assistant-at-surgery services receive little review to determine the medical necessity of the services. A 2001 report by the Department of Health and Human Services Office of Inspector General found that most contractors used by Medicare to pay for part B services do not have any mechanism to ensure that assistant-at- surgery requests for payment for nonphysician health professionals are reviewed for medical necessity before they are paid. Medicare routinely requires submission of documentation of medical necessity for medical review for only 1 percent of assistant-at-surgery services paid under the physician fee schedule. Because the requirements for those authorized to be paid as assistants-at- surgery under the Medicare physician fee schedule do not include assistant-at-surgery education or experience, payments can be made to assistants with no such education or experience. For example, about 23 percent of physician assistants work in surgical specialties. Other physician assistants working in nonsurgical specialties, however, may be paid as assistants-at-surgery under the Medicare physician fee schedule, and their only surgical experience may be a 6-week surgical rotation. On the other hand, nonphysician health professionals, such as surgical technologists, CRNFAs, and orthopedic physician assistants, all of whom have certification programs requiring education and experience as an assistant-at-surgery, cannot be paid by Medicare for their services under the physician fee schedule. One way to address a concern associated with the physician fee schedule payments for assistants-at-surgery is to expand the number of nonphysician health professions eligible for payment. But this would not ensure that only those with the appropriate education and experience serve as assistants-at-surgery unless CMS also sets standards for all those who serve as assistants. There is no consensus, however, on what such standards should include. Bundling all payments for assistants-at-surgery into either the inpatient hospital PPS or the surgeon's global fee would address the flaws of the current payment system. The possibility of paying too much for assistant- at-surgery services would be eliminated because Medicare would make only one payment--to either the hospital or the surgeon--for the service. The hospital or surgeon would have a financial incentive to use the most appropriate assistant-at-surgery--and to use one only when necessary-- because the payment would be the same regardless of whether an assistant was used. The lack of a relationship between the nonphysician health professionals eligible for assistant-at-surgery payments under the physician fee schedule and their education and experience would be moot because payments would no longer be made to individuals performing the role; payments would be made, as part of a larger payment for a bundle of services, to hospitals or surgeons, who would have the responsibility to determine the education and experience that an assistant-at-surgery needs and when an assistant is needed. Folding payments for assistant-at-surgery services into inpatient PPS payments has some advantages that would not accrue if payments were folded into the surgeon's global fee. Hospitals would continue to have incentives to use assistants-at-surgery when they are necessary, and to use the most appropriate assistant. Hospitals are already responsible--under the hospital CoP--for ensuring the health and safety of their patients and that necessary services are provided, including assistant-at-surgery services. Most hospitals already have credentialing processes for their employees. Also, since hospitals likely employ most assistants-at-surgery, limiting payments for assistant services to those made under the inpatient PPS would disrupt the employment relationships for far fewer assistants than would be the case if payment was made to surgeons. There is precedent for Congress approving legislation that no longer allows a service to be paid for separately under part B, but instead requires that the service be included in a bundle of services under part A. In 1997, Congress passed legislation that requires virtually all kinds of services or items furnished to beneficiaries residing in skilled nursing facilities (SNF) that had been paid for separately under part B, instead be included in a bundle of services paid for under part A. Prior to implementation of the provision, SNFs could permit a nonphysician health professional or supplier to seek payment under part B for ancillary services or items furnished directly to SNF residents, as long as the SNF did not include the service or item in its part A bill. The legislation, however, prevents this "unbundling" by including in Medicare SNF PPS payments ancillary services or items a SNF resident may require that previously had been paid under part B. Bundling assistant-at-surgery services into the package of services covered by the surgeon's global payment based on the Medicare physician fee schedule has significant drawbacks. First, because the amount paid under the inpatient hospital PPS for assistants-at-surgery is unknown, the total amount to be added to the physician fee schedule for providing assistants is unknown. Second, a payment amount for assistant-at-surgery services would have to be determined for each surgical procedure. Since data are not collected on how often each surgeon uses assistants-at-surgery for each surgical procedure, the bundled payment would presumably include an allotment for the expected average cost of assistants for all surgeons performing the procedure. Using this approach, surgeons with an unusually high number of procedures requiring assistants would be paid too little, while those with an unusually low number of procedures requiring assistants would be paid too much. In addition, a surgeon would have a financial incentive to use an assistant-at-surgery less frequently for surgical procedures for which ACS says that an assistant may be needed, even when the condition of the beneficiary indicates that an assistant would be desirable. Because there is a difference in costs to a surgeon depending on whether an assistant-at-surgery is used, a surgeon's bundled payment amount could be adjusted when an assistant is used. Doing so, however, would provide no financial incentive for surgeons to use an assistant-at-surgery only when one is medically necessary. Decisions to use an assistant-at-surgery should not be influenced by payment; they should be based on medical necessity. The majority of assistants-at-surgery are likely employed by hospitals, where the inpatient hospital PPS pays for their services. If Congress were to consolidate Medicare physician fee schedule payments for assistant-at-surgery services into the inpatient hospital PPS, this would give hospitals an incentive to use assistants only when they are necessary. Meanwhile, the hospital CoP would continue to give hospitals an incentive to assure that the most appropriate assistants-at-surgery are used as part of their responsibility to provide quality care for their patients. Paying for assistants under the physician fee schedule provides no such incentive. We suggest that Congress may wish to consider consolidating all Medicare payments for assistant-at-surgery services under the hospital inpatient prospective payment system. We received comments on a draft of this report from CMS, which agreed that payment policy for assistants-at-surgery could be improved. CMS noted that it would be helpful to describe the ongoing review process that CMS uses to assign relative values to physician fee schedule services. However, as we state in this report assistants-at-surgery are not paid on the basis of the resources they use to perform their work, but are instead paid a percentage of the amount paid the surgeon. CMS also discussed several details related to implementing payment changes for assistants-at- surgery. Addressing these points was beyond the scope of this report. CMS's comments appear in appendix II. In addition, we obtained oral comments on a draft of this report from representatives of the American Medical Association, the American College of Surgeons, the American Society of General Surgeons, the American Association of Orthopaedic Surgeons, the Society of Thoracic Surgeons, the American Academy of Nurse Practitioners, the American Academy of Physician Assistants, the Association of periOperative Registered Nurses, and the American Hospital Association. We have modified the report, as appropriate, in response to their comments. We are sending copies of this report to the Acting Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please call me at (202) 512-7101. Lisanne Bradley and Michael Rose were major contributors to this report.

Medicare pays for assistant-atsurgery services under both the hospital inpatient prospective payment system and the physician fee schedule. Payments under the physician fee schedule are limited to a few health professions. In 2001, Congress directed GAO to report on the potential impact on the Medicare program of allowing physician fee schedule payments to Certified Registered Nurse First Assistants for assistant-at-surgery services. This report examines: (1) who serves as an assistant-atsurgery, (2) whether health professionals who perform the role must meet a uniform set of professional requirements, and (3) whether Medicare's payment policies for assistants-at-surgery are consistent with the goals of the program and, if not, whether there are alternatives that would help attain those goals. GAO analyzed information provided by physician and other health professional associations and Medicare payment data. Members of a wide range of health professions serve as assistants-at-surgery, including physicians, residents in training for licensure or board certification in a physician specialty, several different kinds of nurses, and members of several other health professions. Hospitals employ all the types of nonphysician health professionals who perform the role. Hospital employees likely serve as assistants-at-surgery for a majority of the procedures for which the American College of Surgeons says an assistant is "almost always" necessary. The number of assistant-at-surgery services performed by physicians and paid under the Medicare physician fee schedule has declined, while the number of such services performed by nonphysician health professionals eligible to receive payment under the physician fee schedule has increased. There is no widely accepted set of uniform requirements for experience and education that the health professionals who serve as assistants-at-surgery are required to meet. The health professions whose members provide assistant-at-surgery services have varying educational requirements. No state licenses all the health professionals who serve as assistants-at-surgery. Furthermore, the certification programs developed by the various nonphysician health professional groups whose members assist at surgery differ. GAO found that there was insufficient information about the quality of care provided by assistants-at-surgery generally, or by a specific type of health professional, to assess the adequacy of the requirements for members of a particular profession to perform the role. There are three flaws in Medicare's policies for paying assistants-at-surgery that prevent the payment system from meeting the program's goals of making appropriate payment for medically necessary services by qualified providers. First, because Medicare pays for assistant-at-surgery services under both the hospital inpatient prospective payment system and the physician fee schedule, and hospital payments for surgical care are not adjusted when an assistant receives payment under the physician fee schedule, Medicare may be paying too much for some hospital surgical care. Second, paying a health professional under the physician fee schedule to be an assistant-at-surgery, instead of including this payment in an all-inclusive payment, gives neither the hospital nor surgeon an incentive to use an assistant only when one is medically necessary. Third, the distinctions between those health professionals eligible for payment as an assistant-at-surgery under the physician fee schedule and those who are not eligible are not based on surgical education or experience as an assistant. Criteria for determining who should be paid as assistants-at-surgery under the physician fee schedule do not exist. However, hospitals are responsible under health and safety rules to provide quality care for their patients.

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 timely and accurately paid 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 timely. Estimates for each type of noncompliance include estimates for some or all of the five types of taxes that IRS administers. IRS develops its tax gap estimates by measuring the rate of taxpayer compliance--the degree to which taxpayers fully and timely complied with their tax obligations. That rate is then used, along with other data and assumptions, to estimate the dollar amount of taxes not timely and accurately paid. For instance, IRS recently estimated that for tax year 2001, from 83.4 percent to 85 percent of owed taxes were paid voluntarily and timely, which translated into an estimate gross tax gap from $312 billion to $353 billion in taxes not paid that should have been. IRS also estimates the amount of the unpaid taxes that it will recover through enforcement and other actions and subtracts that to estimate the net annual tax gap. For tax year 2001, IRS estimated that it would eventually recover about $55 billion for a net tax gap from $257 billion to $298 billion. IRS has estimated the tax gap on multiple occasions, beginning in 1979. IRS's earlier tax gap estimates relied on the Taxpayer Compliance Measurement Program (TCMP), through which IRS periodically performed line-by-line examinations of randomly selected tax returns. TCMP started with tax year 1963 and examined individual returns most frequently-- generally every 3 years--through tax year 1988. IRS contacted all taxpayers selected for TCMP studies. 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 while minimizing taxpayer burden. Under NRP, a program that we have encouraged, IRS recently completed its initial review of about 46,000 randomly selected individual tax returns from tax year 2001. Unlike with TCMP studies, IRS did not need to contact taxpayers for every tax return selected under NRP; handled some taxpayer contacts through correspondence, as opposed to face-to-face examinations; and during face-to-face examinations, generally only asked taxpayers to explain information that it was otherwise unable to verify through IRS and third-party databases. IRS has a strategic planning process through which it supports decisions about strategic goals, program development, and resource allocation. Under the Government Performance and Results Act of 1993 (GPRA), agencies are to develop strategic plans as the foundation for results- oriented management. GPRA requires that agency strategic plans identify long-term goals, outline strategies to achieve the goals, and describe how program evaluations were used to establish or revise the goals. GPRA requires federal agencies to establish measures to determine the results of their activities. The nation is facing a range of important new forces that are already working to reshape American society, our place in the world, and the role of the federal government. Our capacity to address these and other emerging needs and challenges will be predicated on when and how we deal with our fiscal challenges--the long-term fiscal pressures we face are daunting and unprecedented in the nation's history. As this committee is well aware, the size and trend of our projected longer-term deficits means that the nation cannot ignore the resulting fiscal pressures--it is not a matter of whether the nation deals with the fiscal gap, but when and how. Unless we take effective and timely action, our near-term and longer-term deficits present the prospect of chronic and seemingly perpetual budget shortfalls and constraints becoming a fact of life for years to come. Not only would continuing deficits eat away at the capacity of everything the government does, but they will erode our ability to address the wide range of emerging needs and demands competing for a share of a shrinking budget pie. Our long-term simulations illustrate the magnitude of the fiscal challenges we will face in the future. Figures 1 and 2 present these simulations under two different sets of assumptions. In the first, we begin with CBO's January 2005 baseline---constructed according to the statutory requirements for that baseline. Consistent with these requirements, discretionary spending is assumed to grow with inflation for the first 10 years and tax cuts scheduled to expire are assumed to expire. After 2015, discretionary spending is assumed to grow with the economy, and revenue is held constant as a share of gross domestic product (GDP) at the 2015 level. In the second figure, two assumptions are changed: (1) discretionary spending is assumed to grow with the economy after 2005 rather than merely with inflation and (2) all temporary tax cuts are extended. For both simulations, Social Security and Medicare spending is based on the 2005 Trustees' intermediate projections, and we assume that benefits continue to be paid in full after the trust funds are exhausted. As both these simulations illustrate, absent policy changes on the spending or revenue side of the budget, the growth in spending on federal retirement and health entitlements will encumber an escalating share of the government's resources. Indeed, when we assume that recent tax reductions are made permanent and discretionary spending keeps pace with the economy, our long-term simulations suggest that by 2040 federal revenues may be adequate to pay little more than interest on the federal debt. Neither slowing the growth in discretionary spending nor allowing the tax provisions to expire--nor both together--would eliminate the imbalance. Although revenues will be part of the debate about our fiscal future, assuming no further borrowing, making no changes to Social Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap would require at least a doubling of taxes, and that seems highly implausible. Such significant tax increases would also likely have an adverse effect on economic growth and disposable income available to Americans. Accordingly, substantive reform of Social Security and our major health programs remains critical to recapturing our future fiscal flexibility. Although considerable uncertainty surrounds long-term budget projections, we know two things for certain: the population is aging and the baby boom generation is approaching retirement age. The aging population and rising health care spending will have significant implications not only for the budget but also the economy as a whole. Figure 3 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2005 Trustees' intermediate estimates and CBO's long-term Medicaid estimates, spending for these entitlement programs combined will grow to 15.2 percent of GDP in 2030 from today's 8.5 percent. It is clear that taken together Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. 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 during which today's relatively large workforce can increase saving and enhance productivity, two elements critical to growing the future economy. We also 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. Confronting the nation's fiscal challenge will require nothing less than a fundamental review, reexamination, and reprioritization of all major spending and tax policies and programs that may take a generation or more to resolve. Traditional incremental approaches to budgeting will need to give way to more fundamental and periodic reexaminations of the base of government. Many, if not most, current federal programs and policies were designed decades ago to respond to trends and challenges that existed at the time of their creation. If government is to respond effectively to 21st century trends, it cannot accept what it does, how it does it, who does it, and how it gets financed as "given." Not only do outmoded commitments, operations, choices of tools, management structures, and tax programs and policies constitute a burden on future generations, but they also erode the government's capacity to align itself with the needs and demands of the 21st century. Reexamining the base of government will be a challenging task, and we at GAO believe we have an obligation to assist and support Congress in this endeavor. To that end, we recently issued a report that provides examples of the kinds of difficult choices the nation faces with regard to discretionary spending; mandatory spending, including entitlements; as well as tax policies and compliance activities. Regarding tax policy, a debate is under way about the future of our tax system that is partly about whether the goals for the nation's tax system can be best achieved using the current structure or a fundamentally reformed tax structure. The debate is also motivated by increasing globalization, the growing complexity of our tax system, and the growing use of tax preferences whose aggregate revenue loss has exceeded all discretionary spending in 5 of the past 10 years. Although outside the scope of this hearing, today's pressing tax challenges raise important questions. For example: Given our current tax system, what tax rate structure is more likely to raise sufficient revenue to fund government and satisfy the public's perception of fairness? Which tax preferences need to be reconsidered because they fail to achieve the objectives intended by the Congress, their costs outweigh their benefits, they duplicate other programs, or other more cost effective means exist for achieving their objectives? Should the basis of the existing system be changed from an income to a consumption base? Would such a change help respond to challenges posed by demographic, economic, and technological changes? How would such a change affect savings and work incentives? How would reforms address such issues as the impact on state and local tax systems and the distribution of burden across the nation's taxpayers? Regarding compliance with our tax laws, the success of our tax system hinges greatly on the public's perception of its fairness and understandability. Compliance is influenced not only by the effectiveness of IRS's enforcement efforts but also by Americans' attitudes about the tax system and their government. A recent survey indicated that about 12 percent of respondents say it is acceptable to cheat on their taxes. Furthermore, the complexity of, and frequent revisions to, the tax system make it more difficult and costly for taxpayers who want to comply to do so and for IRS to explain and enforce tax laws. Complexity also creates a fertile ground for those intentionally seeking to evade taxes and often trips others into unintentional noncompliance. The lack of transparency also fuels disrespect for the tax system and the government. Thus, a crucial challenge for reexamination will be to determine how we can best strengthen enforcement of existing laws to give taxpayers confidence that their friends, neighbors, and business competitors are paying their fair share. We have long been concerned about tax noncompliance and IRS efforts to address it. Collection of unpaid taxes was included in our first high-risk series report in 1990, with a focus on the backlog of uncollected debts owed by taxpayers. In 1995, we added Filing Fraud as a separate high-risk area, narrowing the focus of that high-risk area in 2001 to Earned Income Credit Noncompliance because of the particularly high incidence of fraud and other forms of noncompliance in that program. We expanded our concern about the Collection of Unpaid Taxes in our 2001 high-risk report to include not only unpaid taxes (including tax evasion and unintentional noncompliance) known to IRS, but also the broader enforcement issue of unpaid taxes that IRS has not detected. In our high-risk update that we issued in January, we consolidated these areas into a single high-risk area--Enforcement of the Tax Laws--because we believe the focus of concern on the enforcement of tax laws is not confined to any one segment of the taxpaying population or any single tax provision. Tax law enforcement is a high-risk area in part because past declines in IRS's enforcement activities threatened to erode taxpayer compliance. In recent years, the resources IRS has been able to dedicate to enforcing the tax laws have declined. For example, the number of revenue agents (those who examine complex returns), revenue officers (those who perform field collection work), and special agents (those who perform criminal investigations) decreased over 21 percent from 1998 through 2003. However, IRS achieved some staffing gains in 2004 and expects modest gains in 2005. IRS's proposal for fiscal year 2006, if funded and implemented as planned, would return enforcement staffing in these occupations to their highest levels since 1999. Concurrently, IRS's enforcement workload--measured by the number of taxpayer returns filed--has continually increased. For example, from 1997 through 2003, the number of individual income tax returns filed increased by about 8 percent. Over the same period, returns for high income individuals grew by about 81 percent. Due to their income levels, IRS believes that these individuals present a particular compliance risk. In light of declines in enforcement staffing and the increasing number of returns filed, nearly every indicator of IRS's coverage of its enforcement workload has declined in recent years. Although in some cases workload coverage has begun to increase, overall IRS's coverage of known workload is considerably lower than it was just a few years ago. Figure 4 shows the trend in examination rates--the proportion of tax returns that IRS examines each year--for field, correspondence, and total examinations since 1995. Field examinations involve face-to-face examinations and correspondence examinations are typically less comprehensive and complex, involving communication through written notices. IRS experienced steep declines in examination rates from 1995 to 1999, but the examination rate has slowly increased since 2000. However, as the figure shows, the increase in total examination rates of individual filers has been driven mostly by correspondence examinations, while more complex field examinations continue to decline. On the collection front, IRS's use of enforcement sanctions, such as liens, levies, and seizures, dropped precipitously during the mid- and late 1990s. In fiscal year 2000, IRS's use of these three sanctions was at 38 percent, 7 percent, and 1 percent, respectively, of fiscal year 1996 levels. However, beginning in fiscal year 2001, IRS's use of liens and levies began to increase. By fiscal year 2004, IRS's use of liens, levies, and seizures reached 71 percent, 65 percent, and 4 percent of 1996 levels, respectively. Further, IRS's workload has grown ever more complex as the tax code has grown more complex. IRS is challenged to administer and explain each new provision, thus absorbing resources that otherwise might be used to enforce the tax laws. Concurrently, other areas of particularly serious noncompliance have gained the attention of IRS and Congress, such as abusive tax shelters and schemes employed by businesses and wealthy individuals that often involve complex transactions that may span national boundaries. Given the broad declines in IRS's enforcement workforce, IRS's decreased ability to follow up on suspected noncompliance, and the emergence of sophisticated evasion concerns, IRS is challenged in attempting to ensure that taxpayers fulfill their obligations. IRS is working to further improve its enforcement efforts. In addition to recent favorable trends in enforcement staffing, correspondence examinations, and the use of some enforcement sanctions, IRS has recently made progress with respect to abusive tax shelters through a number of initiatives and recent settlement offers that have resulted in billions of dollars in collected taxes, interest, and penalties. In addition, IRS is developing a centralized cost accounting system, in part to obtain better cost and benefit information on compliance activities, and is modernizing the technology that underpins many core business processes. It has also redesigned some compliance and collections processes and plans additional redesigns as technology improves. Finally, the recently completed NRP study of individual taxpayers not only gives us a benchmark of the status of taxpayers' compliance but also gives IRS a better basis to target its enforcement efforts. However, IRS's preliminary compliance estimate based on NRP indicates that compliance has not improved and may be worse than IRS originally estimated. As such, sustained progress toward improving compliance is needed. Reducing the tax gap would be a step toward improving our fiscal sustainability while simultaneously enhancing fairness for those citizens who meet their tax obligations. That said, reducing the tax gap is a challenging task, and closing the entire tax gap is not practical. Reducing the tax gap will not likely be achieved through a single solution, but will likely involve multiple strategies that include reducing tax code complexity, providing quality services to taxpayers, and enhancing enforcement of the tax laws through the use of tools such as tax withholding and information reporting that increase the transparency of income and deductions to both IRS and taxpayers. Also, as IRS moves forward in continuing to address the tax gap, building and maintaining a base of information on the extent of, and reasons for, noncompliance as well as defining desired changes in the tax gap and measuring results of efforts to address it will be critical. Given its size, even small or moderate reductions in the net tax gap could yield substantial returns. For example, based on IRS's most recent estimate, each 1 percent reduction in the net tax gap would likely yield more than $2.5 billion annually. Thus, a 10 percent to 20 percent reduction of the net tax gap would translate into from $25 billion to $50 billion or more in additional revenue annually. Although reducing the tax gap may be an attractive means to improve the nation's fiscal position, achieving this end will be a challenging task given persistent levels of noncompliance. IRS has made efforts to reduce the tax gap since the early 1980s; yet the tax gap is still large--although without these efforts it could be even larger. Also, IRS is challenged in reducing the tax gap because the tax gap is spread across the five different types of taxes that IRS administers, and a substantial portion of the tax gap is attributed to taxpayers who are not subject to withholding or information reporting requirements. Moreover, as we have reported in the past, closing the entire tax gap may not be feasible nor desirable, as it could entail more intrusive recordkeeping or reporting than the public is willing to accept or more resources than IRS is able to commit. Although much of the tax gap that IRS currently recovers is through enforcement actions, a sole focus on enforcement will not likely be sufficient to further reduce the net tax gap. Rather, the tax gap must be attacked on multiple fronts and with multiple strategies on a sustained basis. For example, efforts to simplify the tax code and otherwise alter current tax policies may help reduce the tax gap by making it easier for individuals and business to understand and voluntarily comply with their tax obligations. For instance, reducing the multiple tax preferences for retirement savings or education assistance might ease taxpayers' burden in understanding and complying with the rules associated with these options. Also, simplification may reduce opportunities for tax evasion through vehicles such as abusive tax shelters. However, for any given set of tax policies, IRS's efforts to reduce the tax gap and ensure appropriate levels of compliance will need to be based on a balanced approach of providing service to taxpayers and enforcing the tax laws. Furthermore, providing quality services to taxpayers is an important part of any overall strategy to improve compliance and thereby reduce the tax gap. As we have reported in the past, one method of improving compliance through service is to educate taxpayers about confusing or commonly misunderstood tax requirements. For example, if the forms and instructions taxpayers use to prepare their taxes are not clear, taxpayers may be confused and make unintentional errors. One method to ensure that forms and instructions are sufficiently clear is to test them before use. However, we reported in 2003 that IRS had tested revisions to only five individual forms and instructions from July 1997 through June 2002, although hundreds of forms and instructions had been revised in 2001 alone. Finally, in terms of enforcement, IRS will need to use multiple strategies and techniques to find noncompliant taxpayers and bring them into compliance. However, a pair of tools has been shown to lead to high levels of compliance: withholding tax from payments to taxpayers and having third parties report information to IRS and the taxpayers on income paid to taxpayers. For example, banks and other financial institutions provide information returns (Forms 1099) to account holders and IRS showing the taxpayers' annual income from some types of investments. Similarly, most wages, salaries, and tip compensation are reported by employers to employees and IRS through Form W-2. Preliminary findings from NRP indicate that more than 98.5 percent of these types of income are accurately reported on individual returns. In the past, we have identified a few potential areas where additional withholding or information reporting requirements could serve to improve compliance: 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 separately report 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. Require more data on information returns dealing with capital gain income. Past IRS studies have indicated that much of the noncompliance associated with capital gains is a result of taxpayers overstating an asset's "basis," the amount of money originally paid for the asset. Currently, financial institutions are required to report the sales prices, but not the purchase prices, of stocks and bonds on information returns. Without information on purchase prices, IRS cannot use efficient and effective computer-matching programs to check for compliance and must use much more costly means to examine taxpayer returns in order to verify capital gain income. Although withholding and information returns are highly effective in encouraging compliance, such additional requirements generally impose costs and burdens on the businesses that must implement them. However, continued reexamination of opportunities to expand information reporting and tax withholding could increase the transparency of the tax system. Such reexamination could be especially relevant toward improving compliance in areas that are particularly complex or challenging to administer, such as noncash charitable contributions or net income and losses passed through from "flow-through" entities such as S corporations and partnerships to their shareholders and partners. Finally, making progress on closing the tax gap requires that the tools and techniques being used to promote compliance are evaluated to ensure that they actually are effective. IRS evaluates some of its efforts to assess how well they work, perhaps most notably its current effort to test new procedures designed to reduce noncompliance with the Earned Income Tax Credit, but misses other opportunities. For example, the lack of testing for forms and instructions mentioned earlier is one instance where improved evaluation would be worthwhile. We also reported in 2002 that the effectiveness of the Federal Tax Deposit Alert program--a program that since 1972 has been intended to reduce delinquencies in paying employment taxes--could not be evaluated because IRS had no system to track contacts IRS made with delinquent employers. The availability of current compliance information should enhance IRS's ability to evaluate the success of its efforts to promote compliance. Regularly measuring compliance can offer many benefits, including helping IRS identify new or major types of noncompliance, identify changes in tax laws and regulations that may improve compliance, more effectively target examinations of tax returns or other enforcement programs, understand the effectiveness of its programs to promote and enforce compliance, and determine its resource needs and allocations. For example, by analyzing 1979 and 1982 TCMP data, IRS identified significant noncompliance with the number of dependents claimed on tax returns and justified a legislative change to address the noncompliance. As a result, for tax year 1987 taxpayers claimed about 5 million fewer dependents on their returns than would have been expected without the change in law. In addition, tax compliance data are useful outside of IRS for tax policy analysis, revenue estimating, and research. A significant portion of IRS's new tax gap estimate is based on recent compliance data. IRS used data from NRP to update individual income tax underreporting and the portion of individual employment tax underreporting from self-employed individuals. Completion of NRP is a substantial achievement--as table 1 indicates, underreporting of individual income taxes represented about half of the tax gap for 2001 (the estimate ranges from $150 billion to $187 billion out of a gross tax gap estimate that ranges from $312 billion to $353 billion). Also, from $51 billion to $56 billion of the $66 billion to $71 billion in estimated underreported employment tax was due to self-employment tax underreporting. IRS used current, actual data from its Master Files to calculate the underpayment segment of the tax gap. IRS has concerns with the certainty of the overall tax gap estimate in part because some areas of the estimate rely on old data and IRS has no estimates for other areas of the tax gap. IRS does not have estimates for corporate income, employment, and excise tax nonfiling or for excise tax underreporting. For these types of noncompliance, IRS maintains that the data are either difficult to collect, imprecise, or unavailable. IRS has not recently collected compliance data for the remaining segments of the tax gap. For example, IRS used data from the 1970s and 1980s to estimate underreporting of corporate income taxes and employer-withheld employment taxes. IRS is taking several steps that could improve the tax gap estimate for tax year 2001. IRS plans to further analyze the preliminary results from NRP and expects to publish a revised estimate by the end of 2005. The revised estimate will incorporate new methodologies, including those for estimating overall individual income tax underreporting as well as for the portion attributable to self-employed individuals who operate businesses informally, and for estimating individual income tax nonfiling. In addition, IRS research officials have proposed a compliance measurement study that will allow IRS to update underreporting estimates involving flow-through entities. This study, which IRS intends to begin in fiscal year 2006, would take 2 to 3 years to complete. Because either individual taxpayers or corporations may be recipients of income (or losses) from flow-through entities, this study could affect IRS's estimates for the underreporting gap for individual and corporate income tax. While these data and methodology updates could improve the tax gap estimates, IRS has no documented plans to periodically collect more or better compliance data over the long term. Other than the proposed study of flow-through entities, IRS does not have plans to collect compliance data for other segments of the tax gap. Also, IRS has indicated that given its current research priorities, it would not begin another NRP study of individual income tax returns before 2008, if at all, and would not complete such a study until at least 2010. When IRS initially proposed the NRP study, it had planned to study individual income tax underreporting on a 3-year cycle. According to IRS officials, IRS has not committed to regularly collecting compliance data because of the associated costs and burdens. Taxpayers whose returns are examined through compliance studies such as NRP bear costs in terms of time and money. Also, IRS incurs costs, including direct costs and opportunity costs--revenue that IRS potentially forgoes by using its resources to examine randomly selected returns, which may include returns from compliant taxpayers, as opposed to traditional examinations that focus on taxpayer returns that likely contain noncompliance and may more consistently produce additional tax assessments. Although the costs and burdens of compliance measurement are legitimate concerns, as we have reported in the past, we believe compliance studies to be good investments. Without current compliance data, IRS is less able to determine key areas of noncompliance to address and actions to take to maximize the use of its limited resources. The lack of firm plans to continually obtain fresh compliance data is troubling because the frequency of data collection can have a large impact on the quality and utility of compliance data. As we have reported in the past, the longer the time between compliance measurement surveys, the less useful they become given changes in the economy and tax law. In designing the NRP study, IRS balanced the costs, burdens, and compliance risk of studying that area of the tax gap. Any plans for obtaining and maintaining reasonably current information on compliance levels for all portions of the tax gap would similarly need to take into account costs, burdens, and compliance risks in determining which areas of compliance to measure and the scope and frequency of such measurement. Data on whether taxpayers are unintentionally or intentionally noncompliant with specific tax provisions are critical to IRS for deciding 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. Recognizing such benefits, the National Taxpayer Advocate has urged IRS to consider performing additional research into causes of noncompliance. We have also reported in the past that rigorous research of the causes of noncompliance seems intuitive. IRS collects data on the reasons for noncompliance for specific tax issues during its examinations of tax returns, including those reviewed for NRP. However, IRS has a number of concerns with the data: The database is incomplete as not all examiners have been sending information on the results, including reasons, of closed examinations to be entered into the database. IRS has not tested the adequacy of the controls for data entry or the reliability of the data being collected. IRS has found instances where examiners close examinations without assigning a reason for noncompliance or by assigning the same reason to all instances of noncompliance, regardless of the situation. IRS has not trained all examiners to deal with the subjectivity of determining reasons to ensure consistent understanding of the reason categories. The data are not representative of the population of noncompliant taxpayers because the examined tax returns were not selected randomly. As IRS continues to collect data on the reasons for noncompliance in the future, it will be important to take these concerns into account. Additionally, as with its efforts to measure compliance, it will be important for IRS to consider the costs and burden of obtaining data on the reasons for noncompliance. Focusing on outcome-oriented goals and establishing measures to assess the actual results, effects, or impact of a program or activity compared to its intended purpose can help agencies improve performance and stakeholders determine whether programs have produced desired results. As such, establishing long-term, quantitative compliance goals offers several benefits for IRS. Perhaps most important, compliance goals coupled with periodic measurements of compliance levels would provide IRS with a better basis for determining to what extent its various service and enforcement efforts contribute to compliance. Additionally, long-term, quantitative goals may help IRS consider new strategies to improve compliance, especially since these strategies could take several years to implement. For example, IRS's progress toward the goal of having 80 percent of all individual tax returns electronically filed by 2007 has required enhancement of its technology, development of software to support electronic filing, education of taxpayers and practitioners, and other steps that could not be completed in a short time frame. Focusing on intended results can also promote strategic and disciplined management decisions that are more likely to be effective because managers who use fact-based performance analysis are better able to target areas most in need of improvement and select appropriate interventions. Likewise, agency accountability can be enhanced when both agency management and external stakeholders such as Congress can readily measure an agency's progress toward meeting its goals. Finally, setting long-term, quantitative goals would be consistent with results-oriented management principles that are associated with high-performing organizations and incorporated into the statutory management framework Congress has adopted through GPRA. IRS's strategies for improving compliance generally lack a clear focus on long-term, quantitative goals and results measurement. Although IRS has established broad qualitative goals and strategies for improving taxpayer service and enhancing enforcement of the tax laws, it has not specified by how much it hopes these strategies will improve compliance. IRS has also identified measures, such as compliance rates for tax reporting, filing, and payment as well as the percentage of Americans who think it is acceptable to cheat on their taxes, which are intended to gauge the progress of its strategies toward its broad goals. However, IRS does not always collect recent data to update these measures and has not established quantitative goals against which to compare the measures. In response to a President's Management Agenda initiative to better integrate budget and performance information, IRS officials said that they are considering various long-term goals for the agency. These goals are to be released by May 2005. The officials have not indicated how many goals will be related to improving taxpayer compliance or whether they will be quantitative and results- oriented. Not unlike other agencies, IRS faces challenges in implementing a results- oriented management approach, such as identifying and collecting the necessary data to make informed judgments about what goals to set and to subsequently measure its progress in reaching such goals. However, having completed the NRP review of income underreporting by individuals, IRS now has an improved foundation for setting a goal or goals for improving taxpayers' compliance. Nevertheless, measuring progress toward any goals that may be set could be challenging. For example, IRS researchers have found it difficult to determine the extent to which its enforcement actions deter noncompliance or its services improve compliance among taxpayers who want to comply. Measuring these effects is complicated in part because many factors outside of IRS's actions can affect compliance. However, as the National Taxpayer Advocate's 2004 annual report to Congress pointed out, current and existing data on noncompliance may help IRS better understand and address this challenge. Furthermore, even if IRS is unable to show that its actions directly affected compliance rates, periodic measurements of compliance levels can indicate the extent to which compliance is improving or declining and provide a basis for reexamining existing programs and triggering corrective actions if necessary. The nation is currently on an imprudent and unsustainable fiscal path that threatens our future. If we act now to address the looming fiscal challenges facing the nation, the lives of our children and grandchildren will be measurably better than if we wait. Nevertheless, the decisions we must make will not be easy. They involve difficult choices about the role of government in our lives and our economy. Acting now will impose sacrifices, but today we have more options with less severe consequences than if we wait. Reducing the tax gap is one option that would help. While our long term- fiscal imbalance is too large to be eliminated by one strategy, reducing the tax gap can ease the difficult decisions that are needed. But, regardless of the contribution that a reduced tax gap can make to easing our long-term challenges, we need to make concerted efforts to address the tax gap because it is fundamentally unfair and threatens Americans' trust in their government. The tax gap is both a measure of the burden and frustration of taxpayers who want to comply but are tripped by tax code complexity and of willful tax cheating by a minority who want the benefits of government services without paying their fair share. Chairman Grassley, Senator Baucus, and Members of the Committee, this concludes my testimony. At the request of the committee, in the near future, we will issue a report that addresses the tax gap in greater detail and, as appropriate, may make recommendations related to the topics covered in my statement. We look forward to continuing to support the committee's oversight of the tax gap and related issues. I would be happy to answer any questions you may have at this time. For further information on this testimony, please contact Michael Brostek on (202) 512-9110 or [email protected]. Individuals making key contributions to this testimony include Jeff Arkin, Elizabeth Fan, Shannon Groff, George Guttman, Michael Rose, and Tom Short. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Internal Revenue Service's (IRS) recent estimate of the difference between what taxpayers timely and accurately paid in taxes and what they owed ranged from $312 billion to $353 billion for tax year 2001. IRS estimates it will eventually recover some of this tax gap, resulting in a net tax gap from $257 billion to $298 billion. The tax gap arises when taxpayers fail to comply with the tax laws by underreporting tax liabilities on tax returns; underpaying taxes due from filed returns; or "nonfiling," which refers to the failure to file a required tax return altogether or in a timely manner. The Chairman and Ranking Minority Member of the Senate Committee on Finance asked GAO to review a number of issues related to the tax gap. This testimony will address GAO's longstanding concerns regarding tax compliance; IRS's efforts to ensure compliance; and the significance of reducing the tax gap, including some steps that may assist with this challenging task. For context, this testimony will also address GAO's most recent simulations of the long-term fiscal outlook and the need for a fundamental reexamination of major spending and tax policies and priorities. Our nation's fiscal policy is on an unsustainable course. As long-term budget simulations by GAO, the Congressional Budget Office, and others show, over the long term we face a large and growing structural deficit due primarily to known demographic trends and rising health care costs. All simulations indicate that the long-term fiscal challenge is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Rather, a fundamental reexamination of major policies and priorities will be important to recapture our fiscal flexibility. Especially relevant to this committee will be deciding whether and how to change current tax policies and how to ensure that tax compliance is as high as practically possible. Tax law enforcement is one factor affecting compliance that has caused concern in the past, due in part to declines in IRS enforcement occupations, examinations, and other enforcement results. The recent turnaround in staffing and some enforcement results is good news, but IRS's recent compliance estimate indicates that compliance levels have not improved and may be worse than it originally estimated. Thus, sustained progress in improving compliance is needed. Reducing the tax gap would help improve fiscal sustainability, but will be challenging given persistent noncompliance. This task will not likely be achieved through a single solution. Rather, the tax gap must be attacked on multiple fronts and with multiple strategies over a sustained period of time, including reducing tax code complexity, providing quality services to taxpayers, enhancing enforcement of tax laws, and evaluating the success of IRS's efforts to promote compliance. Also important is obtaining current information on the extent of, and reasons for, noncompliance. IRS's 2001 tax gap estimate is based in part on recently collected compliance data for individual income tax underreporting. However, IRS does not have firm plans to obtain compliance data for other areas of the tax gap or again collect data on individual income tax underreporting. Finally, IRS lacks quantitative, long-term goals for improving taxpayer compliance, which would be consistent with results-oriented management.

In November 2013, FAA released the Roadmap that describes its three- phased approach--Accommodation, Integration, and Evolution-- to facilitate incremental steps toward its goal of seamlessly integrating UAS flight in the national airspace. Under this approach, FAA's initial focus will be on safely allowing for the expanded operation of UASs by selectively accommodating some UAS use. In the integration phase, FAA plans to shift its emphasis toward integrating more UAS use once technology can support safe operations. Finally, in the evolution phase, FAA plans to focus on revising its regulations, policy, and standards based on the evolving needs of the airspace. Currently, FAA authorizes all UAS operations in the NAS--military, public (academic institutions and, federal, state, and local governments including law enforcement organizations), and civil (commercial). Federal, state, and local government agencies must apply for Certificates of while civil operators must apply for Waiver or Authorization (COA),special airworthiness certificates in the experimental category. Civil operators may also apply for an exemption, under section 333 of the 2012 Act, Special Rules for Certain Unmanned Aircraft Systems. This requires the Secretary of Transportation to determine if certain UAS may operate safely in the NAS prior to the completion of UAS rulemakings. This also gives the Secretary the authority to determine whether to allow certain UAS aircraft to operate in the NAS without an airworthiness certification. As we previously reported, research and development continue in areas related to a UAS's ability to detect and avoid other aircraft, as well as in command and control technologies and related performance and safety standards that would support greater UAS use in the national airspace. Some of this research is being conducted by DOD and NASA. Until this research matures most UAS operations will remain within visual line of sight of the UAS operator. Foreign countries are experiencing an increase in UAS use, and some have begun to allow commercial entities to fly UASs under limited circumstances. According to industry stakeholders, easier access to these countries airspace has drawn the attention of some U.S. companies that wish to test their UASs without needing to adhere to FAA's administrative requirements for flying UASs at one of the domestically located test sites, or obtaining an FAA COA. As we most recently reported in February 2014, the 2012 Act contained provisions designed to accelerate the integration of UAS into the NAS. These provisions outlined 17 date specific requirements and set deadlines for FAA to achieve safe UAS integration by September 2015 (See app. 1). While FAA has completed several of these requirements, some key ones, including the publication of the final small UAS rule, remain incomplete. As of December 2014, FAA had completed nine of the requirements, was in the process of addressing four, and had not yet made progress on four others. Some stakeholders told us in interviews that FAA's accomplishments to date are significant and were needed, but these stakeholders noted that the most important provisions of the 2012 Act have been significantly delayed or are unlikely to be achieved by the mandated dates. Both the FAA and UAS industry stakeholders have emphasized the importance of finalizing UAS regulations as unauthorized UAS operations in the national airspace continue to increase and present a safety risk to commercial and general aviation activities. Before publication of a final rule governing small UAS, FAA must first issue a Notice of Proposed Rulemaking (NPRM). As we previously reported, the small UAS rule is expected to establish operating and performance standards for a UAS weighing less than 55 pounds, operating under 400 feet, and within line of sight. FAA officials told us in November 2014 that FAA is hoping to issue the NPRM by the end of 2014 or early 2015. According to FAA, its goal is to issue the final rule 16 months after the NPRM. If this goal is met, the final rule would be issued in late 2016 or early 2017, about two years beyond the requirement of the congressional mandate. However, during the course of our ongoing work, FAA told us that it is expecting to receive tens of thousands of comments on the NPRM. The time needed to respond to such a large number of comments could further extend the time to issue a final rule. FAA officials told us that it has taken a number of steps to develop a framework to efficiently process the comments it expects to receive. Specifically, they said that FAA has a team of employees assigned to lead the effort with contractor support to track and categorize the comments as soon as they are received. According to FAA officials, the challenge of addressing comments could be somewhat mitigated if industry groups consolidated comments, thus reducing the total number of comments that FAA must be addressed while preserving content. During our ongoing work, one industry stakeholder has expressed concern that the small UAS rule may not resolve issues that are important for some commercial operations. This stakeholder expects the proposed rule to authorize operations of small UASs only within visual line of sight of the remote operator and to require the remote operator to have continuous command and control throughout the flight. According to this stakeholder, requiring UAS operators to fly only within their view would prohibit many commercial operations, including large-scale crop monitoring and delivery applications. Furthermore, they formally requested that FAA establish a new small UAS Aviation Rulemaking Committee (ARC) with the primary objective to propose safety regulations and standards for autonomous UAS operations and operations beyond visual line of sight. According to FAA, the existing UAS ARC recently formed a workgroup to study operations beyond visual line of sight in the national airspace and to specifically look at the near- and long-term issues for this technology. In November 2013, FAA completed the required 5-year Roadmap, as well as, the Comprehensive Plan for the introduction of civil UAS into the NAS. The Roadmap was to be updated annually and the second edition of the Roadmap was scheduled to be published in November 2014. Although FAA has met the congressional mandate in the 2012 Act to issue a Comprehensive Plan and Roadmap to safely accelerate integration of civil UAS into the NAS, that plan does not contain details on how it is to be implemented, and it is therefore uncertain how UASs will be safely integrated and what resources this integration will require. The UAS ARC emphasized the need for FAA to develop an implementation plan that would identify the means, necessary resources, and schedule to safely and expeditiously integrate civil UAS into the NAS. According to the UAS ARC the activities needed to safely integrate UAS include: identifying gaps in current UAS technologies, regulations, standards, policies, or procedures; developing new technologies, regulations, standards, policies, and identifying early enabling activities to advance routine UAS operations in the NAS integration, and developing guidance material, training, and certification of aircraft, enabling technologies, and airmen (pilots). FAA has met two requirements in the 2012 Act related to the test sites by setting them up and making a project operational at one location. In our 2014 testimony, we reported that in December 2013, 16 months past the deadline, FAA selected six UAS test ranges. Each of these test sites became operational, during our ongoing work, between April and August 2014, operating under an Other Transaction Agreement (OTA) with FAA. These test sites are affiliated with public entities, such as a university, and were chosen, according to FAA during our ongoing work, based on a number of factors including geography, climate, airspace use, and a proposed research portfolio that was part of the application. Each test site operator manages the test site in a way that will give access to other parties interested in using the site. According to FAA, its role is to ensure each operator sets up a safe testing environment and to provide oversight that guarantees each site operates under strict safety standards. FAA views the test sites as a location for industry to safely access the airspace. FAA told us, during our ongoing work that they expect data obtained from the users of the test ranges will contribute to the continued development of standards for the safe and routine integration of UAS. In order to fly under a COA the commercial entity leases its UAS to the public entity for operation. the research and development supporting integration. According to FAA, it cannot direct the test sites to address specific research and development issues, nor specify what data to provide FAA, other than data required by the COA. FAA officials told us that some laws may prevent the agency from directing specific test site activities without providing compensation. As a result, according to some of the test site operators we spoke to as part of our ongoing work, there is uncertainty about what research and development should be conducted to support the integration process. However, FAA states it does provide support through weekly conference calls and direct access for test sites to FAA's UAS office. This level of support requires time and resources from the FAA, but the staff believes test sites are a benefit to the integration process and worth this investment. In order to maximize the value of the six test ranges, FAA is working with MITRE Corporation (MITRE), DOD, and the test sites to define what safety, reliability, and performance data are needed and develop a framework, including procedures, for obtaining and analyzing the data. However, FAA has not yet established a time frame for developing this framework. During our ongoing work, test site operators have told us that there needs to be incentives to encourage greater UAS operations at the test sites. FAA is, however, working on providing additional flexibility to the test sites to encourage greater use by industry. Specifically, FAA is willing to train designated airworthiness representatives for each test site. These individuals could then approve UASs for a special airworthiness certificate in the experimental category for operation at the specific test site. Test site operators told us that industry has been reluctant to operate at the test sites because under the current COA process, a UAS operator has to lease its UAS to the test site, thus potentially exposing proprietary technology. With a special airworthiness certificate in the experimental category, the UAS operator would not have to lease their UAS to the test site, therefore protecting any proprietary technology. According to FAA and some test site operators, another flexibility they are working on is a broad area COA that would allow easier access to the test site's airspace for research and development. Such a COA would allow the test sites to conduct the airworthiness certification, typically performed by FAA, and then allow access to the test site's airspace. FAA has started to use the authority granted under section 333 of the 2012 Act to allow small UASs access to the national airspace for commercial purposes, after exempting them from obtaining an airworthiness certification. While FAA continues to develop a regulatory framework for integrating small UASs into the NAS these exemptions can help bridge the gap between the current state and full integration. According to FAA, this framework could provide UAS operators that wish to pursue safe and legal entry into the NAS a competitive advantage in the UAS marketplace, thus discouraging illegal operations and improving safety. During our ongoing work, FAA has granted seven section 333 exemptions for the filmmaking industry as of December 4, 2014. FAA officials told us that there were more than 140 applications waiting to be reviewed for other industries, for uses such as precision agriculture and electric power line monitoring, and more continue to arrive. (See figure 1 for examples of commercial UAS operations.) While these exemptions do allow access to the NAS, FAA must review and approve each application and this process takes time, which can affect how quickly the NAS is accessible to any given commercial applicant. According to FAA, the section 333 review process is labor intensive for its headquarters staff because most certifications typically occur in FAA field offices; however, since exemptions under section 333 are exceptions to existing regulations, this type of review typically occurs at headquarters. FAA officials stated that to help mitigate these issues, it is grouping and reviewing similar types of applications together and working to streamline the review process. While FAA is making efforts to improve and accelerate progress toward UAS integration, additional challenges remain, including in the areas of authority, resources, and potential leadership changes. As we reported in February 2014, the establishment of the UAS Integration office was a positive development because FAA assigned an Executive Manager and combined UAS-related personnel and activities from the agency's Aviation Safety Organization and Air Traffic Organization. However, some industry stakeholders we have interviewed for our ongoing work have expressed concerns about the adequacy of authority and resources that are available to the office. A UAS rulemaking working group, comprised of both government and industry officials, recently recommended that the UAS Integration Office be placed at a higher level within FAA in order to have the necessary authority and access to other FAA lines of business and offices. In addition, according to FAA officials, the Executive Manager's position may soon be vacant. Our previous work has found that complex organizational transformations involving technology, systems, and retraining key personnel--such as NextGen another FAA major initiative--require substantial leadership commitment over a sustained period. We also found that leaders must be empowered to make critical decisions and held accountable for results. Several federal agencies and private sector stakeholders have research and development efforts under way to develop technologies that are designed to allow safe and routine UAS operations. As we have previously reported, agency officials and industry experts told us that these research and development efforts cannot be completed and validated without safety, reliability, and performance standards, which have not yet been developed because of data limitations. On the federal side, the primary agencies involved with UAS integration are those also working on research and development, namely, FAA, NASA, and DOD. FAA uses multiple mechanisms--such as cooperative research and development agreements (CRDA), federally funded research and development centers (FFRDC), and OTAs (discussed earlier in this statement)--to support its research and development efforts. In support of UAS integration, FAA has signed a number of CRDAs with academic and corporate partners. For example, FAA has CRDAs with CNN and BNSF Railway to test industry-specific applications for news coverage and railroad inspection and maintenance, respectively. Other CRDAs have been signed with groups to provide operational and technical assessments, modeling, demonstrations, and simulations. Another mechanism used by FAA to generate research and development for UAS integration are FFRDCs. For example, MITRE Corporation's Center for Advanced Aviation System Development is an FFRDC supporting FAA and the UAS integration process. Specifically, MITRE has ongoing research and development supporting air traffic management for UAS detection and avoidance systems, as well as other technologies. FAA has cited many accomplishments in research and development in the past fiscal year, as we were conducting our ongoing work. According to FAA, it has made progress in areas related to detect and avoid technologies supporting ongoing work by RTCA Special Committee Other areas of focus and progress by FAA include command and 228.control, as well as operations and approval. According to FAA, progress for command and control was marked by identifying challenges for UAS operations using ground-to-ground communications. FAA also indicated, during our ongoing work, that it conducted simulations of the effects of UAS operations on air traffic management. Furthermore, in support of research and development efforts in the future, FAA solicited for bids for the development of a Center of Excellence. The Center of Excellence is expected to support academic UAS research and development for many areas including detect and avoid, and command and control technologies. FAA expects to announce the winner during fiscal year 2015. We have previously reported that NASA and DOD have extensive research and development efforts supporting integration into the NAS.NASA has a $150-million project focused on UAS integration into the NAS. NASA officials stated that the current goal of this program is to conduct research that reduces technical barriers associated with UAS integration into the NAS, including conducting simulations and flight testing to test communications requirements and aircraft separation, among other issues. DOD has research and development efforts primarily focused on airspace operations related to detect and avoid systems. However, DOD also contributes to research and development focused on certification, training, and operation of UAS. We reported in 2012 that outside the federal government, several academic and private sector companies are conducting research in support of advancing UAS integration. Research by both groups focuses on various areas such as detect and avoid technologies, sensors, and UAS materials. For example, several private sector companies have developed technologies for visual sensing and radar sensing. Academic institutions have conducted extensive research into the use of various technologies to help the maneuverability of UASs. A number of countries allow commercial UAS operations under some restrictions. A 2014 study, conducted by MITRE for FAA, revealed that Japan, Australia, United Kingdom, and Canada have progressed further than the United States with regulations supporting integration. In fact, Japan, the United Kingdom, and Canada have regulations in place allowing some small UAS operations for commercial purposes. According to this study, these countries' progress in allowing commercial access in the airspace may be attributed to differences in the complexity of their aviation environment. Our preliminary observations indicate that Japan, Australia, United Kingdom, and Canada also allow more commercial UAS operations than the United States. According to the MITRE study, the types of commercial operations allowed vary by country. For example, as of December 2014, Australia had issued over 180 UAS operating certificates to businesses engaged in aerial surveying, photography, and other lines of business. Furthermore, the agriculture industry in Japan has used UAS to apply fertilizer and pesticide for over 10 years. Several European countries have granted operating licenses to more than 1,000 operators to use UASs for safety inspections of infrastructure, such as rail tracks, or to support the agriculture industry. While UAS commercial operations can occur in other countries, there are restrictions controlling their use. For example, the MITRE study showed that several of the countries it examined require some type of certification and approval to occur before operations. Also, restrictions may require operations to remain within line of sight and below a certain altitude. In Australia, according to the MITRE study, commercial operations can occur only with UASs weighing less than 4.4 pounds. However, the rules governing UASs are not consistent worldwide, and while some countries, such as Canada, are easing restrictions on UAS operations, other countries, such as India, are increasing UAS restrictions. For our ongoing work, we spoke with representatives of the aviation authority in Canada (Transport Canada) to better understand UAS use and recently issued exemptions. In Canada, regulations governing the use of UAS have been in place since 1996. These regulations require that UAS operations apply for and receive a Special Flight Operations Certificate (SFOC). The SFOC process allows Canadian officials to review and approve UAS operations on a case-by-case basis if the risks are managed to an acceptable level. This is similar to the COA process used in the United States. As of September 2014, over 1,000 SFOCs had been approved for UAS operations this year alone. Canada issued new rules for UAS operations on November 27, 2014. Specifically, the new rules create exemptions for commercial use of small UASs weighing 2 kilograms (4.4 pounds) or less and between 2.1 kilograms to 25 kilograms (4.6 pounds to 55 pounds). UASs in these categories can commercially operate without a SFOC but must still follow operational restrictions, such as a height restriction and a requirement to operate within line of sight. Transport Canada officials told us this arrangement allows them to use scarce resources to regulate situations of relatively high risk. For example, if a small UAS is being used for photography in a rural area, this use may fall under the new criteria of not needing an SFOC, thus providing relatively easy access for commercial UAS operations. Finally, our ongoing work has found that FAA interacts with a number of international bodies in an effort to harmonize UAS integration across countries. According to FAA officials, the agency's most significant contact in Europe has been with the Joint Authorities for Rulemaking for Unmanned Systems (JARUS). JARUS is a group of experts from the National Aviation Authorities (NAAs) and the European Aviation Safety Agency. A key aim of JARUS is to develop recommended certification specifications and operational provisions, which countries can use during the approval process of a UAS. In addition, FAA participated in ICAO's UAS Study Group, an effort to harmonize standards for UAS. ICAO is the international body that, among other things, promotes harmonization in international standards. ICAO plans to release its UAS manual in March 2015, which will contain guidance about UAS integration for the states. Additional international groups that FAA interacts with in support of UAS integration include the Civil Air Navigation Services Organization, European Organization for Civil Aviation Equipment, and North Atlantic Treaty Organization. Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. Appendix I: Selected Requirements and Status for UAS Integration under the FAA Modernization and Reform Act of 2012, as of December 2014 FAA Modernization and Reform Act of 2012 requirement Status of action Enter into agreements with appropriate government agencies to simplify the process for issuing COA or waivers for public UAS. In process - MOA with DOD signed Sept. 2013; MOA with DOJ signed Mar. 2013; MOA with NASA signed Mar. 2013; MOA with DOI signed Jan. 2014; MOA with DOD's Director of Test & Evaluation signed Mar. 2014; MOA with NOAA still in draft. Expedite the issuance of COA for public safety entities Establish a program to integrate UAS into the national airspace at six test ranges. This program is to terminate 5 years after date of enactment. Develop an Arctic UAS operation plan and initiate a process to work with relevant federal agencies and national and international communities to designate permanent areas in the Arctic where small unmanned aircraft may operate 24 hours per day for research and commercial purposes. Determine whether certain UAS can fly safely in the national airspace before the completion of the Act's requirements for a comprehensive plan and rulemaking to safely accelerate the integration of civil UASs into the national airspace or the Act's requirement for issuance of guidance regarding the operation of public UASs including operating a UAS with a COA or waiver. Develop a comprehensive plan to safely accelerate integration of civil UASs into national airspace. Issue guidance regarding operation of civil UAS to expedite COA process; provide a collaborative process with public agencies to allow an incremental expansion of access into the national airspace as technology matures and the necessary safety analysis and data become available and until standards are completed and technology issues are resolved; facilitate capability of public entities to develop and use test ranges; provide guidance on public entities' responsibility for operation. Make operational at least one project at a test range. Approve and make publically available a 5-year roadmap for the introduction of civil UAS into national airspace, to be updated annually. Submit to Congress a copy of the comprehensive plan. Publish in the Federal Register the Final Rule on small UAS. In process Publish in the Federal Register a Notice of Proposed Rulemaking to implement recommendations of the comprehensive plan. Publish in the Federal Register an update to the Administration's policy statement on UAS in Docket No. FAA-2006-25714. Achieve safe integration of civil UAS into the national airspace. In process FAA Modernization and Reform Act of 2012 requirement Status of action Publish in the Federal Register a Final Rule to implement the recommendations of the comprehensive plan. Develop and implement operational and certification requirements for public UAS in national airspace. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202)512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Brandon Haller, Assistant Director; Melissa Bodeau, Daniel Hoy, Eric Hudson, and Bonnie Pignatiello Leer. 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.

UASs are aircraft that do not carry a pilot aboard, but instead operate on pre-programmed routes or are manually controlled by following commands from pilot-operated ground control stations. The FAA Modernization and Reform Act of 2012 put greater emphasis on the need to integrate UASs into the national airspace by requiring that FAA establish requirements governing them. FAA has developed a three-phased approach in its 5-year Roadmap to facilitate incremental steps toward seamless integration. However, in the absence of regulations, unauthorized UAS operations have, in some instances, compromised safety. This testimony discusses 1) progress toward meeting UAS requirements from the 2012 Act, 2) key efforts underway on research and development, and 3) how other countries have progressed in developing UAS use for commercial purposes. This testimony is based on GAO's prior work and an ongoing study examining issues related to UAS integration into the national airspace system for civil and public UAS operations. The Federal Aviation Administration (FAA) has made progress toward implementing the requirements defined in the FAA Modernization and Reform Act of 2012 (the 2012 Act). As of December 2014, FAA had completed 9 of the 17 requirements in the 2012 Act. However, key requirements, such as the final rule for small unmanned aerial systems (UAS) operations, remain incomplete. FAA officials have indicated that they are hoping to issue a Notice of Proposed Rulemaking soon, with a timeline for issuing the final rule in late 2016 or early 2017. FAA has established the test sites as required in the Act, sites that will provide data on safety and operations to support UAS integration. However, some test site operators are uncertain about what research should be done at the site, and believe incentives are needed for industry to use the test sites. As of December 4, 2014, FAA granted seven commercial exemptions to the filmmaking industry allowing small UAS operations in the airspace. However, over 140 applications for exemptions were waiting to be reviewed for other commercial operations such as electric power line monitoring and precision agriculture. Previously, GAO reported that several federal agencies and private sector stakeholders have research and development efforts under way focusing on technologies to allow safe and routine UAS operations. During GAO's ongoing work, FAA has cited many accomplishments in research and development in the past fiscal year in areas such as detect and avoid, and command and control. Other federal agencies also have extensive research and development efforts supporting safe UAS integration, such as a National Aeronautics and Space Administration (NASA) project to provide research that will reduce technical barriers associated with UAS integration. Academic and private sector companies have researched multiple areas related to UAS integration. GAO's ongoing work found that other countries have progressed with UAS integration and allow limited commercial use. A 2014 MITRE study found that Japan, Australia, the United Kingdom, and Canada have progressed further than the United States with regulations that support commercial UAS operations. For example, as of December 2014, Australia had issued 180 UAS operating certificates to businesses in industries including aerial surveying and photography. In addition, Canada recently issued new regulations exempting commercial operations of small UASs weighing 25 kilograms (55 lbs.) or less from receiving special approval.

MDA is a unique agency with extraordinary acquisition flexibility and a challenging mission, however while that flexibility has helped it to rapidly field systems, it has also hampered oversight and accountability. Over the years, Congress has created a framework of laws that makes major defense acquisition programs accountable for their planned outcomes and cost, gives decision makers a means to conduct oversight, and ensures some level of independent program review. Application of many of these laws is triggered by the phases of the Department of Defense's acquisition cycle, such as entry into engineering and manufacturing development. Specifically, major defense acquisition programs are generally required by law and policy to do the following: Document program parameters in an acquisition program baseline that, as implemented by DOD, has been approved by the Milestone Decision Authority, a higher-level DOD official prior to the program's entry into the engineering and manufacturing development phase. The baseline provides decision makers with the program's best estimate of the program's total cost for an increment of work, average unit costs for assets to be delivered, the date that an operational capability will be fielded, and the weapon's intended performance parameters. Once approved, measure the program against the baseline, which is the program's initial business case, or obtain the approval of a higher-level acquisition executive before making changes. Obtain an independent life-cycle cost estimate prior to beginning engineering and manufacturing development, and/or production and deployment. Independent life-cycle cost estimates provide confidence that a program is executable within estimated cost. Regularly provide detailed program status information to Congress, including information on cost, in Selected Acquisition Reports. Report certain increases in unit cost measured from the original or current program baseline. Covered major defense acquisition programs and subprograms are required to complete initial operation test and evaluation before proceeding beyond low-rate initial production. After testing is completed, the Director for Operational Test and Evaluation assesses whether the results of the test confirm that the system or components are effective and suitable for combat. When MDA was established in 2002, it was granted exceptional flexibility in setting requirements and managing the acquisition, in order that its BMDS be developed as a single program, using a capabilities-based, spiral upgrade approach to quickly deliver a set of integrated defensive capabilities. This decision deferred application of DOD acquisition policy to BMDS until a mature capability is ready to be handed over to a military service for production and operation. Because the BMDS program has not formally entered the DOD acquisition cycle, application of laws that are designed to facilitate oversight and accountability of DOD acquisition programs and that are triggered by phases of this cycle, such as the engineering and manufacturing development phase, has also effectively been deferred. This gives MDA unique latitude to manage the BMDS and it enabled MDA to begin delivering an initial defensive capability in 2004. However, the flexibility also came at the expense of transparency and accountability. Specifically, a BMDS cost, schedule, and performance baseline does not have to be established or approved by anyone outside MDA. Recent laws have created some baseline-related requirements for parts of the BMDS. In addition, while most major defense acquisition programs are required by statute to obtain an independent verification of cost estimates, MDA has only recently developed cost estimates for selected assets and plans to work with the DOD Office of the Director for Cost Assessment and Program Evaluation to develop independent cost estimates for more MDA elements. Further, assessments of a system's suitability and effectiveness in combat have only been accomplished, with limitations, for the currently deployed Aegis BMD weapon system. The limited amount of testing completed, which has been primarily developmental in nature, and the lack of verified, validated, and accredited models and simulations prevent the Director of Operational Test and Evaluation from fully assessing the effectiveness, suitability, and survivability of the BMDS in annual assessments. MDA has agreed to conduct an operational flight test in 2012. As we concluded in a prior report, having less transparency and accountability than is normally present in a major weapon program has had consequences. The lack of baselines for the BMDS along with high levels of uncertainty about requirements and program cost estimates effectively set the missile defense program on a path to an undefined destination at an unknown cost. Across the agency, these practices left programs with limited knowledge and few opportunities for crucial management oversight and decision making concerning the agency's investment and the warfighter's continuing needs. At the program level, these practices contributed to quality problems affecting targets acquisitions, which in turn, hampered MDA's ability to conduct tests as planned. MDA has employed at least three strategies to acquire and deploy missile defense systems, which has exacerbated transparency and accountability challenges. From its inception in 2002 through 2007, MDA developed missile defense capability in 2-year increments, known as blocks, each built on preceding blocks intended to enhance the development and capability of the BMDS. However, there was little visibility into baseline costs and schedules associated with the systems that comprised the blocks or how the blocks addressed particular threats. In response to our recommendations, in December 2007, MDA announced a new capabilities-based block structure intended to improve the program's transparency, accountability, and oversight. Instead of being based on 2-year time periods, the new blocks focused on fielding capabilities that addressed particular threats. Because the new block structure was not aligned to regular time periods, multiple blocks were under way concurrently. This approach included several positive changes, including a DOD commitment to establish total acquisition costs and unit costs for selected block assets, including only those elements or components of elements in a block that would be fielded during the block and abandoning deferrals of work from one block to another. MDA was still transitioning to this new capabilities-based block approach when the Director, MDA terminated it in June 2009. According to MDA, this was done in order to address congressional concerns regarding how to structure MDA's budget justification materials. This termination marked the third acquisition management strategy for the BMDS in the prior 3 years and effectively reduced transparency and accountability for the agency. The agency then began to manage BMDS as a single integrated program but planned to report on cost, schedule, and performance issues by each element within the program. Changing the acquisition strategy is problematic because each time it is changed, the connection is obscured between the old strategies' scope and resources and the new strategy's rearranged scope and resources. This makes it difficult for decision makers to hold MDA accountable for expected outcomes and clouds transparency of the agency's efforts. We also reported in December 2010 that the adoption of the European Phase Adaptive Approach (PAA) for deploying missile defense assets has limitations in transparency and accountability. Specifically, we reported that DOD made progress in acquisition planning for technology development and systems engineering and testing and partial progress in defining requirements and identifying stakeholders but had not yet developed a European PAA acquisition decision schedule or an overall European PAA investment cost. We found that the limited visibility into the costs and schedule for the European PAA and the lack of some key acquisition management processes reflect the oversight challenges with the acquisition of missile defense capabilities that we have previously reported. We concluded that for the European PAA, the flexibility desired by DOD is not incompatible with appropriate visibility into key aspects of acquisition management. Moreover, as DOD proceeds with the European PAA acquisition activities, it is important for Congress and the President to have assurance that the European PAA policy is working as intended and that acquisition activities are cost-effective. We made recommendations also in January 2011 regarding the development of life-cycle cost estimates and an integrated schedule for the acquisition, infrastructure and personnel activities to help identify European PAA implementation risks. DOD partially concurred with the first recommendation and fully concurred with the second. Congress has taken action to address concerns regarding the acquisition management strategy, accountability, and oversight of MDA. For example, in the National Defense Authorization Act for Fiscal Year 2008, Congress required MDA to establish acquisition cost, schedule, and performance baselines for each system element that has entered the equivalent of the engineering and manufacturing development phase of acquisition or is being produced or acquired for operational fielding. Most recently, the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 requires the Secretary of Defense to ensure that MDA establishes and maintains an acquisition baseline for each program element of the BMDS. Since our first MDA report in 2004, we have made a series of recommendations to improve transparency and accountability, many of which are designed to adapt the key transparency and accountability features already embedded in the DOD acquisition regulation and apply them to MDA. Some of our key recommendations include: Establishing and reporting to Congress costs and unit costs, including development costs in unit costs, including sunk costs in cost estimates, reporting top-level test goals, obtaining independent cost and taking steps to ensure the underlying cost estimates are high quality, reliable, and documented reporting variances. Improving transparency by requesting and using procur instead of research, development, testing and evaluation funds to acquire fielded assets. Strengthening the test program by establishing baselines for each new class of target in development, including sufficient schedule and resource margin, including spare test assets and targets, and strengthening the role of the Director, Operational Test and Evaluation in assessing missile defense progress. Implementing a knowledge-based acquisition strategy consistent with DOD acquisition regulations, and ensure that items are not manufactured for fielding before their performance has been validated through testing. DOD has committed to take action on many of these recommenda While agreeing with our recommendations to enhance baseline reporting, there are differences in MDA's perspectives on such issues as sunk costs and changes in unit cost. tions. In 2010, MDA made significant progress in implementing some of these recommendations by finalizing a new baseline phase review process in which the agency set detailed baselines for several BMDS elements, or portions of elements, for the first time. Specifically, MDA established resource, schedule, test, operational capacity, technical, and contract baselines for several BMDS components. It reported these to Congress in its June 2010 BMDS Accountability Report. MDA also identified three phases of development where baselines are approved--technology development, product development, and initial production phases--and specified the key knowledge that is needed at each phase. MDA officials stated that they expect that aligning the development efforts with the phases will help to ensure that the appropriate level of knowledge is obtained before the acquisitions move from one phase to the next. In another key step, approval of the product development and initial production baselines will be jointly reviewed by the Director of MDA and the respective service acquisition executive, as a number of missile defense systems are expected to eventually transition to the military services for operation. In addition, in regard to these new phases, the agency established a process for approving baselines. As a result of MDA's new baseline phase review process, its 2010 BMDS Accountability Report is more comprehensive than its 2009 report. program and that its test and targets program needed to be managed way that fully supported high-priority near-term programs. We reported last year that MDA extensively revised the test plan to address these concerns. MDA's new approach now bases test scenari os r on modeling and simulation needs and extends the test baseline to cove the Future Years Defense Program which allows for better estimation of art of its new target needs, range requirements, and test assets. Also, as p test plan, MDA scheduled dedicated periods of developmental and operational testing, during which the system configuration will rema fixed to allow the warfighter to carry out training, tactics, techniques, and procedures for developmental and operational evaluation. Additionally, the new test plan is expected to provide sufficient time after test events to conduct a full post-test analysis. As we reported last year, these improvements are important because BMDS performance cannot be assessed until models and simulations are accredited and validated and the test program cannot be executed without meeting its target needs. Our assessment of the schedule baselines determined that we could not compare the asset delivery schedule to the prior year's baseline because MDA has stopped reporting a comprehensive list of planned asset deliveries. Finally, we found the test baseline to be well documented. However, because it is success oriented, any problems encountered in executin the plan can cause ripple effects throughout remaining test events. Th frequent changes that continue to occur undermine the value of the test baseline as an oversight tool. Ove suc ens to t c consistent lack of disciplined analysis that would provide an understanding of what it would take to field a weapon system before system development begins. We have reported that there is a clear set of prerequisites that must be met by each program's acquisition strategy t o realize successful outcomes. These prerequisites include establishin g a clear, knowledge-based, executable business case for the product. An executable business case is one that provides demonstrated evidence (1) the identified needs are real and necessary and can best be met with the chosen concept and (2) the chosen concept can be developed and produced within existing resources--including technologies, funding, time, and management capacity. Knowledge-based acquisition principle and business cases combined are necessary to establish realistic cost, schedule and performance baselines. Without documented realistic baselines there is no foundation to accurately measure program progre Our work has shown that when agencies do not follow a knowledge-ba approach to acquisition, high levels of uncertainty about requirements, technologies, and design often exist at the start of development program As a result, cost estimates and related funding needs are often understated. r the past 10 years, we have conducted extensive research on cessful programs and have found that successful defense programs ure that their acquisitions begin with realistic plans and baselines pri he start of development. We have previously reported that ause of poor weapon system outcomes, at the program level, is the s. Aegis Ashore program and the Ground-based Midcourse Defense (GMD) program. Testing and Targets: As in previous years, failures and delays in testing have continued to delay the validation of models and simulations used to assess BMDS performance. Target availability was a significant, though not the only, driver to the test plan delays. Since 2006, we have reported that target availability has delayed and prompted modifications to planned test objective s. This trend continued in 2010. We reported this year that five tests scheduled for fiscal year 2010 were canceled because of a moratorium on air launches of targets. The moratorium was imposed following the failure of an air launched target participating in MDA's December 2009 Theater High Altitude Area Defense (THAAD) flight test. A failure review board investi identified the rigging of cables to the missile in the aircraft as immediate cause of the failure and shortcomings in inte processes at the contractor as the underlying cause. Additionally, target shortfalls contributed to delays in flight tests, reduced the number of flight tests, and altered flight test objectives. December 2009 THAAD flight test failure. The extended use of undefinitized contract actions has previously been identified by GAO and others as risky to the government. Because co officers normally reimburse contractors for all allowable co incur before definitization, contractors bear less risk and have l incentive to control costs during this period. The government als risks incurring unnecessary costs as requirements may change before the contract is definitized. Aegis Ashore: the ship-based Aegis BMD. It is expected to track and intercept ballistic missiles in their midcourse phase of flight using Standard Missile-3 (SM-3) interceptor variants as they become available. However, while Aegis BMD has demonstrated performance at sea, these demonstrations used the currently fielded 3.6.1 version of Aegis BMD with the SM-3 IA interceptor, not the newer variant of re the Aegis operating system and new interceptor that Aegis Asho will use. Aegis Ashore is dependent on next-generation versions of -3 Aegis systems--Aegis 4.0.1 and Aegis 5.0--as well as the new SM IB interceptor, all of which are currently under development. Moreover, a series of changes are required to further modify these new variants of Aegis BMD for use on land with Aegis Ashore. These modifications include changes to the Vertical Launching System; suppression or disabling of certain features used at se design, integration, and fabrication of a new deckhouse enclosure for the radar, and potential changes to the SM-3 IB interceptor. Changes to those existing Aegis BMD components that will be reused for Aegis Ashore may reduce their maturity in the context of the new Aegis Ashore program, and new features will require Aegis Ashore is MDA's future land-based variant of testing and assessment to demonstrate their performance. MDA is plans to make production decisions for the first operational Aeg Ashore before conducting both ground and flight tests. We concluded in this year's report that it is a highly concurrent effor with significant cost, schedule and performance risk. Ground-based Midcourse Defense: GMD is a ground-based d system designed to provide combatant commanders the capability to defend the homeland against a limited attack from intermediate, and intercontinental-range ballistic missiles during the midcourse phase of flight. The GMD consists of a ground-based interceptor--a booster with an Exoatmospheric Kill Vehicle on top--and a fire control system that receives target information from sensors in order to formulate a battle plan. GMD continues to deliver assets before testing has fully determined their capabilities and limitations. The Director, MDA testified on March 31, 2011 that he considers the GMD interceptors essentially prototypes. In the urgency to deploy assets to meet the Presidential directive to field an initial capability by 2004, assets were built and deployed before developmental testing was completed. During the ongoing developmental testing, issues were found that led to a need for retrofits. GMD intercept tests conducted to date have already led to major hardware or software changes to the interceptors--not all of which have been verified through flight testing. In addition, manufacturing of a new variant called the Capability Enhancement II is well underway and more than half of those variants have already been delivered although their capability has not been validated through developmental flight tests. To date, the two f tests utilizing this variant have both failed to intercept the target. According to MDA, as a result of the most recent failure in December 2010, deliveries of this variant have been halted. Again, because of the urgency to deploy some capability, limited work was undertaken on long-term sustainment for the system which is critical to ensure the system remains effective through 2032. In September 2010, MDA finalized the GMD Stockpile Reliability Program Plan, a key step in developing the knowledge needed to determine the sustainment needs of the GMD system. Chairman Nelson, Ranking Member Sessions, and Members of the Subcommittee, this completes my prepared statement. I would be respond to any questions you may have at this time. For questions about this statement, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include David Best, Assistant Director; LaTonya Miller; Steven Stern; Meredith Allen Kimmett; Letisha Antone; Gwyneth Woolwine; Teague Lyons; Kenneth E. Patton; Robert Swierczek; and Alyssa Weir. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In order to meet its mission, the Missile Defense Agency (MDA) is developing a highly complex system of systems--land-, sea-, and spacebased sensors, interceptors, and battle management. Since its initiation in 2002, MDA has been given a significant amount of flexibility in executing the development and fielding of the ballistic missile defense system. GAO was asked to testify on its annual review of MDA and on progress made to improve transparency and accountability. This statement is based on our March 2011 report. When MDA was established in 2002, it was granted exceptional flexibility in setting requirements and managing the acquisition, in order to meet a Presidential directive to deliver an initial defensive capability in 2004. However, the flexibility also came at the expense of transparency and accountability. For example, unlike certain other Department of Defense (DOD) major defense acquisition programs, a cost, schedule, and performance baseline does not have to be established or approved outside MDA. In addition, while most major defense acquisition programs are required by statute to obtain an independent verification of cost estimates, MDA has only recently developed cost estimates for selected assets and plans to work with DOD's Office of the Director for Cost Assessment and Program Evaluation to develop independent cost estimates for more MDA elements. Further, assessments of a system's suitability and effectiveness in combat have only been accomplished, with limitations, for the currently deployed Aegis Ballistic Missile Defense weapon system. Since its inception, MDA has employed at least three different strategies to acquire and deploy missile defense systems. Because these changes involved different structures for reporting cost, schedule, and performance data, they have exacerbated transparency and accountability challenges--each time a strategy changes, the connection between the old and new strategy planned scope and resources is obscured. In 2010, MDA made significant progress in addressing previously reported concerns about transparency and accountability. Specifically, MDA : (1) Established resource, schedule, test, operational capacity, technical, and contract baselines for several missile defense systems. It reported these to Congress in its June 2010 BMDS Accountability Report. (2) Identified three phases of development where baselines are approved-- technology development, product development, and initial production phases--and specified the key knowledge that is needed at each phase. (3) Established processes for reviewing baselines and approving product development and initial production jointly with the military services that will ultimately be responsible for those assets. GAO also reported last year that MDA extensively revised the test plan to increase its robustness and ability to inform models and simulations for assessing missile defense performance. While it is clear that progress has been made in terms of implementing new acquisition reviews and reporting detailed baselines, there remain critical gaps in the material reported, particularly the quality of the underlying cost estimates needed to establish baselines. Moreover, GAO still has concerns about realism in test planning and acquisition risks associated with the rapid pace of fielding assets. These risks are particularly evident in MDA's efforts to develop systems to support a new approach for missile defense in Europe as well as the Ground-based Midcourse Defense system. GAO does not make new recommendations in this testimony but emphasizes the importance of implementing past recommendations, including: (1) Establishing and reporting complete, accurate, reliable cost information. (2) Strengthening test planning and resourcing. (3) Following knowledge-based acquisition practices that ensure sufficient knowledge is attained on requirements, technology maturity, design maturity, production maturity and costs before moving programs into more complex and costly phases of development. DOD has committed to take action on many of our recommendations.

The Peace Corps was created in 1961 to help countries meet their needs for trained manpower. In addition, it was meant to provide a new expression of U.S. character and foreign policy--an idealistic sense of purpose and a means of countering the expansion of communism throughout the world. It was anticipated that through contact at the grassroots level, Peace Corps volunteers would help promote a better understanding of the American people, who in turn would better understand cultures of other peoples. The end of the Cold War presented the Peace Corps with an historic opportunity: For the first time, the countries of the former Eastern bloc became open to Western economic and technical assistance. In July 1989, the President announced that Peace Corps volunteers would teach English in Hungary. Shortly thereafter, new programs were started in Poland and Czechoslovakia, then successively throughout Central and Eastern Europe. In December 1991, the Secretary of State announced that he would like to see at least 250 volunteers placed in the states of the former Soviet Union by the end of 1992. From 1989 through 1993 the Peace Corps established 18 new country programs throughout Central and Eastern Europe and the former Soviet Union. During this period of expansion into Europe and Central Asia, the Peace Corps also opened or reopened 20 new programs in Africa, Asia, and Latin America. Together, these new programs raised the total number of countries served by Peace Corps to 93--an increase of 43 percent since 1989. These new country programs represent the largest increase of new programs since the first years of the agency's existence. Peace Corps programs in the former Eastern bloc countries were selected in consultation with the host governments and in concert with the Department of State, which is responsible for coordinating U.S. assistance to the region. The Peace Corps concentrated its development assistance in the region in three program areas: the Teaching English as a Foreign Language (TEFL) program; a small business development program, which provided technical assistance in such areas as privatization, marketing, management, and business education; and a program in the environmental sector to promote environmental awareness and education. During fiscal year 1993, an average of 665 volunteers served in former Eastern bloc countries. The volunteers serving in this region are, on average, older and more experienced than the average Peace Corps volunteer. The average age of all Peace Corps volunteers is 32. The average age of volunteers serving in the region is 37, with small business development volunteers averaging 40 years of age. In addition, many of the business volunteers hold advanced degrees and have significant work experience. The Peace Corps policy and procedures manuals describe numerous, often interdependent steps for opening new overseas posts. These manuals are generally comprehensive and sound and, if followed, should result in effective programs. The Peace Corps' Policy Manual, for example, identifies the following as necessary steps: consulting with host country officials, assessing a country's needs, and determining which Peace Corps programs can best address those needs; negotiating agreements with host country officials regarding the Peace Corps and host country services and support to be provided; recruiting and selecting country staff; establishing administrative support services, including obtaining office space and medical and banking services; identifying and developing volunteer work sites; identifying and recruiting volunteers in the necessary numbers and with the requisite skills to implement country program plans; and designing and conducting in-country technical, language, health and safety, and cross-cultural training programs to prepare volunteers for their assignments. The Peace Corps' newly developed Programming and Training System (PATS) manual provides additional guidance for starting new volunteer projects. This manual defines project criteria, field staffs' efforts with host country and other foreign assistance agencies to identify and define the scope of work for individual projects, and volunteers' training, placement, and support. Peace Corps guidance also provides information on the sequencing of various steps in the program development process. For example, consultations with host country officials on a country's needs should precede an assessment of those needs; country agreements should be completed and signed before the country office is established and opened and staff arrive; and project identification and development and volunteer training programs should be in place before the volunteers' arrival. In its attempt to quickly begin programs in Central and Eastern Europe and the former Soviet Union, the Peace Corps often did not follow its established guidance when starting its programs. Many of the steps necessary to introduce effective programs were rushed, done superficially, or not done at all. Consequently, many of the new programs we examined were poorly designed and faced a host of other problems, including the lack of qualified staff, the assignment of volunteers to inappropriate or underdeveloped projects, insufficient volunteer training, and volunteer support systems that did not work. These problems frustrated many volunteers who had joined the Peace Corps to contribute to the region's development and contributed to a relatively high resignation rate among the volunteers. The Peace Corps relied on consultants or staff who lacked adequate cultural or language knowledge to develop sector plans. These personnel were often under pressure to work quickly and did not have time to learn about local conditions or cultivate a common understanding with host country officials. For example, the Peace Corps assigned a staff person on temporary duty from the Philippines to design its environment program in Poland, even though the person did not know the language and had no previous experience in the region. As a result, the program's design did not address Poland's environmental goals or have much impact. In another case, a consultant for the Peace Corps designed Russia's Far East small business program without traveling to the region to assess its business situation. Once drafted, sector plans were not systematically reviewed by senior Peace Corps management officials on a timely basis. Peace Corps personnel who normally provide technical support to country programs told us that they were usually left out of the review process. When reviews did take place they were often cursory or were done after volunteers were already in the country. For example, Russia's small business project plans were not reviewed by the Peace Corps' technical support officials until several months after volunteers were at their sites. These critiques identified a number of gaps in the planning process, such as the failure to identify assignments before volunteers were placed at sites. This later turned out to be a critical problem. Finally, the Peace Corps' senior management did not formally approve country program plans prior to their implementation. We were told that the Peace Corps' regional directors are ultimately responsible for ensuring the adequacy of country program plans in their regions and are given significant authority and autonomy to ensure that their programs are effectively managed. However, they often did not carry out this responsibility, and management oversight of the country programs we visited appeared to be minimal. For example, the Peace Corps sent small business development volunteers to Uzbekistan despite the fact it had not developed a business program. In Poland, the small business program designed and implemented in 1991 was not approved until 1994. Peace Corps management officials told us that some newer programs required greater management support from Washington than others, and in February 1993, Washington staff began playing a direct role in managing certain problem programs in the former Soviet Union. They said actions taken included delaying the entry of volunteers into some programs to give staff more time to prepare; making staff changes; and instituting initiatives to strengthen training, programming, and staff support. Peace Corps policy manuals require that programs be sufficiently staffed in order to properly plan volunteer assignments and support volunteers at their sites. However, the Peace Corps did not always provide adequate numbers of staff to open new posts and did not assign sufficient staff to countries once the programs were underway. Compounding the problems caused by inadequate staffing was the short lead time the Peace Corps had to prepare for the arrival of the large number of volunteers assigned to the region. The Peace Corps' recruitment of staff for these new country entries was reactive. The Peace Corps' recruiting efforts largely consisted of sending announcements of vacancies to a few publications and foreign affairs associations. The Peace Corps also relied on former volunteers and staff from other countries to fill its staff positions. The quality of the staff was uneven in Central and Eastern Europe and the former Soviet Union countries. The Peace Corps often assigned staff that had prior Peace Corps experience but did not have necessary language skills. Also, some staff and consultants lacked the necessary cultural knowledge and technical skills. The Peace Corps' staff training was also inadequate. Many of the staff we interviewed said they did not receive any training until after they started their assignments. In addition, staff we spoke with said that what training they received after they started their assignments was too general in nature and failed to prepare them for the particular challenges of their posts. Many of the staff we met told us they had little knowledge of the local language and culture before they arrived, which they said significantly hindered their effectiveness. Peace Corps staffing data indicates a pattern of shortages and turnover throughout the region, as illustrated in the following examples: Country directors resigned or were terminated within the first year in 3 of 4 countries we visited and in 9 of 18 country programs in the region. The Bulgaria program had four country directors and one acting director in a 20-month span. Three of the four countries we visited did not have an Associate Peace Corps Director (APCD) for their small business programs until after the volunteers arrived in country. In Poland, the small business APCD arrived 18 months after the first business volunteers arrived. In Bulgaria and Uzbekistan, there was no small business APCD for 6 months or more while volunteers were in the field. In Poland, the first APCD for the TEFL program was responsible for developing assignments for 60 volunteers, when the normal staff ratio is one APCD for approximately 30 volunteers. At the time of our fieldwork, many country programs in the region had other staff vacancies, including positions in Russia and Uzbekistan that had been vacant for over a year. The Peace Corps gave several reasons for having insufficient staff. First, the Peace Corps had already reached its overall staff ceiling established by the Office of Management and Budget. Second, in some instances the State Department restricted the number of U.S. personnel allowed into a country. For example, the Peace Corps was restricted to managing its three Baltic programs--Estonia, Latvia, and Lithuania--from a central office in Latvia. Third, the Peace Corps had difficulty attracting qualified candidates to fill a number of its staff positions. Peace Corps officials attributed the high staff turnover to two factors. First, the Peace Corps did not have enough lead time to recruit, prepare, and place staff in the field before the volunteers arrived. Once staff arrived, they had to accomplish too many tasks in a short amount of time, which led to frustration and burnout. Second, some staff were not a good match for their assignments and lacked the necessary skills and temperaments for the job. The Peace Corps did not provide adequate assignment programming and other support for volunteers in the countries we visited. In many cases, volunteer sites were not visited, assignments were ill-defined, and host-country sponsors were not identified. Host country officials were often uncertain what the Peace Corps' goals and philosophy were, what volunteers had to offer, and what the Peace Corps expected of host country officials. In addition, sponsors did not provide what they committed to provide, such as housing, office space, and counterparts, because they lacked a clear understanding of their roles and had no written agreements. These problems eventually led many volunteers to change their assignments or leave the Peace Corps early. Designing adequate assignments for its volunteers has been a long-standing Peace Corps problem. In 1990, we reported that, worldwide, many volunteers had no positions or were underemployed, were forced to develop their own assignments, or did not receive host government support--problems we first reported in 1979. We recommended in 1990 that the Peace Corps establish procedures to improve the planning and development of volunteer assignments and projects. In response to our recommendation, the Peace Corps developed the PATS manual to improve its programming efforts. The manual states that all sites are to be visited and surveyed and that the roles and expectations of the local people should be clarified 3 to 6 months before volunteers arrive for training. The scope of this review did not include a worldwide evaluation to determine whether the Peace Corps' actions corrected the assignment problems in other areas; however, site identification and development problems persisted in each of the four countries we visited. In Poland, over one-half of the first small business volunteers were moved to new assignments because of insufficient staff work on site placements and project design. These assignment problems have persisted, as some small business volunteers of subsequent groups have had difficulties finding meaningful positions. Volunteers assigned to work in the environmental sector were largely unemployed because the Peace Corps had not developed project plans that were accepted by Polish officials. Volunteers assigned to teach English in secondary schools told us that their schools had large numbers of skilled English teachers and that it was hard to justify their continued presence in the schools. In Bulgaria, half of the first class of small business volunteers left early due to frustrations over their assignments. The centerpiece of the Peace Corps' small business program was to be the creation of regional resource centers where volunteers would provide information and advice to local businesses. However, the centers lacked local sponsorship and an independent funding source. This left the volunteers unsupported and forced them into fund-raising activities. According to the volunteers, office equipment and supplies needed to set up the centers did not arrive until some volunteers were already halfway into their 2-year assignment. Over 25 percent of the first TEFL volunteers had to be reassigned because sponsors had failed to provide them adequate housing or teaching positions. Although generally positive about their experience, many of the TEFL volunteers we spoke with questioned their placements, since their schools had large numbers of capable English language teachers. The Peace Corps also experienced some of the same difficulties in Russia that we saw in other countries. The main problem in Russia was a lack of local government officials' understanding of and commitment to the program and the Peace Corps' inability to provide volunteers with business equipment and other support. These factors, coupled with frustrations over undefined assignments and lack of housing, contributed to the departure of 30 percent of the volunteers within the first year. Local officials expected the Peace Corps to staff and equip sophisticated business centers, speak Russian proficiently, and attract joint ventures. When these expectations did not materialize, their support for the volunteers declined. Nonetheless, according to the Peace Corps, local officials continue to request more volunteers. Of the four countries' programs we reviewed, Uzbekistan's program experienced the most difficulties. Half of the volunteers left the program within their first year of service, and of the volunteers that remained, over half had their sites changed due to harassment by the local population, the lack of viable assignments, or the failure of sponsors to follow through with commitments to provide housing. Many volunteers were sent to sites that were not visited by Peace Corps staff. The Peace Corps failed to design a business program, and the business volunteers were thus forced to develop their own assignments. The TEFL volunteers were sent to their sites in March--near the end of the school year--and had to wait until September to start their teaching assignments. The TEFL volunteers' situation was made worse when the preservice training instructor quit and was not replaced. Some of the volunteers told us they were struggling because they lacked the necessary technical training and experience to be in a classroom. Many of the volunteers told us they had made little impact because much of their time was spent finding a meaningful assignment or adequate housing. The size of a program also affected assignment programming. The Peace Corps' rule of thumb for programs is that each APCD should manage about 30 volunteers. The Poland and Hungary programs started with a ratio of one APCD to 60 volunteers. Overall, the programs in Central Europe and the former Soviet Union averaged over 35 volunteers in their first year. The Peace Corps' procedures call for the training of volunteers so that they can effectively carry out their assignments. The Peace Corps is expected to provide information to volunteers before their departure and intensive preservice training after they arrive in the country. This training is supposed to help volunteers serve and work effectively and has four components: language, technical, cross-cultural, and personal health and safety. Language training is to provide volunteers with reasonable proficiency to function effectively in their assignments. The technical training strategy is to teach job skills within a cultural context in conjunction with language and social customs. Many volunteers said that their language training did not prepare them for their assignments. The languages of the region are difficult to learn, so the Peace Corps officials said they focused on improving language training in the region. Nonetheless, most business and environment volunteers we interviewed said that their language skills were not sufficient to perform their jobs and the language training lacked job-related terminology. As a result, to perform their work, many of them were relying on interpreters. Some of the volunteers we spoke with in Uzbekistan were trained to speak Russian and Uzbek but were assigned to cities where the Tajik language is predominant. TEFL volunteers fared better because they were expected to speak English and did not have to rely on their language skills to function in their assignments. A common theme struck by the small business volunteers we spoke with throughout the region was that their technical training had little relevance to their assignments. The Peace Corps trainers taught basic U.S. business practices, which were of little use to many volunteers who already had degrees in business, accounting, and law and years of practical business experience. These volunteers said they needed to know how to adapt their expertise to local situations, but their trainers had no knowledge or appreciation of local conditions. Some of the TEFL volunteers we spoke with told us that their technical training did not prepare them for their teaching assignments. The volunteers we spoke with told us the cross-cultural training they received generally prepared them for living and working in a new culture. However, the volunteers in rural and small urban areas in Uzbekistan told us that they were totally unprepared for the physical and verbal harassment westerners, especially women, received. Many women volunteers in rural and small urban areas in Uzbekistan were targets of physical and verbal assaults, including beatings, fondling, and rock throwing. As a result several volunteers left early. The remaining women volunteers were relocated to larger, safer cities. The Peace Corps had trouble providing support to volunteers once they were at their sites. The main causes for the lack of support to volunteers were the shortage and turnover of staff and the lack of adequate resources. The unsettled staffing situation pressed Peace Corps missions to operate in a crisis-response mode. This crisis mode did not permit adequate time for dealing with volunteer issues in the field. Volunteers we spoke with told us it was generally up to them to solve any problems related to their assignments or living situations. Despite the programming problems and the lack of preparation and support, many volunteers told us that they were often able to find meaningful work on their own initiative and generally believed they were making some positive impact. Also, according to several U.S. assistance and private voluntary organization officials, volunteers are a low-cost means to provide assistance to the region, and host country officials appreciate Peace Corps support. Various officials said the region needs the long-term technical assistance the Peace Corps provides. Officials of other assistance agencies told us that Peace Corps volunteers generally worked well with them. Since the Peace Corps has volunteers at the grassroots level, the U.S. Agency for International Development, the U.S. Information Agency, the U.S. and Foreign Commercial Service, and U.S.-funded private voluntary organizations, among others, often relied on volunteers to provide advice and identify suitable development projects, exchange students, and business ventures. Top Peace Corps officials acknowledged that the agency had difficulties introducing programs in Central and Eastern Europe and the former Soviet Union and told us they are taking steps to address them. They said they are taking precautionary measures to ensure better planning and preparation for future programs and actions to address problems in existing programs. According to Peace Corps officials, the schedule for introducing programs into the region was overly ambitious, both in terms of time to adequately develop the programs and the funding and staff resources to support them. They said that future programs would be more thoroughly planned before their introduction and better supported when introduced. They also said additional emphasis would be placed on developing individual volunteer assignments and volunteer support programs. In conjunction with this increased emphasis, the Peace Corps' office of Europe, Central Asia, and Mediterranean (ECAM) operations, which is responsible for managing country programs in the former Eastern bloc, recently clarified its planning, review, and approval processes and made them policy. ECAM also plans to request input from technical advisors when designing new volunteer projects and will develop program plans prior to sending volunteers to a country. The Department of State provided the Peace Corps fiscal year 1994 supplemental funding, which was being used to stabilize new country programs in the region. The funds were used to contract for additional consultants to help strengthen ongoing programs, among other things. The funds will also be used to place more staff in programs in the region. In addition, a recently completed Peace Corps evaluation recommended improvements in staff hiring and support practices, and a special recruitment effort was underway at the time of our review to increase the pool of small business staff candidates. The Peace Corps was also revising and testing its overseas staff development training curriculum and expanding staff training in the field. Officials said the revised curriculum would be fully developed and operational by April 1995. In addition, ECAM has hired additional staff to increase the time volunteers devote to language training, is developing additional language materials, and is making technical training more specific to the country. The Peace Corps' entry into the former Eastern bloc did not appear to adversely affect staffing and financial resources for programs in the African, Asian and Pacific, and Inter-American regions. During fiscal years 1990-94, the Peace Corps received incremental budget increases to facilitate the start-up of new programs. In addition, in fiscal year 1994, the Department of State transferred $12.5 million to the Peace Corps to develop and stabilize its new programs in the former Soviet Union. For fiscal year 1995, the Peace Corps has requested $11.6 million from the State Department for these programs. Table 1 shows the Peace Corps funding for fiscal years 1989-95. According to the Conference Report on the fiscal year 1995 appropriations act, the Congress expects that the State Department will transfer funds to the Peace Corps to cover the full cost of its fiscal year 1995 operations in the newly independent states of the former Soviet Union. During expansion into the 18 countries in Central and Eastern Europe and the former Soviet Union, the Peace Corps also started 20 additional programs in the rest of the world and closed or suspended 10 programs, for a net increase of 28 country programs. From fiscal year 1989 through 1993, Peace Corps direct-hire staff increased by 10 percent, from 1,071 to 1,183. Our review of staffing allocations indicates that the African and Inter-American regions received staffing increases of 4 and 9 percent, respectively, during this period, and staffing in the Asian and Pacific region decreased by 10 percent. According to the Peace Corps, if the new Europe, Central Asia, and Mediterranean region and its new posts were excluded, the number of fully active posts would have increased from 52 to 66, a 27-percent increase, and the direct hire staff equivalent would have increased by 18, a 3.4-percent increase. The Peace Corps' Washington staff levels remained relatively constant during this period. As the number of Peace Corps programs increased during the period, the average number of volunteers serving in countries worldwide decreased. From 1989 through 1993 the total number of volunteers increased from 5,185 to 5,351 (approximately 3 percent). Thus, with the net addition of 28 new programs, the Peace Corps added 166 volunteers. During this period, the average ratio of volunteers to country programs decreased from 80 to 57. (Twelve of the new programs did not begin until fiscal year 1993. Because the Peace Corps' policy is generally to phase in the agreed-upon contingent of volunteers over a 2-year period, 11 of the 12 programs had only half their volunteer contingents in place in 1993. (See table 2.) Peace Corps officials attributed the reduction in the average number of volunteers per country to factors other than the initiation of programs in the former Eastern bloc. For example, programmatic assessments made prior to 1990 had already suggested reductions of over 250 volunteers in Central America and the Caribbean (Belize, Costa Rica, Guatemala, Honduras, Jamaica, and Haiti). Also, 600 positions became available with the closure of three large programs (Liberia, the Philippines, and Zaire) and the temporary suspension of 11 other programs for safety and security reasons. Notwithstanding the Peace Corps' earlier development of the PATS manual and its current initiatives, we recommend that the Director of the Peace Corps ensure that the written procedures are followed so that (1) program plans are well-developed, (2) volunteers have received adequate preservice training, and (3) viable assignments are in place before volunteers arrive. In commenting on a draft of this project, the Peace Corps stated that its programs in Central and Eastern Europe and the states of the former Soviet Union have been a difficult challenge. The agency indicated that some problems were attributable to unique circumstances in this region, but acknowledged that it had brought some problems on itself. The agency's comments, which are reprinted in their entirety in appendix I, discuss the steps the Peace Corps has taken recently in an effort to improve programming, training, and staffing in the region. We conducted our review at the Peace Corps' headquarters in Washington, D.C., and in Poland, Bulgaria, Russia, and Uzbekistan. To assess the Peace Corps' new country entry processes, coordination, and volunteer assignment and support issues, we reviewed current and historical records and interviewed numerous Peace Corps officials, including former officials who were primarily responsible for opening new programs in the region. We reviewed Peace Corps manuals and policy documents and analyzed budget, staffing, and volunteer data. We also met with officials from various U.S. agencies responsible for coordinating assistance to the region, including the Department of State, the Agency for International Development, the U.S. Information Agency, and the Office of Management and Budget. We selected the Poland, Bulgaria, Russia, and Uzbekistan programs on the bases of their differing sizes, dates of introduction, and geographical and cultural diversity, and because of the countries' differing stages of development. Poland was one of the first programs in the region, and the largest. Bulgaria was a smaller program, introduced after Poland. Russia was the largest program in the former Soviet Union. Uzbekistan was a later entry, and representative of entries into central Asia. The four countries were selected in consultation with the Peace Corps. In each of the four countries we visited, we obtained pertinent documents and interviewed Peace Corps staff, U.S. embassy officials, and representatives of private voluntary organizations that worked with volunteers. In each country, we interviewed a large number of Peace Corps volunteers at their sites. We also visited several volunteers' project sites and interviewed the host-country people with whom the volunteers lived and worked. To determine whether the Peace Corps' expansion into the former Eastern bloc came at the expense of other regions' programs, we examined budget and staffing data and spoke with senior Peace Corps officials responsible for managing those programs. However, we did not conduct work in the other regions. We conducted our review between September 1993 and July 1994 in accordance with generally accepted government auditing standards. We plan no further distribution of this report until 30 days after its issue date, unless you publicly announce its contents earlier. At that time, we will send copies to the Director of the Peace Corps, the Secretary of State, the Administrator of the Agency for International Development, and the Director of the Office of Management and Budget. Copies will also be made available to other interested parties upon request. If you or your staffs have any questions about this report, please call me on (202) 512-4128. Major contributors to this report were David R. Martin, Patrick A. Dickriede, Edward D. Kennedy, and Peter J. Bylsma. 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. 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Pursuant to a congressional request, GAO reviewed the Peace Corps' processes and procedures for starting programs in Central and Eastern Europe and the states of the former Soviet Union, focusing on: (1) the adequacy of the Peace Corps' planning and staffing procedures; (2) whether the Peace Corps provided volunteers with adequate assignments, training, and other support; and (3) whether the expansion into former Eastern bloc countries came at the expense of other regional programs. GAO found that: (1) although the Peace Corps has comprehensive, sound written procedures for planning and implementing new programs and preparing volunteers, the Peace Corps did not follow normal procedures in its haste to start programs in former Eastern bloc countries; (2) serious difficulties due to poor design and inadequate volunteer guidance, training, and support limited the new programs' effectiveness in these countries and led to high volunteer turnover; (3) despite these problems, many volunteers believed that they had a positive impact on the people they served; (4) it is too soon to tell if the Peace Corps' actions to correct problems in the Eastern bloc programs will be effective; and (5) other regions' funding and staffing have not been affected by the new programs.

As part of our audit of the fiscal years 2007 and 2006 CFS, we evaluated the federal government's financial reporting procedures and related internal control, and we followed up on the status of corrective actions taken by Treasury and OMB to address open recommendations relating to the processes used to prepare the CFS that were in our previous reports. In our audit report on the fiscal year 2007 CFS, which is included in the fiscal year 2007 Financial Report of the United States Government, we discussed the material weaknesses related to the federal government's processes used to prepare the CFS. These material weaknesses contributed to our disclaimer of opinion on the accrual basis consolidated financial statements and also contributed to our adverse opinion on internal control. We performed sufficient audit procedures to provide the disclaimer of opinion on the accrual basis consolidated financial statements in accordance with U.S. generally accepted government auditing standards. This report provides the details of the material weaknesses we identified in performing our fiscal year 2007 audit procedures related to the processes used to prepare the CFS and our recommendations to correct these weaknesses, as well as the status of corrective actions taken by Treasury and OMB to address recommendations in our previous reports. We requested comments on a draft of this report from the Director of OMB and the Secretary of the Treasury or their designees. OMB provided oral comments, which are described in the Agency Comments section of this report. Treasury's comments are reprinted in appendix II and are also described in the Agency Comments section. Over the past several years, Treasury has developed and documented numerous standard operating procedures (SOP) for preparing the CFS, which have substantially addressed GAO's recommendation for Treasury to develop and document policies and procedures for preparing the CFS. However, one of Treasury's SOPs entitled "Standard Operating Procedures for Preparing the Financial Report of the U.S. Government" is incomplete. For example, certain steps Treasury performs to prepare the CFS are not documented in this SOP and, for the key practices that are documented, the SOP is unclear as to who is responsible for performing the procedures. In connection with its role as preparer of the CFS, Treasury management is responsible for developing and documenting detailed policies, procedures, and practices for preparing the CFS and ensuring that internal control is built into and is an integral part of the related process. GAO's Standards for Internal Control in the Federal Government calls for clear documentation of policies and procedures. Without adequately documented policies and procedures, standards and practices may not be consistently followed or followed at all. This potential for inconsistency increases the risk that errors in the compilation process could go undetected and could result in an incomplete and inaccurate summarization of data within the CFS. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to enhance and fully document all practices referred to in the SOP entitled "Standard Operating Procedures for Preparing the Financial Report of the U.S. Government" to better ensure that practices are proper, complete, and can be consistently applied by staff members. For many years, we have reported that Treasury had not established a formal process to ensure that the financial statements, related notes, stewardship information and supplemental information in the CFS were presented in conformity with GAAP. Over the past several years, Treasury has developed a formal process that has significantly improved its ability to timely identify GAAP requirements, modify its closing package requirements to obtain information needed, assess the effect of omitted disclosures, and document decisions reached and the rationale for such decisions. However, there continue to be some instances where disclosures are not presented in conformity with GAAP. A contributing factor to the continued instances of nonconformity with GAAP is that the process Treasury developed to compile the CFS does not include adequately documenting its (1) timely assessment of the relevance, usefulness, or materiality of information reported by the federal agencies for use at the governmentwide level, (2) consideration of relevant accounting standards other than those issued by FASAB, and (3) final decisions regarding the inclusion or exclusion of federal agencies' disclosure information in the existing notes to the CFS. As part of the process Treasury developed, it created a checklist containing FASAB requirements for use as a tool to help determine if disclosures in the CFS are in conformity with GAAP. Due to the way the checklist was designed, Treasury primarily used it as a planning tool to ensure that it requested in the closing package the data that Treasury would need from federal agencies to report in compliance with GAAP. Although this is a useful and important first step, we found that Treasury's checklist was limited by its design and was not used by staff to help ensure that the published CFS was in conformity with GAAP in all material respects. As a result, the checklist did not adequately assist Treasury in ensuring that all GAAP required disclosures were adequately disclosed in the CFS or documenting why certain disclosures were excluded. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to enhance its checklist or design an alternative and use it to adequately and timely document Treasury's (1) assessment of the relevance, usefulness, or materiality of information reported by the federal agencies for use at the governmentwide level; (2) consideration of relevant accounting standards other than those issued by FASAB; and (3) final decisions regarding the inclusion or exclusion of federal agencies' disclosure information in the existing notes to the CFS. The federal government reports a unified budget deficit (budget deficit) in the Reconciliation of Net Operating Cost and the Unified Budget Deficit and in the Statement of Changes in Cash Balance from Unified Budget and Other Activities. The budget deficit is calculated by subtracting actual budget outlays from actual budget receipts. Budget outlays consist of federal agencies' outlay amounts, that is, gross outlays net of offsetting collections and distributed offsetting receipts at the agency level, and undistributed offsetting receipts at the governmentwide level. Federal agencies also report net outlays in their SBRs. Both the net outlays as a component of the budget deficit reported in the CFS and as reported in the federal agencies' SBRs should generally match the budget outlays reported in the Budget of the United States Government. For several years, we have reported material unreconciled differences between the total net outlays reported in selected federal agencies' SBRs and Treasury's central accounting records used to compute the budget deficit reported in the CFS. OMB and Treasury have continued to work with federal agencies to reduce these material unreconciled differences. However, in fiscal year 2007, billions of dollars of unreconciled differences still existed in this and other components of the budget deficit. One way OMB has been working with federal agencies has been to require the agencies, beginning with the first quarter in fiscal year 2007, to submit to OMB an analysis and reconciliation, based on certain criteria, of any material differences between the federal agency's quarterly unaudited SBR and the agency's related quarterly Standard Form (SF) 133 Report on Budget Execution and Budgetary Resources (SBR to SF 133 reconciliations). Agencies' SF 133s are submitted to Treasury and serve as the main source for the CFS budget reporting and reconciliation. Material unreconciled differences remained at the end of fiscal year 2007 between the agencies' SBRs and their related SF 133s. OMB conducted further analysis on the agencies' quarterly SBR to SF 133 reconciliations and determined that many of these differences related to the recording of distributed offsetting receipts. Although distributed offsetting receipts are included in the net outlay calculation in federal agencies' SBRs, as well as in the computation of the budget deficit in the CFS, they are not included as part of the SF 133s, and as such are not being identified and addressed by the agencies in the quarterly reconciliation process. OMB is aware that the reporting of distributed offsetting receipts contributes to many of the material differences in net outlays and is currently determining how to reconcile distributed offsetting receipts included in the net outlay calculation of federal agencies' SBRs and the amounts included in the computation of the budget deficit in the CFS. Until the federal government has effective processes and procedures in place for identifying and resolving material differences between the total net outlays reported in federal agencies' SBRs and the records used to prepare the CFS, the actual extent of such differences and their effect on the CFS will be unknown. We recommend that the Director of OMB direct the Controller of OMB's Office of Federal Financial Management, in coordination with Treasury's Fiscal Assistant Secretary, to develop formal processes and procedures for identifying and resolving any material differences in distributed offsetting receipt amounts included in the net outlay calculation of federal agencies' SBRs and the amounts included in the computation of the budget deficit in the CFS. Treasury developed the Governmentwide Financial Report System (GFRS) to collect federal agencies' audited financial statement information to prepare the CFS. Federal agencies enter their audited financial information into GFRS, and Treasury exports the data into a database and then into various spreadsheets in order to compile the CFS. Treasury did not maintain adequate control over the spreadsheets used to summarize and array financial data for presentation in the CFS. Specifically, Treasury's processes and procedures for management and control of the spreadsheets were largely undocumented. In addition, Treasury had not established adequate controls to ensure that certain key spreadsheets were (1) protected from inadvertent change and (2) documented to facilitate detection and tracking of changes to key formulas and data. Further, the column headings within many spreadsheets were either not labeled or the labels were not aligned with the data contained in the column. GAO's Standards for Internal Control in the Federal Government calls for controls to be in place to safeguard financial information and help reduce the risk of errors, misuse, or unauthorized alteration. In addition, vendor documentation also provides guidance on maintaining and protecting spreadsheet integrity. OMB Circular No. A-127 requires that appropriate internal control be applied to all financial management system inputs, processing, and output. It also requires that financial management systems and associated instructions for maintenance and use be clearly documented in sufficient detail to permit an individual with appropriate background knowledge to obtain a comprehensive understanding of the entire operation of the system. Inadequate spreadsheet controls increase Treasury's risk that its financial reporting data will be inaccurate, and that these inaccuracies will not be prevented or detected in a timely manner. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to establish effective internal control to ensure the spreadsheets used to compile the CFS are (1) protected from inadvertent change and (2) documented to facilitate detection and tracking of changes to key formulas and data. Further, we recommend that columns within key spreadsheets be labeled and properly aligned to reflect the data contained within. Treasury, in coordination with OMB, has not established processes for monitoring and assessing the effectiveness of internal control over the processes used to prepare the CFS. According to OMB Circular No. A-123, management has a fundamental responsibility to develop and maintain effective internal control. Effective internal control provides reasonable assurance that significant weaknesses in the design or operation of internal control, that could adversely affect the entity's ability to meet its objectives, would be prevented or detected in a timely manner. In addition, periodic reviews, reconciliations, or comparisons of data should be included as part of the regular assigned duties of personnel. Periodic assessments should be integrated as part of management's continuous monitoring of internal control, which should be ingrained in the entity's operations. If an effective continuous monitoring program is in place, it can leverage the resources needed to maintain effective internal controls throughout the year. In addition, GAO's Standards for Internal Control in the Federal Government states that internal control is a major part of managing an organization and should include monitoring. Without effective monitoring and assessment of internal control, there is a risk that errors in the compilation process could go undetected and could result in an incomplete and inaccurate summarization of data within the CFS. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB's Office of Federal Financial Management, to develop and implement effective processes for monitoring and assessing the effectiveness of internal control over the processes used to prepare the CFS. As indicated in our most recent audit report on the CFS, and since fiscal year 2003, there have been limitations on the scope of our work that contribute to our disclaimer of opinion on the accrual basis consolidated financial statements. Since fiscal year 2003, Treasury and OMB began accelerating the time frame for preparation of the CFS. Consequently, GAO in turn has accelerated the time frame to issue our reports on the audits of the CFS. For fiscal year 2007, we reported that Treasury was unable to provide the final accrual basis consolidated financial statements and certain supporting documentation in time for us to complete all of our planned auditing procedures related to the compilation of these financial statements. We also reported that personnel at Treasury's Financial Management Service had excessive workloads that required an extraordinary amount of effort and dedication to compile the CFS and that quarterly compilations were not performed at the governmentwide level. This leads to almost all the compilation effort being performed during a condensed time period at the end of the year. Federal agencies are required to produce unaudited quarterly financial statements and remit them to OMB; however, Treasury does not use these quarterly financial statements or request any other interim financial information that would enable it to perform some of the compilation effort before the end of the year. For example, if a federal agency changed the manner in which it was reporting certain information in its financial statements, by obtaining and utilizing the agency's quarterly financial statements, Treasury would be aware of this change and could evaluate any effect this might have on the CFS during the year rather than during the condensed time period at the end of the year. Until such time that interim financial information is obtained and utilized in some capacity to assist Treasury in overcoming the existing resource and time constraints, we believe that Treasury will continue to face significant challenges in being able to provide accrual basis consolidated financial statements and supporting documentation in time for us to complete our planned auditing procedures. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB's Office of Federal Financial Management, to develop and implement alternative solutions to performing almost all of the compilation effort at the end of the year, including obtaining and utilizing interim financial information from federal agencies. In oral comments on a draft of this report, OMB stated that it generally agreed with the new findings and related recommendations in this report. In written comments on a draft of this report, which are reprinted in appendix II, Treasury stated that it agrees with the new findings and related recommendations. This report contains recommendations to the Secretary of the Treasury and the Director of OMB. The head of a federal agency is required by 31 U.S.C. SS 720 to submit a written statement on actions taken on these recommendations. You should submit your statement to the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Oversight and Government Reform within 60 days of the date of this report. A written statement must also be sent 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 the report. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Homeland Security and Governmental Affairs; the Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security, Senate Committee on Homeland Security and Governmental Affairs; the House Committee on Oversight and Government Reform; and the Subcommittee on Government Management, Organization, and Procurement, House Committee on Oversight and Government Reform. In addition, we are sending copies to the Fiscal Assistant Secretary of the Treasury, the Deputy Director for Management of OMB, and the Acting Controller of OMB's Office of Federal Financial Management. Copies will be made available to others upon request. This report is also available at no charge on GAO's Web site at http://www.gao.gov. We acknowledge and appreciate the cooperation and assistance provided by Treasury and OMB during our audit. If you or your staff have any questions or wish to discuss this report, please contact me on (202) 512- 3406 or [email protected]. Key contributors to this report are listed in appendix III. This appendix includes recommendations that were open at the beginning of our fiscal year 2007 audit from five of our previous reports: Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Improvement, GAO-04-45 (Washington, D.C.: Oct. 30, 2003); Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Further Improvement, GAO-04- 866 (Washington, D.C.: Sept. 10, 2004); Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Continues to Need Improvement, GAO-05-407 (Washington, D.C.: May 4, 2005); Financial Audit: Significant Internal Control Weaknesses Remain in Preparing the Consolidated Financial Statements of the U.S. Government, GAO-06-415 (Washington, D.C.: Apr. 21, 2006); and Financial Audit: Significant Internal Control Weaknesses Remain in the Preparation of the Consolidated Financial Statements of the U.S. Government, GAO-07-805 (Washington, D.C.: July 23, 2007). Recommendations that were closed in prior reports are not included in this appendix. This appendix includes the status of the recommendations according to the Department of the Treasury (Treasury) and the Office of Management and Budget (OMB) as well as our own assessments. Explanations are included in the status of recommendations per GAO when Treasury and OMB disagreed with our recommendation or the status of a recommendation. Of the 81 recommendations relating to the processes used to prepare the consolidated financial statements of the U.S. government (CFS) that are listed in this appendix, 35 were closed and 46 remained open as of December 10, 2007, the date of our report on the audit of the fiscal year 2007 CFS. In addition to the above contact, the following individuals made key contributions to this report: Lynda Downing, Assistant Director; Mickie Gray; David Hayes; Sharon Kittrell; Dragan Matic; Maria Morton; and Taya Tasse.

For the past 11 years, since GAO's first audit of the consolidated financial statements of the U.S. government (CFS), certain material weaknesses in internal control and in selected accounting and financial reporting practices have prevented GAO from expressing an opinion on the CFS. GAO has consistently reported that the U.S. government did not have adequate systems, controls, and procedures to properly prepare the CFS. GAO's December 2007 disclaimer of opinion on the fiscal year 2007 accrual basis consolidated financial statements included a discussion of continuing control deficiencies related to the preparation of the CFS. The purpose of this report is to (1) provide details of continuing material weaknesses, (2) recommend improvements, and (3) provide the status of corrective actions taken to address the 81 open recommendations related to the preparation of the CFS that GAO reported in July 2007. GAO identified continuing and new control deficiencies during its audit of the fiscal year 2007 CFS that relate to the federal government's processes used to prepare the CFS. These control deficiencies contribute to material weaknesses in internal control regarding the U.S. government's inability to (1) adequately account for and reconcile intragovernmental activity and balances between federal agencies; (2) ensure that the CFS was consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles; and (3) identify and either resolve or explain material differences that exist between certain components of the budget deficit reported in the Department of the Treasury's records, used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities, and related amounts reported in federal agencies' financial statements and underlying financial information and records. The control deficiencies GAO identified during its tests of the processes used to prepare the fiscal year 2007 CFS involved the following areas: documenting a key standard operating procedure for preparing the CFS, reporting in conformity with U.S. generally accepted accounting principles, reconciling distributed offsetting receipts, maintaining adequate control over spreadsheets used in preparing the CFS, monitoring internal control over the processes used to prepare the CFS, using interim financial information in the CFS preparation process, and various other control deficiencies that were identified in previous years' audits but remained in fiscal year 2007. Of the 81 open recommendations GAO reported in July 2007 regarding the processes used to prepare the CFS, 35 were closed and 46 remained open as of December 10, 2007, the date of our report on our audit of the fiscal year 2007 CFS. GAO will continue to monitor the status of corrective actions taken to address the 10 new recommendations and the new remaining balance of 56 open recommendations during its fiscal year 2008 audit of the CFS.

As we reported in June 2015, in fiscal year 2013, 332,934 veterans received TDIU benefits, an increase of 22 percent since fiscal year 2009. Overall, TDIU beneficiaries make up a substantial portion (45 percent) of the group of all veterans who receive benefit payments at the 100 percent disability compensation rate. This population of TDIU beneficiaries increased in each of the 4 years we compared to the following year. Moreover, the number of older beneficiaries (aged 65 and older) increased for each of the years we examined and by fiscal year 2013, they represented the majority (54 percent) of the TDIU population--a 73 percent increase from fiscal year 2009. Further, of these older beneficiaries, 56,578 were 75 years of age and older in fiscal year 2013 while 10,567 were 90 years of age and older. The increase in beneficiaries over age 65 was mostly attributed to new beneficiaries who were receiving the benefit for the first time as shown in figure 1. Between 2009 and 2013, the number of new older beneficiaries more than doubled to 13,259. Of these new older beneficiaries, 2,801 were aged 75 and over while 408 were 90 and over. We estimated that, in fiscal year 2013, the TDIU benefit was a $5.2 billion supplemental payment above what beneficiaries would have received in the absence of TDIU benefits. Although VA does not track the overall costs of TDIU benefits, we used disability compensation payment rate information, data on the TDIU beneficiary population, and data on the population of all new beneficiaries to calculate this estimate. In our June 2015 report, we found that VBA's guidance, quality assurance approach, and income verification procedures do not ensure that TDIU decisions are well supported. Specifically, we identified the following challenges in decision-making procedures: Incomplete guidance on how to determine unemployability: VBA provides guidance to rating specialists to help them determine if veterans meet the eligibility requirements for TDIU benefits. This guidance tasks rating specialists, based upon the evidence at hand, to determine veterans' unemployability; it also recognizes that the process is subjective and involves professional interpretation. However, the guidance provided by VBA on which factors to consider when determining if a veteran is "unemployable" is incomplete in three ways, creating potential variation in TDIU claim decisions. First, rating specialists in some (5 of 11) of the discussion groups we held at five regional offices disagreed on whether they are permitted to consider additional factors not specifically mentioned in VBA's guidance such as, enrollment in school, education level, or prior work history when assessing an applicant's employability. For example, one rating specialist recently reviewed a claim for TDIU that was submitted by a veteran suffering from traumatic brain injury. The rating specialist found that the veteran was enrolled in school part time and earning A's in engineering classes, which the specialist felt clearly demonstrated employability. However, another rating specialist within the group stated that the veteran's enrollment in classes would not be part of her decision-making. Second, rating specialists noted that for those factors that rating specialists can consider in their decision-making process, such as whether the veteran receives Social Security Disability Insurance benefits, the guidance is silent on which, if any, should be given greater priority or weight. We confirmed that this information was not in the manual or guidance provided by VBA. Rating specialists in the majority (7 of 11) of the discussion groups specifically noted that they could come to an opposite decision when reviewing the same evidence due to the fact that they weighted certain factors differently. For example, a rating specialist told us that a medical opinion was always weighted more heavily than all other evidence in the veteran's file while another specialist expressed a hesitancy to rely too much on the examiner's opinion. Third, the guidance does not provide instruction on how to separate extraneous factors from allowable ones. Findings from our case file review illustrates this issue: One file described a 77- year-old veteran claiming TDIU benefits for blindness that was caused by (1) a service-connected disability, (2) glaucoma, and (3) macular degeneration. However, because all three conditions related to the veteran's quality of vision, the rating specialist noted in the file her difficulty separating the effect of the service- connected disability from the non-service-connected glaucoma and macular degeneration due to the man's age. In light of these challenges, in our June 2015 report, we recommended that VA instruct VBA to update the guidance to clarify how rating specialists should determine unemployability when making TDIU benefit decisions. This update could clarify if factors such as enrollment in school, education level, and prior work history should be used and if so, how to consider them, and whether to assign more weight to certain factors than others. VA concurred with this recommendation and stated that VBA will review and identify improvements to TDIU policies and procedures to provide clearer guidance including the extent to which age, education, work history, and enrollment in training programs are factors claims processors must address. VA anticipates that its Compensation Service will complete this review and provide options to VBA for a decision by the end of January 2016. Format and delivery of guidance is inefficient: Rating specialists in the majority (7 of 11) of our discussion groups at five regional offices reported that VBA's guidance for reviewing TDIU claims is formatted and delivered in ways that make it difficult for them to efficiently complete their decision-making responsibilities. For example, TDIU guidance is delivered using multiple formats, including--but not limited to--manuals, policy and procedure letters, monthly bulletins, and e-mails. Thus, rating specialists lack a definitive source for TDIU benefit decision guidance. In addition, VBA officials acknowledged the manual for TDIU benefit decisions is outdated and stated they issue interim guidance in many forms between manual updates because such updates are time-consuming and difficult to do on a regular basis. VBA officials also told us they have completed two of the four stages for a web portal that will house all existing guidance and will subsequently consolidate the guidance into one processing manual, which they are in the process of rewriting. Officials told us they plan to complete the consolidation by the end of fiscal year 2015. Quality assurance approach may not be comprehensive: VBA's quality assurance approach--accomplished mainly through its Systematic Technical Accuracy Review (STAR)--may not be providing a comprehensive assessment of TDIU claim decisions.Specifically, the agency's current approach does not allow it to identify variations in these decisions or ascertain the root causes of variation that may exist. VBA's quality assurance standards indicate that for the quality assurance officer to decide that the rating specialist made an error, it must be clear and undebatable; the officer cannot substitute his or her professional opinion with the opinion of the rating specialist who made the original decision. Because of this high standard, a STAR review of a sample of claims finalized during the first three quarters of fiscal year 2014 determined that nearly 95 percent of TDIU claims (872 of 920) were error-free. Of the 48 claims found to contain an error, all the errors were found to be "procedural," such as an incorrect date for the onset of unemployability. No "decisional" errors--that is, an error on the decision to grant or deny the benefit-- were found. According to VBA officials, it is unlikely that they will find many decisional errors because there is so much individual judgment allowed in TDIU claim decisions, and VBA's quality assurance standards do not allow for the reevaluation of the professional opinion of the original rating specialist. While we recognize that TDIU benefit decisions have an inherently subjective component, in June 2015, we recommended that VA identify other quality assurance approaches to comprehensively assess TDIU benefit claim decisions. The approach should assess the completeness, accuracy and consistency of decisions and ascertain the root causes of any significant variation so that VBA can take corrective actions as appropriate. This effort could be informed by the approaches VBA uses to assess non-TDIU claims. For example, as we reported in 2014, VBA conducted a targeted review of military sexual trauma claims using a consistency questionnaire to test rating specialists' understanding and interpretation of policies in response to concerns that related post- traumatic stress disorder claims were not being accurately decided. VA concurred with this recommendation and stated that quality assurance staff would add TDIU-specific questions to the In-Process Review checklist at the regional offices by September 2015. Based on the results of the reviews, VA stated that VBA will determine the most effective approach for assessing the accuracy and consistency of TDIU decisions. Self-Reported income eligibility information is not verified: VBA requires TDIU claimants and beneficiaries to provide information on their employment earnings, but it places the benefits at risk of being awarded to ineligible veterans by not using third-party data sources to independently verify self-reported earnings. To begin receiving and remain eligible for TDIU benefits, veterans must meet certain income eligibility requirements. Rating specialists use information provided by claimants to request additional information from employers and, when possible, verify the claimant's reported income, especially for the year prior to applying for the benefit. However, VBA officials and our file review indicated that employers provide the requested information only about 50 percent of the time. If VBA does not receive verification from a veteran's employer after multiple attempts, it accepts the veteran's claimed earnings. VBA previously conducted audits of existing beneficiaries' reported income by obtaining income verification matches from Internal Revenue Service (IRS) earnings data through an agreement with the Social Security Administration (SSA). However, the agency is no longer doing so despite having standing agreements with the IRS and SSA to do so. In 2012, VBA suspended income verification matches to allow for the development of a new system that would allow for more frequent, electronic information sharing. However, that system was never developed. To better ensure beneficiaries' eligibility, in June 2015, we recommended VA instruct VBA to verify the self-reported income provided by veterans (1) applying for TDIU benefits and (2) undergoing the annual eligibility review process by comparing such information against IRS earnings data. VA concurred with this recommendation and stated that VBA is developing an upfront verification process including expanding the data sharing agreement with SSA, which enables VBA to receive federal tax information via an encrypted electronic transmission through a secure portal. VBA expects to implement this new process for TDIU claimants by January 2016. With regard to the options for revising TDIU eligibility requirements and the benefit structure, in our June 2015 report, we identified a number of options proposed by others as described in table 1. More specifically, six options focused on revising eligibility such as changing existing requirements in various ways, for example, setting age limits, lowering the disability rating requirement, or increasing the income threshold. A seventh option would affect the benefit structure by lowering--but not immediately eliminating--the TDIU benefit payments as beneficiaries earn income beyond the eligibility limit. Based on interviews with selected experts and representatives of veterans service organizations (VSO), we identified a range of potential strengths and challenges associated with each option. The experts and VSO representatives commonly mentioned the equity of the proposed change, an increase or decrease of VA's management and administration efforts and cost, and the effect on veterans as potential strengths and challenges. For example, a couple of the options present possible opportunities for VA to better target TDIU benefits to veterans who are unemployable, but implementation of these options could pose challenges in ensuring that all veterans are treated equitably. Each of the seven options and the potential strengths and challenges identified by stakeholders that we interviewed are summarized in our report. In addition to these options, in its 2012 report, the Advisory Committee on Disability Compensation made recommendations to VA regarding potential revisions to the TDIU benefit, and while VA concurred with those recommendations, it has yet to take actions in response to them. Specifically, the committee recommended that the agency (1) study whether age should be considered when deciding if a veteran is unemployable and (2) require a vocational assessment for all TDIU applicants. Taking the committee's advice into consideration could better position the agency to meet federal internal control standards. In its comments to the committee, VA noted that before it could proceed with the vocational assessment requirement, it needed to complete a study on whether it was possible to disallow TDIU benefits for veterans whose assessment indicated they would be employable after rehabilitation. In light of VA's agreement with the committee's recommendations, we subsequently recommended in our June 2015 report that VBA develop a plan to study (1) whether age should be considered when deciding if veterans are unemployable and (2) whether it is possible to disallow TDIU benefits for veterans whose vocational assessment indicated they would be employable after rehabilitation.recommendation and stated that Compensation Service initiated a review of TDIU policies and procedures in April 2015 including consideration of age and vocational assessments in claim decisions. VBA expects to complete an action plan to initiate any studies, legislative proposals, or proposed regulations deemed necessary, by July 2015. In conclusion, the benefits veterans are entitled to, as well as VA's decisions on what constitutes a work disability, are in need of constant refinement to keep pace with changes in medicine, technology, and the modern work environment. Within this broad context, VA can position itself to better manage the TDIU benefit and look for opportunities to strengthen the assessments of its eligibility decisions. Having a strong framework for program integrity is important for any federal program, and in light of the multi-billion dollar--and growing--TDIU benefit, taking steps to ensure payments are properly awarded to veterans is essential. Moreover, VA has the opportunity to benefit from the attention the TDIU benefit has received by various experts, including its own advisory committee. The options and potential strengths and challenges identified by experts and VSO representatives may warrant consideration in any broader benefit refinement discussions and efforts to improve the TDIU benefit design and eligibility criteria going forward. VA generally agreed with our conclusions in our June 2015 report and concurred with all of our recommendations and made plans to address them. Chairman Miller, Ranking Member Brown, and Members of the Committee, this concludes my prepared remarks. I would be happy to answer any questions that you or other members of the committee may have. For further information regarding this testimony, please contact Daniel Bertoni at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Brett Fallavollita (Assistant Director), Melissa Jaynes, Kurt Burgeson, David Chrisinger, Alexander Galuten, and Kirsten Lauber. 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 population of veterans who receive these supplemental benefits has been growing. GAO was asked to testify on its recent review of VA's management of these benefits. GAO issued a report in June 2015 that discussed the results of its review. Like the June 2015 report, this statement (1) examined age-related trends in the population of TDIU beneficiaries and benefit payments; (2) assessed the procedures used for benefit decision-making; and (3) described suggested options for revising the benefit. The number of veterans receiving Total Disability Individual Unemployability (TDIU) benefits has been increasing, as has the total amount of benefit payments, especially among older veterans. VA generally provides TDIU benefits to disabled veterans who are unable to maintain employment with earnings above the federal poverty guidelines due to service-connected disabilities. To be eligible for TDIU benefits, a veteran must have a single service-connected disability rated at least 60 percent or multiple disabilities with a combined rating of at least 70 percent (with at least one disability rated at 40 percent or higher). In addition, the veteran must be unable to obtain or maintain "substantially gainful employment" as a result of these service-connected disabilities. In fiscal year 2013, over 330,000 veterans received this benefit, a 22 percent increase from fiscal year 2009, while the TDIU disability payments increased by 30 percent. GAO estimated that $5.2 billion was spent in fiscal year 2013 for the supplement. These trends occurred alongside GAO also found that VA's procedures do not ensure that TDIU benefit decisions are well supported. Specifically, (1) VBA's guidance for determining unemployability, and thus benefit eligibility, is incomplete and formatted and delivered inefficiently; (2) VBA's quality assurance approach may not comprehensively assess TDIU benefit decisions; and (3) self-reported income eligibility information is not verified with third-party earnings data. GAO also identified seven options proposed by experts for revising TDIU eligibly requirements and the benefit structure. Six options focus on eligibility requirements, such as considering additional criteria when determining unemployability and applying an age cap of 65. A seventh option would affect the benefit structure by lowering--but not immediately eliminating--the TDIU benefit payments as beneficiaries earn income beyond the eligibility limit. In its June 2015 report, GAO recommended that VA issued updated guidance to determine eligibility; identify a comprehensive quality assurance approach to assess benefit decisions; verify veterans' self-reported income; and move forward on studies suggested by its advisory committee. VA concurred with all of GAO's recommendations.

Shortages of chemical and biological defense equipment are a long-standing problem. After the Persian Gulf Conflict, the Army changed its regulations in an attempt to ensure that early-deploying units would have sufficient equipment on hand upon deployment. This direction, contained in U.S. Forces Command Regulation 700-2, has not been universally implemented. Neither the Army's more than five active divisions composing the crisis response force nor the early-deploying Army reserve units we visited had complied with the new stocking level requirements. All had shortages of critical equipment; three of the more than five active divisions had 50 percent or greater shortages of protective suits, and shortages of other critical items were as high as 84 percent, depending on the unit and the item. This equipment is normally procured with operation and maintenance funds. These shortages occurred primarily because unit commanders consistently diverted operation and maintenance funds to meet what they considered higher priority requirements, such as base operating costs, quality-of-life considerations, and costs associated with other-than-war deployments such as those to Haiti and Somalia. Relative to the DOD budget, the cost of purchasing this protective equipment is low. Early-deploying active divisions in the continental United States could meet current stocking requirements for an additional cost of about $15 million. However, unless funds are specifically designated for chemical and biological defense equipment, we do not believe unit commanders will spend operation and maintenance funds for this purpose. The shortages of on-hand stock are exacerbated by inadequate installation warehouse space for equipment storage, poor inventorying and reordering techniques, shelf-life limitations, and difficulty in maintaining appropriate protective clothing sizes. The Army is presently considering several actions to improve these conditions. New and improved equipment for chemical and biological defense is needed to overcome some shortfalls, and DOD is having difficulty meeting all of its planned chemical and biological defense research goals. Efforts to improve the management of the materiel development and acquisition process have so far had limited results and will not attain their full effect until at least fiscal year 1998. In response to lessons learned in the Persian Gulf Conflict, Congress directed DOD to improve the coordination of chemical and biological doctrine, requirements, research, development, and acquisition among DOD and the military services. DOD has acted. During 1994 and 1995, it established the Joint Service Integration Group to prioritize chemical and biological defense research efforts and develop a modernization plan; and the Joint Service Materiel Group to develop research, development, acquisition, and logistics support plans. The activities of these two groups are overseen by a single DOD office--the Assistant Secretary of Defense for Nuclear, Biological, and Chemical Warfare Defense. While these groups have begun to implement the congressional requirements of P.L. 103-160, progress has been slower than expected. At the time of our review, the Joint Service Integration Group expected to produce during 1996 its proposed (1) list of chemical and biological defense research priorities and (2) joint service modernization plan and operational strategy. The Joint Service Materiel Group expects to deliver its proposed plan to guide chemical and biological defense research, development, and acquisition in October 1996. Consolidated research and modernization plans are important for avoiding duplication among the services and otherwise achieving the most effective use of limited resources. It is unclear whether or when DOD will approve these plans. However, DOD officials acknowledged that it will be fiscal year 1998 at the earliest, about 5 years after the law was passed, before DOD can begin formal budgetary implementation of these plans. DOD officials told us progress by these groups has been adversely affected by personnel shortages and collateral duties assigned to the staff. DOD efforts to field specific equipment and conduct research to address chemical and biological defense deficiencies have produced mixed results. On the positive side, DOD began to field the Biological Integrated Detection System in January 1996 and expects to complete the initial purchase of 38 systems by September 1996. However, DOD has not succeeded in fielding other needed equipment and systems designed to address critical battlefield deficiencies identified during the Persian Gulf Conflict and earlier. For example, work initiated in 1978 to develop an Automatic Chemical Agent Alarm to provide visual, audio, and command-communicated warnings of chemical agents remains incomplete. Due to budget constraints, DOD has approved and acquired only 103 of the more than 200 FOX mobile reconnaissance systems originally planned. Of the 11 chemical and biological defense research goals listed in DOD's 1995 Annual Report to the Congress, DOD met 5 by their expected completion date of January 1996. Some were not met. For example, a DOD attempt to develop a less corrosive and labor-intensive decontaminate solution is now not expected to be completed until 2002. Chemical and biological defense training at all levels has been a constant problem for many years. For example, in 1986, DOD studies found that its forces were inadequately trained to conduct critical tasks. It took 6 months during the Persian Gulf Conflict to prepare forces in theater to defend against chemical and biological agents. However, these skills declined again after this conflict. A 1993 Army Chemical School study found that a combined arms force of infantry, artillery, and support units would have extreme difficulty performing its mission and suffer needless casualties if forced to operate in a chemical or biological environment because the force was only marginally trained. Army studies conducted from 1991 to 1995 showed serious weaknesses at all levels in chemical and biological defense skills. Our analysis of Army readiness evaluations, trend data, and lessons learned reports from this period also showed individuals, units, and commanders alike had problems performing basic tasks critical to surviving and operating in a chemical or biological environment. Despite DOD efforts--such as doctrinal changes and command directives--designed to improve training in defense against chemical and biological warfare since the Persian Gulf Conflict, U.S. forces continue to experience serious weaknesses in (1) donning protective masks, (2) deploying detection equipment, (3) providing medical care, (4) planning for the evacuation of casualties, and (5) including chemical and biological issues in operational plans. The Marine Corps also continues to experience similar problems. In addition to individual service training problems, the ability of joint forces to operate in a contaminated environment is questionable. In 1995, only 10 percent of the joint exercises conducted by four major CINCs included training to defend against chemical and biological agents. None of this training included all 23 required chemical/biological training tasks, and the majority included less than half of these tasks. Furthermore, these CINCs plan to include chemical/biological training in only 15 percent of the joint exercises for 1996. This clearly demonstrates the lack of chemical and biological warfare training at the joint service level. There are two fundamental reasons for this. First, CINCs generally consider chemical and biological training and preparedness to be the responsibility of the individual services. Second, CINCs believe that chemical and biological defense training is a low priority relative to their other needs. We examined the ability of U.S. Army medical units that support early-deploying Army divisions to treat casualties in a chemically and biologically contaminated environment. We found that these units often lacked needed equipment and training. Had Iraq actually employed chemical and/or biological agents during the Persian Gulf Conflict, the military's ability to deal with subsequent casualties would have been severely impaired at best. Medical units supporting early-deploying Army divisions we visited often lacked critical equipment needed to treat casualties in a chemically or biologically contaminated environment. For example, these units had only about 50 to 60 percent of their authorized patient treatment and decontamination kits. Some of the patient treatment kits on hand were missing critical items such as drugs used to treat casualties. Also, none of the units had any type of collective shelter in which to treat casualties in a contaminated environment. Army officials acknowledged that the inability to provide treatment in the forward area of battle would result in greater rates of injury and death. Old versions of collective shelters are unsuitable, unserviceable, and no longer in use; new shelters are not expected to be available until fiscal year 1997 at the earliest. Few Army physicians in the units we visited had received formal training on chemical and biological patient treatment beyond that provided by the Basic Medical Officer course. Further instruction on chemical and biological patient treatment is provided by the medical advanced course and the chemical and biological casualty management course. The latter course provides 6-1/2 days of classroom and field instruction needed to save lives, minimize injury, and conserve fighting strength in a chemical or biological warfare environment. During the Persian Gulf Conflict, this course was provided on an emergency basis to medical units already deployed to the Gulf. In 1995, 47 to 81 percent of Army physicians assigned to early-deploying units had not attended the medical advanced course, and 70 to 97 percent had not attended the casualty management course. Both the advanced and casualty management courses are optional, and according to Army medical officials, peacetime demands to provide care to service members and their dependents often prevented attendance. Also, the Army does not monitor those who attend the casualty management course, nor does it target this course toward those who need it most, such as those assigned to early-deploying units. Today, DOD still has inadequate stocks of vaccines for known threat agents, and so far has chosen not to implement existing immunization policy and procedures. DOD's program to vaccinate U.S. forces to protect them against biological agents will not be fully effective until these problems are resolved. Though DOD has identified which biological agents are critical threats and determined the amount of vaccines that should be stocked, we found that the amount of vaccines stocked remains insufficient to protect U.S. forces, as it was during the Persian Gulf Conflict. Problems also exist with regard to the vaccines available to DOD. Only a few biological agent vaccines have been approved by the Food and Drug Administration (FDA). Many remain in Investigational New Drug (IND) status. Although IND vaccines have long been safely administered to personnel working in DOD vaccine research and development programs, the FDA usually requires large-scale field trials in humans to demonstrate new drug safety and effectiveness before approval. DOD has not performed such field trials due to ethical and legal considerations. DOD officials said that they hoped to acquire a prime contractor during 1996 to subcontract vaccine production and do what is needed to obtain FDA approval of vaccines currently under investigation. Since the Persian Gulf Conflict, DOD has consolidated the funding and management of several biological warfare defense activities, including vaccines, under the new Joint Program Office for Biological Defense. A 1993 DOD Directive established the policy, procedures, and responsibilities for stockpiling biological agent vaccines and inoculating service members assigned to high-threat areas or to early-deploying units before deployment. The JCS and other high-ranking DOD officials have not yet approved implementation of this immunization policy. The draft policy implementation plan is completed and is currently under review within DOD. However, this issue is highly controversial within DOD, and whether the implementation plan will be approved and carried out is unclear. Until that happens, service members in high-threat areas or designated for early deployment in a crisis will not be protected by approved vaccines against biological agents. The primary cause for the deficiencies in chemical and biological defense preparedness is a lack of emphasis up and down the line of command in DOD. In the final analysis, it is a matter of commanders' military judgment to decide the relative significance of risks and to apply resources to counter those risks that the commander finds most compelling. DOD has decided to concentrate on other priorities and consequently to accept a greater risk regarding preparedness for operations on a contaminated battlefield. Chemical and biological defense funding allocations are being targeted by the Joint Staff and DOD for reduction in attempts to fund other, higher priority programs. DOD allocates less than 1 percent of its total budget to chemical and biological defense. Annual funding for this area has decreased by over 30 percent in constant dollars since fiscal year 1992, from approximately $750 million in that fiscal year to $504 million in 1995. This reduction has occurred in spite of the current U.S. intelligence assessment that the chemical and biological warfare threat to U.S. forces is increasing and the importance of defending against the use of such agents in the changing worldwide military environment. Funding could decrease even further. On October 26, 1995, the Joint Requirements Oversight Council and the JCS Chairman proposed to the Office of the Secretary of Defense (OSD) a cut of $200 million for each of the next 5 years ($1 billion total) to the counterproliferation budget. The counterproliferation program element in the DOD budget includes funding for the joint nuclear, chemical, and biological defense program as well as vaccine procurement and other related counterproliferation support activities. If implemented, this cut would severely impair planned chemical and biological defense research and development efforts and reverse the progress that has been made in several areas, according to DOD sources. A final $800 million cut over 5 years was recommended to the Secretary of Defense. On March 7, 1996, we were told that DOD was now considering a proposed funding reduction of $33 million. In January 1996, the Deputy Secretary of Defense requested a DOD Program Analysis and Evaluation study on counterproliferation support programs. The study is expected to be completed by the end of June 1996. The battle staff chemical officer/chemical noncommissioned officers are a commander's principal trainers and advisers on chemical and biological defense operations and equipment operations and maintenance. We found that chemical and biological officer staff positions are being eliminated and that when filled, staff officers occupying the position are frequently assigned collateral tasks that reduce the time available to manage chemical and biological defense activities. At U.S. Army Forces Command and U.S. Army III Corps headquarters, for example, chemical staff positions are being reduced. Also, DOD officials told us that the Joint Service Integration and Joint Service Materiel Groups have made limited progress largely because not enough personnel are assigned to them and collateral duties are assigned to the staff. We also found that chemical officers assigned to a CINC's staff were frequently tasked with duties not related to chemical and biological defense. The lower emphasis given to chemical and biological matters is also demonstrated by weaknesses in the methods used to monitor their status. DOD's current system for reporting readiness to the Joint Staff is the Status of Resources and Training System (SORTS). We found that the effectiveness of SORTS for evaluating unit chemical and biological defense readiness is limited largely because (1) it allows commanders to be subjective in their evaluations, (2) it allows commanders to determine for themselves which equipment is critical, and (3) reporting remains optional at the division level. We also found that after-action and lessons learned reports and operational readiness evaluations were limited in their effectiveness for accurately assessing unit chemical and biological defense status. At the U.S. Army Reserve Command there is no chemical or biological defense staff position. Consequently, the U.S. Army Reserve Command does not effectively monitor the chemical and biological defense status of reserve forces. The priority given to chemical and biological defense varied widely. Most CINCs assign chemical and biological defense a lower priority than other threats. Even though the Joint Staff has tasked CINCs to ensure that their forces are trained in certain joint chemical and biological defense tasks, the CINCs we visited considered such training a service responsibility. Several DOD officials said that U.S. forces still face a generally limited, although increasing, threat of chemical and biological warfare. At Army corps, division, and unit levels, the priority given to this area depended on the commander's opinion of its relative importance. At one early-deploying division we visited, the commander had an aggressive system for chemical and biological training, monitoring, and reporting. At another, the commander had made a conscious decision to emphasize other areas, such as other-than-war deployments and quality-of-life considerations. As this unit was increasingly being asked to conduct operations other than war, the commander's emphasis on the chemical and biological warfare threat declined. Officials at all levels said training in chemical and biological preparedness was not emphasized because of higher priority taskings, low levels of interest by higher headquarters, difficulty working in cumbersome and uncomfortable protective clothing and masks, the time-consuming nature of the training, and a heavy reliance on post-mobilization training and preparation. We have no means to determine whether increased emphasis on chemical and biological warfare defense is warranted at the expense of other priorities. This is a matter of military judgment by DOD and of funding priorities by DOD and Congress. However, in view of the increasing chemical and biological threat and the continuing U.S. chemical and biological defense weaknesses identified in our report, we recommended that the Secretary of Defense reevaluate the priority and emphasis given this area throughout DOD. We further recommended that if the Secretary's reevaluation determines that more emphasis is needed, the Secretary should consider (1) elevating the single office responsible for program oversight to the Assistant Secretary level rather than leaving it in its current position as part of the Office of the Assistant Secretary for Nuclear, Biological, and Chemical Warfare Defense and (2) adopting more of a single manager approach for executing the chemical and biological defense program. We made eight other recommendations concerning opportunities to improve the effectiveness of existing DOD chemical and biological activities. DOD, in its official response to our report, generally agreed with our findings and concurred with 9 of our 10 recommendations. We would be pleased to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed the capability of U.S. forces to fight and survive chemical and biological warfare. GAO noted that: (1) none of the Army's crisis-response or early-deployment units have complied with requirements for stocking equipment critical for fighting under chemical or biological warfare; (2) the Department of Defense (DOD) has established two joint service groups to prioritize chemical and biological defense research efforts, develop a modernization plan, and develop support plans; (3) although DOD has begun to field a biological agent detection system, it has not successfully fielded other needed equipment and systems to address critical battlefield deficiencies; (4) ground forces are inadequately trained to conduct critical tasks related to biological and chemical warfare, and there are serious weaknesses at all levels in chemical and biological defense skills; (5) medical units often lack the equipment and training needed to treat casualties resulting from chemical or biological contamination; (6) DOD has inadequate stocks of vaccines for known threat agents and not implemented the immunization policy established in 1993; and (7) the primary cause of these deficiencies is a lack of emphasis along the DOD command chain, with DOD focusing its efforts and resources on other priorities.

Air cargo ranges in size from 1 pound to several tons, and in type from perishables to machinery, and can include items such as electronic equipment, automobile parts, clothing, medical supplies, other dry goods, fresh cut flowers, fresh seafood, fresh produce, tropical fish, and human remains. Cargo can be shipped in various forms, including large containers known as unit loading devices that allow many packages to be consolidated into one container that can be loaded onto an aircraft, wooden crates, assembled pallets, or individually wrapped/boxed pieces, known as break bulk cargo. Participants in the air cargo shipping process include shippers, such as individuals and manufacturers; indirect air carriers, also referred to as freight forwarders; air cargo handling agents who process and load cargo onto aircraft on behalf of air carriers; and air carriers that store, load, and transport cargo. A shipper may also send freight by directly packaging and delivering it to an air carrier's ticket counter or sorting center where either the air carrier or a cargo handling agent will sort and load cargo onto the aircraft. According to TSA's Air Cargo Strategic Plan, issued in November 2003, the agency's mission for the air cargo program is to secure the air cargo transportation system while not unduly impeding the flow of commerce. TSA's responsibilities for securing air cargo include, among other things, establishing security requirements governing domestic and foreign passenger air carriers that transport cargo, and domestic freight forwarders. TSA is also responsible for overseeing the implementation of air cargo security requirements by air carriers and freight forwarders through compliance inspections, and, in coordination with the Department of Homeland Security's (DHS) Science and Technology (S&T) Directorate, for conducting research and development of air cargo security technologies. Air carriers are responsible for implementing TSA security requirements, predominantly through a TSA-approved security program that describes the security policies, procedures, and systems the air carrier will implement and maintain to comply with TSA security requirements. These requirements include measures related to the acceptance, handling, and screening of cargo; training of employees in security and cargo screening procedures; testing employee proficiency in cargo screening; and access to cargo areas and aircraft. If threat information or events indicate that additional security measures are needed to secure the aviation sector, TSA may issue revised or new security requirements in the form of security directives or emergency amendments applicable to domestic or foreign air carriers. Air carriers must implement the requirements set forth in the security directives or emergency amendments in addition to those requirements already imposed and enforced by TSA. DHS's U.S. Customs and Border Protection (CBP) has primary responsibility for preventing terrorists and implements of terrorism from entering the United States. Specifically, CBP screens inbound air cargo upon its arrival in the United States to ensure that cargo entering the country complies with applicable laws and does not pose a security risk. CBP's efforts include analyzing information on cargo shipments to identify high-risk cargo arriving in the United States that may contain terrorists or weapons of mass destruction, commonly known as targeting, and physically screening this cargo upon its arrival. Air carriers use several methods and technologies to screen cargo. These currently include manual physical searches and the use of approved technology, such as X-ray systems; explosives trace detection systems; decompression chambers; explosive detection systems (EDS); and certified explosives detection canine teams. Under TSA's security requirements for domestic and inbound cargo, passenger air carriers are currently required to randomly screen a specific percentage of nonexempt cargo pieces listed on each airway bill. As of October 2006, domestic freight forwarders are also required, under certain conditions, to screen a certain percentage of cargo prior to its consolidation. TSA does not regulate foreign freight forwarders, or individuals or businesses that have their cargo shipped by air to the United States. DHS has taken some steps to develop and test technologies for screening and securing air cargo, but has not yet completed assessments of the technologies TSA plans to approve for use as part of the CCSP. According to TSA officials, there is no single technology capable of efficiently and effectively screening all types of air cargo for the full range of potential terrorist threats, including explosives and weapons of mass destruction. We reported in October 2005, and again in April 2007, that TSA, working with DHS's S&T Directorate, was developing and pilot testing a number of technologies to screen and secure air cargo with minimal impact on the flow of commerce. DHS officials stated that once the department determines which technologies it will approve for use with domestic air cargo, it will consider the use of these technologies for enhancing the security of inbound cargo shipments. These pilot programs seek to enhance the security of cargo by improving the effectiveness of air cargo screening through increased detection rates and reduced false alarm rates, while addressing the two primary threats to air cargo identified by TSA-- hijackers on an all-cargo aircraft and explosives on passenger aircraft. A description of these pilot programs and their status is included in table 1. Although TSA is moving forward with its plans to implement a system to screen 100 percent of cargo transported on passenger aircraft, the agency has not completed all of its assessments of air cargo screening technologies. According to TSA officials, the results of its technology tests will need to be analyzed before the agency determines which technologies will be certified for screening cargo, and whether it will require air carriers and other CCSP participants to use such technology. Although TSA has not completed all of its pilot programs or set time frames for completing all of them, TSA is planning on allowing CCSFs to use explosives trace detection, explosive detection system (EDS), X-ray, and other technology under CCSP for screening cargo. Without all of the results of its pilot programs or a time frame for their completion, however, TSA cannot be assured that the technologies the agency plans to approve for screening cargo as part of the CCSP are effective. GAO will likely review this issue as part of our planned review of TSA's efforts to meet the requirement to screen 100 percent of cargo transported on passenger aircraft. According to TSA officials, tamper-evident/resistant security seals will be essential for ensuring that cargo screened under the CCSP has not been tampered with during transport from the CCSF to the air carrier. Officials noted that the agency recognizes that the weakest link in the transportation of air cargo is the chain of custody to and from the various entities that handle and screen cargo shipments prior to its loading onto an aircraft. Officials stated that the agency has taken steps to analyze the chain of custody of cargo under the CCSP, and is drafting a security program that will address all entities involved in the transportation and screening of cargo under the CCSP to ensure that the chain of custody of the cargo is secure. However, as of July 2008, TSA officials stated that the agency is not conducting a pilot program to test tamper-evident/resistant security seals. Therefore, the effectiveness of security seals to effectively prevent cargo shipments from tampering is unknown. GAO will likely review this issue as part of our planned review of TSA's efforts to meet the requirement to screen 100 percent of cargo transported on passenger aircraft. In addition, we reported in April 2007 that several air carriers we met with were using large X-ray machines at facilities abroad to screen entire pallets of cargo transported on passenger aircraft. These machines allow for cargo on pallets to undergo X-ray screening without requiring the pallet to be broken down. We also noted that CBP uses this technology to screen inbound air cargo once it enters the United States. TSA officials recently stated that the agency planned to pilot test large X-ray machines, identifying that large X-ray machines could be used to screen certain types of cargo that are currently exempt from TSA's screening requirements, as part of the agency's efforts to screen 100 percent of cargo transported on passenger aircraft. TSA officials stated that the agency plans to evaluate this equipment beginning late 2008 as part of its CCSP pilot program and to complete the evaluation at the conclusion of the CCSP pilot in August 2010. In addition, as part of the agency's plans to screen 100 percent of cargo transported on passenger aircraft, TSA is taking steps to expand the use of TSA-certified explosives detection canine teams to screen cargo before it is placed onto passenger aircraft. In 2004, TSA conducted a pilot program that determined that canine teams had an acceptable rate of detecting explosives in an air cargo environment, even when the teams were not specifically trained in this area. TSA is in the process of adding 170 canine teams to support aviation security efforts, of which 85 will be primarily used to screen air cargo. These teams are to be primarily located at the 20 airports that receive approximately 65 percent of all air cargo transported within the United States. TSA officials, however, could not identify whether the additional 85 canine teams will meet the agency's increasing screening needs as part of its efforts to screen 100 percent of such cargo, thus raising questions regarding the future success of the CCSP. According to TSA officials, the federal government and the air cargo industry face several challenges that must be overcome to effectively implement any of these technologies to screen or secure cargo. These challenges include factors such as the nature, type and size of cargo to be screened; environmental and climatic conditions that could impact the functionality of screening equipment; low screening throughput rates; staffing and training issues for individuals who screen cargo; the location of air cargo facilities; employee health and safety concerns, such as worker exposure to radiation; and the cost and availability of screening technologies. As TSA takes steps to implement the CCSP, it will be critical for the agency to address these challenges to ensure the effectiveness of the program. As TSA proceeds from piloting to implementing the CCSP, the issue of who purchases the technologies to support the program will have to be resolved. Specifically, TSA officials stated that under the CCSP, certified facilities and air carriers will be responsible for purchasing equipment to screen cargo. Officials noted that many air carriers already have screening equipment in place at their facilities to support this screening, and stated that TSA will reimburse CCSFs for the cost of the equipment, such as EDS, for up to $375,000 per facility as long as these entities continue to meet security requirements established by TSA. The CCSF, however, will be responsible for maintaining the screening equipment and purchasing new equipment in the future. In addition, CCSFs will be required to train their staff to operate the equipment using TSA's training standards. Air cargo industry stakeholders have already raised concerns regarding the cost of purchasing and maintaining screening equipment to support the CCSP. According to some industry estimates, the cost of purchasing air cargo screening equipment will be much more than the $375,000 TSA plans to reimburse each CCSP participant. In addition, the air cargo industry has expressed concern regarding the costs associated with training those individuals who will be operating the air cargo screening equipment. TSA plans to revise and eliminate current exemptions for some categories of cargo, thereby reducing the percentage of cargo transported on passenger aircraft that is subject to alternative methods of screening. These changes will go into effect in early 2009. However, according to agency officials, TSA made these determinations based on a limited number of vulnerability assessments, as well as professional judgment. In February 2008, TSA issued a report assessing existing screening exemptions for certain kinds of cargo transported on passenger aircraft and evaluated the risk of maintaining those exemptions. As part of its assessment, TSA officials stated that they considered and determined the threat to and vulnerability of the exempted cargo types. TSA officials also stated they based their determinations on which screening exemptions to revise, maintain or eliminate in part on results from air cargo vulnerability assessments at Category X airports they completed in accordance with law. TSA has completed assessments at 6 of the 27 Category X airports. Absent the completed assessments, which could help to identify potential security vulnerabilities associated with the exemptions, TSA does not have complete information with which to make risk-based decisions regarding the security of air cargo. TSA officials have acknowledged the importance of completing air cargo vulnerability assessments and stated that they will complete them by the end of 2009. Officials further stated that as the agency conducts additional air cargo vulnerability assessments, they will assess the results to determine whether existing screening exemptions should be revised, maintained or eliminated. To ensure that existing air cargo security requirements are being implemented as required, TSA inspects air carriers and freight forwarders that transport cargo. Under the CCSP, TSA will also have to inspect other entities, such as shippers, who volunteer to participate in the program. These compliance inspections range from an annual comprehensive review of the implementation of all air cargo security requirements to a more frequent review of at least one security requirement by an air carrier or freight forwarder. In October 2005, we reported that TSA had conducted compliance inspections on less than half (49 percent) of the estimated 10,000 freight forwarder facilities nationwide, and of those freight forwarders they had inspected, the agency found violations in over 40 percent of them. We also reported that TSA had not determined what constitutes an acceptable level of performance related to compliance inspections, or compared air carriers' and freight forwarders' performance against this standard; analyzed the results of inspections to systematically target future inspections on those entities that pose a higher security risk to the domestic air cargo system; or assessed the effectiveness of its enforcement actions taken against air carriers and freight forwarders to ensure that they are complying with air cargo security requirements. We recommended that TSA develop a plan for systematically analyzing and using the results of air cargo compliance inspections to target future inspections and identify systemwide corrective actions. We also recommended that TSA assess the effectiveness of enforcement actions in ensuring air carrier and freight forwarder compliance with air cargo security requirements. TSA officials stated that, since our report was issued, the agency has increased the number of inspectors dedicated to conducting domestic air cargo compliance inspections. Officials also told us that TSA has begun analyzing compliance inspection results to prioritize their inspections on those entities that have the highest rates of noncompliance, as well as newly approved freight forwarders and air carriers that have yet to be inspected. However, in recent discussions with TSA officials regarding their plans to implement the CCSP, they stated that there may not be enough compliance inspectors to conduct compliance inspections of all the entities that could be a part of the CCSP, which TSA officials told us could number in the thousands, once the program is fully implemented by August 2010. As a result, TSA is anticipating requesting an additional 150 cargo Transportation Security Inspectors for fiscal year 2010 to supplement its existing allocation of 450 Transportation Security Inspectors. However, TSA officials stated that they have not formally assessed the number of Transportation Security Inspectors the agency will need. Without such an assessment, TSA may not be able to ensure that entities involved in the CCSP are meeting TSA requirements to screen and secure cargo. GAO will likely review this issue as part of our planned review of TSA's efforts to meet the requirement to screen 100 percent of cargo transported on passenger aircraft. We reported in April 2007 that more work remains in order for TSA to strengthen the security of inbound cargo. As previously stated, TSA is currently taking steps to develop a system of screening 100 percent of domestic and outbound cargo transported on passenger aircraft. TSA does not, however, currently plan to include inbound cargo as part of this system. TSA officials acknowledge that vulnerabilities to inbound cargo exist, but stated that each foreign country has its own security procedures for flights coming into the United States, and further stated that TSA does not impose its security requirements on foreign countries. According to TSA, it will continue to work with other countries to encourage the adoption of uniform measures for screening cargo flights bound for the United States as it enhances its requirements for screening cargo originating in the United States. TSA has begun working with foreign governments to develop uniform air cargo security standards and to mutually recognize each other's security standards, referred to as harmonization. We reported, however, that duplicative air cargo security standards exist, which can impede the flow of commerce, expose air cargo shipments to security risk, and damage high-value items. For example, to meet TSA requirements, passenger air carriers transporting cargo into the United States must screen a certain percentage of nonexempt cargo shipments, even though these shipments may have already been screened by a foreign government. Air carrier representatives stated that meeting TSA screening requirements is problematic in certain foreign countries because air carriers are not permitted to rescreen cargo shipments that have already been screened by foreign government employees and deemed secure. These conflicts and duplication of effort could potentially be avoided through harmonization. According to TSA officials, pursuing harmonization would improve the security of inbound cargo and assist TSA in performing its mission. For example, officials stated that the harmonization of air cargo security standards would provide a level of security to those entities not currently regulated by the agency, such as foreign freight forwarders and shippers. However, achieving harmonization with foreign governments may be challenging because these efforts are voluntary and some foreign countries do not share the United States' view regarding air cargo security threats and risks. Additionally, foreign countries may lack the resources or infrastructure needed to develop an air cargo security program as comprehensive as that of the United States. In April 2007, we recommended that TSA, in collaboration with foreign governments and the United States air cargo industry, systematically compile and analyze information on air cargo security practices used abroad to identify those that may strengthen TSA's overall air cargo security program. TSA agreed with this recommendation and, since the issuance of our report, has reviewed the air cargo screening models of two foreign countries. According to TSA officials, this review led to the design of their proposed CCSP. Opportunities exist for TSA to further strengthen its screening efforts for inbound cargo in the following three key areas: Conducting air cargo vulnerability assessments for inbound cargo. As noted earlier, TSA is currently conducting air cargo vulnerability assessments at Category X airports, but is not including inbound cargo in these assessments. While TSA has plans to conduct vulnerability assessments as part of its risk-based approach to securing inbound cargo, the agency has not established a time frame for doing so. Such assessments could provide information on the potential vulnerabilities posed by the transport of inbound cargo. We reported in April 2007 that TSA officials stated that they would conduct vulnerability assessments of inbound cargo after they had assessed the vulnerability of domestic cargo. Nevertheless, TSA officials acknowledged that vulnerabilities to inbound cargo exist and that these vulnerabilities are in some cases similar to those facing the domestic and outbound air cargo supply chain. Assessing the vulnerability posed by maintaining screening exemptions for inbound air cargo. TSA has not assessed the potential vulnerabilities posed by inbound air cargo screening exemptions. In April 2007, we reported on the potential vulnerabilities associated with inbound air cargo screening exemptions. Specifically, we reported that screening exemptions could pose a risk to the inbound air cargo supply chain because TSA has limited information on the background of and security risks posed by foreign freight forwarders and shippers whose cargo may fall into one of the exemption categories. We recommended that TSA assess whether existing inbound air cargo screening exemptions pose an unacceptable vulnerability to the air cargo supply chain and if necessary, address these vulnerabilities. TSA agreed with this recommendation and noted that the agency had recently revised and eliminated domestic and outbound air cargo screening exemptions. However, TSA has yet to address our recommendation for assessing inbound air cargo screening exemptions. Updating TSA's Air Cargo Strategic Plan to address inbound cargo. As part of TSA's risk-based approach, TSA issued an Air Cargo Strategic Plan in November 2003 that focused on securing the domestic air cargo supply chain. However, in April 2007, we reported that this plan did not include goals and objectives for securing inbound cargo, which presents different security challenges than cargo transported domestically. To ensure that a comprehensive strategy for securing inbound cargo exists, we recommended that DHS develop a risk-based strategy to address inbound cargo security that should define TSA's and CBP's responsibilities for ensuring the security of inbound cargo. In response to our recommendation, CBP issued its International Air Cargo Security Strategic Plan in June 2007. While this plan identifies how CBP will partner with TSA, it does not specifically address TSA's responsibilities in securing inbound cargo. According to TSA officials, the agency plans to revise its Air Cargo Strategic Plan in the fall of 2008, and will address TSA's strategy for securing cargo from international last points of departure, as well as its collaborative efforts with CBP to secure this cargo. Ms. Chairwoman, 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 Cathleen Berrick at (202) 512- 3404 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 to this testimony include Steve D. Morris, Assistant Director; Lara Kaskie; Tom Lombardi; Meg Ullengren; and Margaret Vo. 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 Implementing Recommendations of the 9/11 Commission Act of 2007 requires the Transportation Security Administration (TSA) to implement a system to physically screen 100 percent of cargo on passenger aircraft by August 2010. To fulfill these requirements, the Department of Homeland Security's (DHS) TSA is developing the Certified Cargo Screening Program (CCSP), which would allow the screening of cargo to occur prior to placement on an aircraft. This testimony addresses four challenges TSA may face in developing a system to screen 100 percent of cargo: (1) deploying effective technologies; (2) changing TSA air cargo screening exemptions; (3) allocating compliance inspection resources to oversee CCSP participants; and (4) securing cargo transported from a foreign nation to the United States. GAO's comments are based on GAO products issued from October 2005 through February 2008, including selected updates conducted in July 2008. DHS has taken steps to develop and test technologies for screening and securing air cargo; however, TSA has not completed assessments of the technologies it plans to use as part of the CCSP. TSA has reported that there are several challenges that must be overcome to effectively implement any of these technologies, including the nature, type, and size of cargo to be screened and the location of air cargo facilities. In addition, the air cargo industry voiced concern about the costs associated with purchasing the screening equipment. GAO will likely review this issue in future work. TSA plans to revise and eliminate screening exemptions for some categories of air cargo, thereby reducing the percentage of cargo transported on passenger aircraft that is subject to alternative methods of screening. However, TSA plans to continue to exempt some types of domestic and outbound cargo (cargo transported by air from the United States to a foreign location) after August 2010. TSA based its determination regarding the changing of exemptions on professional judgment and the results of air cargo vulnerability assessments. However, TSA has not completed all of its air cargo vulnerability assessments, which would further inform its efforts. TSA officials stated there may not be enough compliance inspectors to oversee implementation of the CCSP and is anticipating requesting an additional 150 inspectors for fiscal year 2010. They further stated that they have not formally assessed the number of inspectors the agency will need. Without such an assessment, TSA may not be able to ensure that CCSP entities are meeting TSA requirements to screen and secure cargo. To ensure that existing air cargo security requirements are being implemented as required, TSA conducts audits, referred to as compliance inspections, of air carriers that transport cargo. The compliance inspections range from a comprehensive review of the implementation of all security requirements to a review of at least one security requirement by an air carrier or freight forwarder (which consolidates cargo from many shippers and takes it to air carriers for transport). GAO reported in October 2005 that TSA had conducted compliance inspections on fewer than half of the estimated 10,000 freight forwarders nationwide and, of those, had found violations in over 40 percent of them. GAO also reported that TSA had not analyzed the results of compliance inspections to systematically target future inspections. GAO reported in April 2007 that more work remains for TSA to strengthen the security of cargo transported from a foreign nation to the United States, referred to as inbound air cargo. Although TSA is developing a system to screen 100 percent of domestic and outbound cargo, TSA officials stated that it does not plan to include inbound cargo because it does not impose its security requirements on foreign countries. TSA officials said that vulnerabilities to inbound air cargo exist and that these vulnerabilities are in some cases similar to those of domestic air cargo, but stated that each foreign country has its own security procedures for flights coming into the United States.

Military ranges and training areas are used primarily to test weapons systems and train military forces. Required facilities include air ranges for air-to-air, air-to-ground, drop zone, and electronic combat training; live-fire ranges for artillery, armor (e.g., tanks), small arms, and munitions training; ground maneuver ranges to conduct realistic force-on-force and live-fire training at various unit levels; and sea ranges to conduct ship maneuvers for training. According to DOD officials, a slow but steady increase in encroachment problems has limited the use of training facilities and the gradual accumulation of these problems increasingly threatens training readiness. DOD has identified eight encroachment issues: Designation of critical habitat under the Endangered Species Act of 1973. Under the act, agencies are required to ensure that their actions do not destroy or adversely modify habitat that has been designated for endangered or threatened species. Currently, over 300 such species are found on military installations. Application of environmental statutes to military munitions. DOD believes that the Environmental Protection Agency could apply environmental statutes to the use of military munitions, shutting down or disrupting military training. According to DOD officials, uncertainties about the future application and enforcement of these statutes limit the officials' ability to plan, program, and budget for compliance requirements. Competition for frequency spectrum. The telecommunications industry is pressuring for the reallocation of some of the radio frequency spectrum from federal to commercial control. DOD claims that over the past decade, it has lost about 27 percent of the frequency spectrum allocated for aircraft telemetry. And we previously reported that additional reallocation of spectrum could affect space systems, tactical communications, and combat training. Marine regulatory laws that require consultation with regulators when a proposed action may affect a protected resource. Defense officials say that the process empowers regulators to impose potentially stringent measures to protect the marine environment from the effects of proposed training. Competition for airspace. Increased airspace congestion limits pilots' ability to train to fly as they would in combat. Clean Air Act requirements for air quality. DOD officials believe that the act requires controls over emissions generated on DOD installations. New or significant changes in range operations also require emissions analyses, and if emissions exceed specified thresholds, they must be offset with reductions elsewhere. Laws and regulations mandating noise abatement. DOD officials state that weapons systems are exempt from the Noise Control Act of 1972, but DOD must still assess the impact of noise under the National Environmental Policy Act. As community developments have expanded closer to military installations, concerns over noise from military operations have increased. DOD officials report that pressure from groups at the local, regional, and state levels can serve to restrict or reduce military training. Urban growth. DOD says that unplanned or "incompatible" commercial or residential development near training ranges compromises the effectiveness of training activities. Local residents have filed lawsuits charging that military operations lowered the value or limited the use of their property. To the extent that encroachment adversely affects training readiness, opportunities exist for the problems to be reported in departmental and military service readiness reports. The Global Status of Resources and Training System is the primary means that units use to report readiness against designed operational goals. The system's database indicates, at selected points in time, the extent to which units possess the required resources and training to undertake their wartime missions. In addition, DOD is required under 10 U.S.C. 117 to prepare a quarterly readiness report to Congress. The report is based on briefings to the Senior Readiness Oversight Council, a forum assisted by the Defense Test and Training Steering Group. In June 2000, the council directed the steering group to investigate encroachment and develop and recommend a comprehensive plan of action. The secretaries of the military services are responsible for training personnel and for maintaining their respective training ranges and facilities. Within the Office of the Secretary of Defense, the Under Secretary of Defense for Personnel and Readiness develops policies, plans, and programs to ensure the readiness of the force and provides oversight on training; the Deputy Under Secretary of Defense for Installations and Environment develops policies, plans, and programs for DOD's environmental, safety, and occupational health programs, including compliance with environmental laws, conservation of natural and cultural resources, pollution prevention, and explosive safety; and the Director, Operational Test and Evaluation, provides advice on tests and evaluations. Over time, the impact of encroachment on training ranges has gradually increased. Because most encroachment problems are caused by population growth and urban development, these problems are expected to increase in the future. Although the effects vary by service and by individual installation, encroachment has generally limited the extent to which training ranges are available or the types of training that can be conducted. This limits units' ability to train as they would expect to fight and causes work- arounds that may limit the amount or quality of training. Installations overseas reported facing similar training constraints. Below are brief descriptions of some of the problems as reported by the installations and organizations we visited in the continental United States. Marine Corps Base Camp Pendleton, California. Camp Pendleton officials report encroachment problems related to endangered species and their habitat, urbanization, air space, and noise. Recently, about 10 percent of the installation has been designated as critical habitat for endangered species. Airspace restrictions limit the number of days that weapons systems can be employed, and noise restrictions limit night helicopter operations. Fort Lewis and the Yakima Training Center, Washington. Fort Lewis officials report encroachment problems related to noise, air quality, endangered species and their habitat, urbanization, frequency spectrum, and munitions and munitions components. In response to local complaints, Fort Lewis voluntarily ceased some demolitions training. Air quality regulations restrict the operation of smoke generators at Fort Lewis. Habitat considerations restrict maneuvers and off-road vehicle training in parts of both installations. There is periodic communications interference. Nellis Air Force Base and Nevada Test and Training Range, Nevada. Nellis Air Force Base has encroachment problems stemming from urbanization and noise. Nellis officials said that urban growth near the base and safety concerns have restricted the flight patterns of armed aircraft, causing mission delays and cancellations. They also report that the two installations receive a total of some 250 complaints about noise each year. Eglin Air Force Base, Florida. Eglin Air Force Base officials report encroachment problems involving endangered species habitat, noise, urban growth, and radio frequency spectrum. Eglin contains habitat for two endangered species. Aircraft must alter flight paths to avoid commercial towers and noise-sensitive areas. The base's major target control system receives frequency interference from nearby commercial operators. U.S. Atlantic Fleet. Atlantic Fleet officials report encroachment problems stemming from endangered marine mammals and noise. Live- fire exercises at sea are restricted, and night live-fire training is not allowed. Naval Air Station Oceana, Virginia, is the target of frequent noise complaints. Special Operations Command. This command owns no training ranges of its own and largely depends on others for the use of their training ranges. The Navy component of the Special Operations Command reports being most directly affected by encroachment from endangered species and urban development. A variety of endangered species live on the training areas used by the Navy Special Warfare Command in California, particularly on Coronado and San Clemente islands. Because of environmental restrictions, Navy Special Warfare units can no longer practice immediate action drills on Coronado beaches; they cannot use training areas in Coronado for combat swimmer training; and they cannot conduct live-fire and maneuver exercises on much of San Clemente Island during some seasons. The Special Operations Command has previously been able to mitigate deficiencies in local training areas by traveling to alternate training sites. However, recent limitations on the amount of time that units can spend away from their home station have required new solutions. The command is requesting funding for new environmental documentation in its budget to protect assets in California and is integrating its encroachment mitigation efforts with DOD and the services. DOD and military service officials said that many encroachment issues are related to urbanization around military installations. They noted that most, if not all, encroachment issues result from population growth and urbanization and that growth around DOD installations is increasing at a rate higher than the national average. According to DOD officials, new residents near installations often view military activities as an infringement on their rights, and some groups have organized in efforts to reduce operations such as aircraft and munitions training. At the same time, according to one Defense Department official, the increased speed and range of weapons systems are expected to increase training range requirements. Our recent report on training limitations overseas noted that, while some restrictions are longstanding, the increase in restrictions facing U.S. forces in many cases is the result of growing commercial and residential development affecting established training areas and ranges. Despite the loss of some training range capabilities, service readiness data do not indicate that encroachment has significantly affected training readiness. Even though in testimonies and during many other occasions DOD officials have cited encroachment as preventing the services from training as they would like, DOD's primary readiness reporting system does not reflect the extent to which encroachment is a problem. In fact, it rarely cites training range limitations at all. Similarly, DOD's quarterly reports to Congress, which should identify specific readiness problems, hardly ever mention encroachment as a problem. I should also note that our recent assessment of training limitations overseas (which are often greater than those found stateside) found that units abroad rarely report lower training readiness in spite of concerns cited by DOD officials that training constraints overseas can require work-arounds or in some instances prevent training from being accomplished. Although readiness reporting can and should be improved to address training degradation due to encroachment and other factors, it will be difficult for DOD to fully assess the impact of encroachment on its training capabilities and readiness without (1) obtaining more complete information on both training range requirements and the assets available to support those requirements and (2) considering to what extent other complementary forms of training may help mitigate some of the adverse impacts of encroachment. The information is needed to establish a baseline for measuring losses or shortfalls. A full assessment of the effects of encroachment on training capabilities and readiness will be limited without better information on the services' training range requirements and limitations and on the range resources available to support those requirements. Each service has, to varying degrees, assessed its training range requirements. For example, the Marine Corps has completed one of the more detailed assessments among the services concerning the degree to which encroachment has affected the training capability of Camp Pendleton. The assessment determined to what extent Camp Pendleton could support the training requirements of two unit types (a light armored reconnaissance platoon and an artillery battery) and two specialties (a mortar man and a combat engineer) by identifying the tasks that could be conducted according to standards in a "continuous" operating scenario (e.g., an amphibious assault and movement to an objective) or in a fragmented manner (tasks completed anywhere on the camp). The analysis found that from 60 to 69 percent of the training tasks in the continuous scenario and from 75 to 92 percent of the tasks in the fragmented scenario could be conducted according to standards. Some of the tasks that could not be conducted according to standards were the construction of mortar- and artillery-firing positions outside of designated areas, cutting of foliage to camouflage positions, and terrain marches. Marine Corps officials are completing a further analysis of four other types of units or specialties at Camp Pendleton and said they might expand the effort to other installations. However, none of the services' studies have comprehensively reviewed available range resources to determine whether assets are adequate to meet needs, and they have not incorporated an assessment of the extent that other types of complementary training could help offset shortfalls. We believe that relying solely on the basis of live training, these assessments may overstate an installation's problems and do not provide a complete basis for assessing training range needs. A more complete assessment of training resources should include assessing the potential for using virtual or constructive simulation technology to augment live training. While these types of complementary training cannot replace live training and cannot eliminate encroachment, they may help mitigate some training range limitations. Stated another way, these actions are not meant to take the place of other steps to deal with encroachment, but they are key to more fully depicting the net effects of encroachment on training capabilities now and in the future. Furthermore, to the extent that the services do have inventories of their training ranges, they do not routinely share them with each other (or with other organizations such as the Special Operations Command). While DOD officials acknowledge the potential usefulness of such data, there is no directory of DOD-wide training areas, and commanders sometimes learn about capabilities available outside their own jurisdiction by chance. All this makes it extremely difficult for the services to leverage adequate assets that may be available in nearby locations, increasing the risk of inefficiencies, lost time and opportunities, delays, added costs, and reduced training opportunities. Although the services have been known to share training ranges, these arrangements are generally made through individual initiatives, not through a formal or organized process that easily and quickly identifies all available infrastructure. Navy Special Operations forces only recently learned, for example, that some ranges at the Army's Aberdeen Proving Grounds, Maryland, are accessible from the water--a capability that is a key requirement for Navy team training. Given DOD's increasing emphasis on joint capabilities and operations, having an inventory of DOD-wide training assets and capabilities would seem to be a logical step toward a more complete assessment of training range capabilities and shortfalls that may need to be addressed. While some service officials have cited increasing costs because of work- arounds related to encroachment, the services' data systems do not capture these costs in any comprehensive manner. At the same time, DOD's overall environmental conservation program funding, which also covers endangered species management, has fluctuated with only a modest gain over the past 6 years, increasing in fiscal years 1996-98, but then dropping among all components, except for the Army. Total DOD conservation program obligations fluctuated, increasing from $105 million in fiscal year 1996 to $136 million in fiscal years 1998-99, and then decreasing to $124 million in fiscal year 2001. DOD documents attribute the fluctuation in conservation program obligations to increased costs from preparing Integrated Natural Resource Management Plans. Senior DOD officials recognized the need for a comprehensive plan to address encroachment back in November 2000, but they have not yet finalized such a plan. The task was first given to a working group of subject matter experts, who drafted plans of action for addressing the eight encroachment issues. The draft plans include an overview and analysis of the issue, and current actions being taken, as well as recommended short-, mid-, and long-term strategies and actions to address the issue. Examples of the types of future strategies and actions identified in the draft plans include the following: Enhancing outreach efforts to build and maintain effective working relationships with key stakeholders by making them aware of DOD's need for ranges and airspace, its need to maintain readiness, and its need to build public support for sustaining training ranges. Developing assessment criteria to determine the cumulative effect of all encroachment restrictions on training capabilities and readiness. The draft plan noted that while many examples of endangered species/critical habitat and land use restrictions are known, a programmatic assessment of the effect that these restrictions pose on training readiness has never been done. Ensuring that any future base realignment and closure decisions thoroughly scrutinize and consider the potential encroachment impact and restrictions on the operations of and training for recommended base realignment actions. Improving coordinated and collaborative efforts between base officials and city planners and other local officials in managing urban growth. At the time we completed our review, the draft action plans had not been finalized. DOD officials told us that they consider the plans to be working documents and stressed that many concepts remain under review and may be dropped, altered, or deferred, while other proposals may be added. No details were available on the overall actions planned, clear assignments of responsibilities, measurable goals and time frames for accomplishing planned actions, or funding requirements--information that would be needed in a comprehensive plan. Although DOD has not yet finalized a comprehensive plan of actions for addressing encroachment issues, it has made progress in several areas. It has taken or is in the process of taking a number of administrative actions that include the following: DOD has finalized, and the services are tasked with implementing, a Munitions Action Plan--an overall strategy for addressing the life-cycle management of munitions to provide a road map that will help DOD meet the challenges of sustaining its ranges. DOD formed a Policy Board on Federal Aviation Principles to review the scope and progress of DOD activities and to develop the guidance and process for managing special use air space. DOD formed a Clean Air Act Services' Steering Committee to review emerging regulations and to work with the Environmental Protection Agency and the Office of Management and Budget to protect DOD's ability to operate. DOD implemented an Air Installation Compatible Use Zone Program to assist communities in considering aircraft noise and safety issues in their land-use planning. DOD is drafting a directive that establishes the department's policy on the Sustainment of Ranges and Operating Areas to serve as the foundation for addressing range sustainability issues. The directive, currently in coordination within DOD, would outline a policy framework for the services to address encroachment on their ranges and direct increased emphasis on outreach and coordination efforts with local communities and stakeholders. In addition, the department is preparing separate policy directives to establish a unified noise abatement program and to specify the outreach and coordination requirements highlighted in the sustainable ranges directive. DOD is also seeking legislative actions to help deal with encroachment issues. In December 2001, the Deputy Secretary of Defense established a senior-level Integrated Product Team to act as the coordinating body for encroachment efforts and to develop a comprehensive legislative and regulatory set of proposals by January 2002. The team agreed on a set of possible legislative proposals for some encroachment issues. After internal coordination deliberations, the proposals were submitted in late April 2002 to Congress for consideration. According to DOD, the legislative proposals seek to "clarify" the relationship between military training and a number of provisions in various conservation statutes, including the Endangered Species Act, the Migratory Bird Treaty Act, the Marine Mammal Protection Act, and the Clean Air Act. DOD's proposals would, among other things, do the following: Preclude designation under the Endangered Species Act of critical habitat on military lands for which Integrated Natural Resources Management Plans have been completed pursuant to the Sikes Act. At the same time, the Endangered Species Act requirement for consultation between DOD and other agencies on natural resource management issues would remain. Permit DOD to "take" migratory birds under the Migratory Bird Treaty Act without action by the Secretary of the Interior, where the removal would be in connection with readiness activities, and require DOD to minimize the removal of migratory birds to the extent practicable without diminishment of military training or other capabilities, as determined by DOD. Modify the definition of "harassment" under the Marine Mammal Protection Act as it applies to military readiness activities.

The following eight "encroachment" issues are hampering the military's ability to carry out realistic training: endangered species' critical habitat, unexploded ordnance and munitions, competition for radio frequency spectra, protected marine resources, competition for airspace, air pollution, noise pollution, and urban growth around military installations. Officials at all the installations and major commands GAO visited in the continental United States reported that encroachment had affected some of their training range capabilities, requiring work-arounds that are unrealistic. Service officials believe that population growth is responsible for current encroachment problems in the United States and is likely to cause more training range losses in the future. Despite concerns about encroachment, military readiness reports do not indicate the extent to which encroachment is harming training. Improvements in readiness reporting can better reveal shortfalls in training, but the ability to fully assess training limitations and their impact on capabilities and readiness will be limited without (1) more complete baseline data on training range capabilities, limitations, and requirements and (2) consideration of how live training capabilities may be complemented by training devices and simulations. Progress in addressing individual encroachment issues has been made, but more will be required to comprehensively plan for encroachment. Legislation proposed by the Department of Defense to "clarify" the relationship between military training and various environmental statues may require trade-offs between environmental policy and military training objectives.

Payroll taxes are the main source of financing for Social Security-- which includes OASI and DI--and for the HI program in Medicare-- also referred to as Medicare part A. The payroll taxes for these programs are levied on wages and on the net self-employment income of workers under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). Although Social Security is often discussed as a retirement program, Social Security (OASDI) is a social insurance program that provides cash payments to persons or families to replace income lost through retirement, death, or disability. Workers make "contributions" in the form of payroll taxes that are then credited by the Treasury to the Social Security trust funds. Once individuals have worked a sufficient time to qualify, they become eligible for benefits under the program. enrollees (about 25 percent of total annual funding) and appropriations of general funds (about 75 percent of total funding). While both the Social Security OASDI and Medicare HI are overwhelmingly financed by payroll taxes, those trust funds receive some general revenues in the form of income taxes paid on a portion of the Social Security benefits of upper-income retirees. Collection of the payroll taxes that fund OASDI and Medicare HI is administered by IRS. However, because these payroll taxes are earmarked to fund specific retirement, disability, and medical benefits for which workers become eligible through their qualified employment, they are fundamentally different from income taxes, which are imposed on certain segments of the population and which are not earmarked for any specific purpose. HI tax is 2.9 percent, divided evenly between the employee and the employer. Until 1994, the wage base for HI was identical to that for OASDI. Since 1994, however, the HI tax has been imposed on all of a worker's wages and self-employment earnings. Figure 1 illustrates the flow of payroll taxes into the Social Security and Medicare trust funds. income wage earners replace a larger portion of their earnings than do the payments to higher wage earners. As with retirement benefits, a number of rules apply in determining who is eligible for disability benefits. Generally, a disability is defined as the inability to engage in "substantial gainful activity" by reason of physical or mental impairment. Workers who have become fully qualified for OASI benefits and who become disabled are also generally qualified for disability benefits. Workers who become disabled before becoming fully qualified for OASI benefits may nevertheless qualify for disability benefits under certain circumstances. Payments to disabled individuals, like those to retirees, take into account personal work histories and wages earned. As with retirement benefits, lower wage earners have a larger portion of their wages replaced than do higher wage earners. individual. For certain types of medical services, patients may be required to pay deductibles or additional charges. Under current law, employers withhold OASDI and HI payroll taxes from employees' pay along with federal and state income taxes, if any. Both the employees' and the employers' shares of FICA taxes are deposited--along with other federal taxes--to a designated Federal Reserve bank or other authorized depository. All federal taxes are then deposited in the Treasury. Treasury credits the Social Security and HI trust funds for the applicable amounts. Neither eligibility for benefits nor the amount of benefits is based on the amount of taxes paid by an individual, and neither IRS nor the Social Security Administration (SSA) directly credits to the individual the annual and cumulative FICA taxes paid by or on behalf of each individual. Cumulatively, the OASDI and HI taxes collected represent dedicated receipts. They are accounted for in earmarked funds: the Social Security OASI trust fund, Social Security DI trust fund, and Medicare HI trust fund. These trust funds hold funds in the form of special nonmarketable U.S. Treasury securities that are backed by the full faith and credit of the U.S. government. They are an asset to the trust fund and a legal claim on--or an obligation of--the general fund of the Treasury. When benefits are to be paid, securities sufficient to fund those benefits are redeemed, and benefits are paid by the Treasury. trust funds earn interest on the funds lent to the Treasury. This interest is paid in the form of additional Treasury securities. Until 1983, program revenues and expenses were closely matched, and the reserves were modest. After the 1983 Social Security Commission recommendations were enacted, balances grew. As a result, interest credits have become a more important source of revenue for the OASDI trust funds. As we have reported, both Social Security and Medicare face serious financing challenges. Today, taxes paid into the trust funds exceed benefits paid out. However, as more and more of the "baby boom" generation enters retirement, this will change. The combination of a larger elderly population, increased longevity, and rising health care costs will drive significant increases in health and retirement spending when the "baby boom" generation begins to retire. Over the long term, the trust funds are not solvent. SSA projections show that, absent a change in the structure of the program, the OASDI trust funds will only be able to pay full benefits through 2037. However, as we have reported, because a trust fund's accumulated balance does not necessarily reflect the full future cost of existing government commitments, it is not an adequate measure of the fund's solvency or the program's sustainability. The cash flows for these programs will create pressure on the federal budget long before these so-called trust fund exhaustion dates. securities and pay benefits, the government would have to raise taxes, cut spending for other programs, increase borrowing from the public, or retire less debt (if there is a surplus)--or some combination of these. As the Comptroller General testified last month, our long-term simulations show that, absent a change in the design of Social Security and Medicare, ultimately the government would do little more than mail checks to the elderly and their healthcare providers. The EITC is a refundable tax credit established by Congress in 1975. The credit offsets the impact of Social Security taxes paid by low- income workers and encourages low-income persons to seek work rather than welfare. The EITC is available to taxpayers with and without children and depends on the nature and amount of qualifying income and on the number of children who meet age, relationship, and residency tests. The amount of EITC allowed to an individual is first applied as a payment against any income tax liability of that individual. Any remaining amount is refunded to the individual. Workers can receive the credit as a lump sum payment after filing an income tax return or in advance as part of their paycheck. Table 2 shows, for the past 3 years, the number of EITC recipients, the relatively small number of those who reported receiving an advance EITC, and the total EITC amount. In December 1998, the Council of Economic Advisers concluded that "the EITC is one of our most successful programs for fighting poverty and encouraging work." Among other things, the report said that the EITC had lifted 4.3 million Americans out of poverty in 1997, had reduced the number of children living in poverty that year by 2.2 million, and had increased the labor force participation of single mothers. For many EITC recipients, the credit is more than enough to fully offset Social Security taxes. Most EITC recipients earn credits that exceed their income tax liabilities. The Joint Committee on Taxation has estimated that 87 percent of the credit earned in 2000 will be refunded as direct payments to taxpayers. For many of the recipients these refunds will be more than enough to offset their payroll tax burdens. For example, a head-of-household filer who has two children and earns $15,000 in wages would have earned an EITC of $3,396 in 2000. This amount would have exceeded her precredit income tax liability of $24 plus her $1,148 portion of payroll tax liability. It would also have been more than enough to offset her employer's $1,148 share of the payroll tax, which most economists believe to be borne by the employee. However, many low-income individuals and couples, especially those without children, do not earn the EITC. Looking at all low-income taxpayers together, the Congressional Budget Office estimated that in 1999 households with cash incomes between zero and $10,000, on average, received EITC refunds equal to 4.1 percent of their incomes. This average refunded credit was enough to offset the average payroll tax liability of these households, but it would not have completely offset the burden of the employer's portion of the payroll tax. The average refunded credit for households with cash incomes between $10,000 and $20,000 typically would not have been sufficient to offset any of the employer's share of the payroll tax and only a portion of the employee's share for those households. Since 1995, we have identified EITC noncompliance as one of the high-risk areas within IRS because such noncompliance exposes the federal government to billions of dollars of risk through overpayments of the EITC. Although IRS has estimated that billions of dollars have been overpaid to EITC recipients, it has not reported on the portions of noncompliance that may be due to unintentional errors, perhaps attributable at least in part to the complexity of the EITC, or to fraudulent efforts to obtain the credit. In April 1997 and September 2000, respectively, IRS reported on the results of two EITC compliance studies--the first involving tax year 1994 EITC claims accepted by IRS between January 15 and April 21, 1995, and the second involving tax year 1997 claims processed by IRS between January 20 and May 29, 1998. Although changes in IRS' study methodology as well as legislative changes between 1994 and 1997 made the results of the two studies noncomparable, both studies documented a significant amount of EITC noncompliance. Of $17.2 billion in EITC claimed during the first study period, IRS estimated that $4.4 billion (about 26 percent) was overclaimed. Of $30.3 billion in EITC claimed during the second study period, IRS estimated that $9.3 billion (about 31 percent) was overclaimed. The largest source of taxpayer error identified by IRS in both studies related to EITC requirements that are difficult for IRS to verify-- principally those related to eligibility of qualifying children. Currently, to be a qualifying child, a child must (1) be the taxpayer's son, daughter, adopted child, grandchild, stepchild, or eligible foster child (i.e., meet a relationship test); (2) be under age 19, under age 24 and a full-time student, or any age and permanently and totally disabled (i.e., meet an age test); and (3) have lived with the taxpayer in the United States for more than half the year or for the entire year if an eligible foster child (i.e., meet a residency test). Failure to meet the residency test was the most common qualifying child error identified in both studies. IRS' studies identified the following as other sources of EITC errors. Complicated living arrangements--when a child meets the rules to be a qualifying child of more than one person, the person with the higher modified adjusted gross income (AGI) is the only one who can claim the EITC using that child. The person with the lower modified AGI cannot use that child to claim the EITC even if the other person does not claim the EITC. This rule does not apply if the other person is the taxpayer's spouse and they file a joint return. Misreporting of filing status--these errors involved married taxpayers filing as single or head of household when they should have filed as married filing separately. Persons who file as married filing separately are not eligible to claim the EITC. Income misreporting--these errors included misreporting of earned income and underreporting of investment income. EITC "noncompliance" as identified in IRS' studies and as referred to in this testimony includes errors caused by mistakes--possibly due to the complexity of the EITC--or an intent to defraud. Both of these potential sources of error have been of concern to IRS and others. Some analysts consider the EITC to be a complex tax provision that challenges those applying for it to properly understand and follow the qualifying rules. On the other hand, the credit's possible susceptibility to fraud has also been a concern to Congress and IRS for many years. Although being able to differentiate between these different causes may be important in identifying appropriate corrective measures, IRS' primary goal in conducting its compliance studies was to identify the level of overall EITC noncompliance. Determining the causes of overpayments is more challenging and costly, especially determining whether an EITC claim is fraudulent, which requires knowing the difficult-to- prove intent behind the taxpayer's actions. IRS' reports on its two compliance studies did not discuss the extent to which EITC overclaims were due to mistakes versus fraud. However, as we discussed in a July 1998 report on IRS' first study, IRS examiners and case reviewers did make a determination of intent for almost every case involving an overclaim. Based on those determinations, about one-half of the returns with an EITC overclaim and two-thirds of the total amount overclaimed were considered to be the result of intentional errors. Because these assessments were judgmental and made without any specific criteria, they were considered too imprecise to be included in IRS' report. However, as we said in 1998, the results did indicate that IRS' compliance efforts should include activities aimed at taxpayers who intentionally misclaim the EITC. Concerned about the level of EITC noncompliance, Congress and IRS have taken various steps to reduce it. After the 1994 compliance study, Congress took the following steps: According to law, an EITC is not to be allowed unless the tax return contains the EITC-qualifying-child's Social Security number (SSN) as well as the SSNs of the taxpayer and the taxpayer's spouse, if any. Before 1997, if IRS identified a return with an invalid SSN, it had to resolve that issue through its normal audit procedures. Because those procedures are resource intensive, IRS was not able to follow up on most of the invalid SSNs identified. In 1995, for example, IRS stopped the refunds on about 3 million returns with invalid SSNs. However, IRS was only able to follow up with taxpayers on about 700,000 of those returns. For the other 2.3 million returns, IRS released the refunds without any follow-up. In 1996, Congress authorized IRS to treat invalid SSNs as "math errors," similar to the way that IRS had historically handled computational mistakes. With that authority, IRS has been able to (1) automatically disallow any EITC claim associated with an invalid SSN and (2) make appropriate adjustments to any refund that the taxpayer might be claiming. collect SSNs of birth parents and provide IRS with information linking the parents' and child's SSNs. Congress began providing IRS with appropriated funds (about $143 million a year) for a 5-year EITC compliance initiative beginning in fiscal year 1998. As part of the 5-year compliance initiative and using the tools provided by Congress, IRS implemented a plan that calls for reducing EITC noncompliance through expanded customer service and public outreach, strengthened enforcement, and enhanced research. In implementing its plan, IRS has taken several actions, with some significant results. For example: In 1999 and 2000, IRS identified a total of about 3.4 million "math errors" related to the EITC, about 24 percent of which involved invalid SSNs.According to IRS, it denied about $675 million in erroneous EITC claims during fiscal years 1999 and 2000 because of EITC-related "math errors." Other types of EITC noncompliance are not as easy to identify as invalid SSNs. These types of noncompliance can be detected only through an in- depth review. For the past few years, IRS has targeted for in-depth review certain types of EITC claims, such as those involving the use of a child's SSN on multiple returns for the same year, that IRS had identified as important sources of noncompliance. Returns identified by IRS were to be audited to determine if the EITC claims were valid. During fiscal years 1999 and 2000, according to IRS, it completed more than 500,000 of these audits and identified about $800 million in overclaims. about $435,000 for 143 of those preparers. We do not know how, if at all, IRS' visits resulted in improved due diligence by preparers. That question may be addressed in IRS' report on the results of its visits, which, according to IRS, will be issued about May 1. IRS implemented a program to enforce the recertification requirements of the Taxpayer Relief Act of 1997. According to IRS data, (1) about 312,000 taxpayers were required to recertify after being denied the EITC for tax year 1997 and (2) about 193,000 of those taxpayer did not claim the EITC on their tax year 1998 returns. IRS sees these results as an indication that recertification has reduced the number of improper claims. IRS expanded its EITC outreach and educational efforts. For example, it developed partnerships with groups that are advocates for low-income taxpayers and with businesses and large employers who include EITC information in monthly billings or employees' pay statements. IRS also refocused its media campaign and publications toward educating the public about EITC eligibility requirements. IRS developed a database that can be used to help verify the accuracy of taxpayers' claimed dependents and EIC-qualifying children. It incorporates data from an assortment of sources including the HHS and SSA information provided for in the 1997 Act. According to IRS, the database is used to screen returns during processing for potential compliance issues and to select for pre-refund audits those with the highest potential. Also, according to IRS, the returns being selected are primarily ones filed by EITC claimants. Despite these initiatives, it remains to be seen how, if at all, Congress' and IRS' efforts have succeeded in reducing the 31- percent EITC overclaim rate identified by IRS' tax year 1997 EITC compliance study. IRS is doing a study of tax year 1999 returns and plans to study tax year 2001 returns. The results of those studies, when compared to the results of the tax year 1997 study, should provide a basis for assessing the impact on overall EITC noncompliance. Although well-designed and effectively-implemented processes should help reduce EITC noncompliance, certain features of the EITC represent a trade-off between compliance and other desired goals. Unlike income transfer programs, such as Temporary Assistance for Needy Families and Food Stamps, the EITC was designed to be administered through the tax system. Accordingly, while other income transfer programs have staff who review documents and other evidence before judging applicants to be qualified to receive assistance, the EITC relies more directly on the self-reported qualifications of individuals. This approach generally should result in lower administrative costs and possibly higher participation rates for the EITC than the other assistance programs. However, EITC noncompliance may also be higher. This is especially true when eligibility depends on information that cannot be readily and rapidly verified by IRS as it processes tax returns. EITC eligibility, particularly related to qualifying children, is difficult for IRS to verify through its traditional enforcement procedures, such as matching return data to third-party information reports. Correctly applying the residency test, for example, often involves understanding complex living arrangements and child custody issues. Thoroughly verifying qualifying child eligibility basically requires IRS to audit individual tax returns, as was done in the tax year 1994 compliance study--a costly, time-consuming, and intrusive proposition. - - - - - I appreciate this opportunity to appear today to provide a basic description of the payroll taxes funding Social Security and Medicare hospital insurance and to discuss what is known about EITC noncompliance. Mr. Chairman, that concludes my prepared statement. I would be happy to answer any questions you or other Members of the Committee might have. contributions to this testimony included David Attianese, Kenneth Bombara, Christine Bonham, Barbara Bovbjerg, Carol Henn, Susan Irving, Deborah Junod, and John Lesser. Long-Term Budget Issues: Moving From Balancing the Budget to Balancing Fiscal Risk (GAO-01-385T, Feb. 6, 2001). Federal Trust and Other Earmarked Funds: Answers to Frequently Asked Questions (GAO-01-199SP, January 2001). Medicare Reform: Issues Associated With General Revenue Financing (GAO/T-AIMD-00-126, Mar. 27, 2000). Medicare Reform: Leading Proposals Lay Groundwork, While Design Decisions Lie Ahead (GAO/T-HEHS/AIMD-00-103, Feb. 24, 2000). Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS- 00-29, Nov. 4, 1999). Social Security Reform: Implementation Issues for Individual Accounts (GAO/HEHS-99-122, June 18, 1999). Social Security: Different Approaches for Addressing Program Solvency (GAO/HEHS-98-33, July 22, 1998). Tax Administration: Assessment of IRS' 2000 Tax Filing Season (GAO-01-158, Dec. 22, 2000). Earned Income Credit: IRS' Tax Year 1994 Compliance Study and Recent Efforts to Reduce Noncompliance (GAO/GGD-98-150, July 28, 1998). Tax Administration: Earned Income Credit Noncompliance (GAO/T- GGD-97-105, May 8, 1997).

This testimony discusses (1) how payroll taxes fund Social Security and the Medicare Hospital Insurance (HI) programs and (2) noncompliance associated with the Earned Income Tax Credit (EITC) and efforts to deal with that noncompliance. Payroll taxes fund the Social Security Program and the Medicare HI program. These taxes are paid in equal portions by employees and their employers. Employees and their families become eligible to collect these benefits once workers have been employed for a sufficient period of time. Although Social Security benefits are calculated using a formula that considers lifetime earnings, HI benefits are based on the health of the covered individual and are paid directly to the health care provider. Demographic trends indicate that these programs will impose an increasing burden on the federal budget and the overall economy. Regarding EITC, significant compliance problems can expose the Internal Revenue Service (IRS) to billions of dollars in overpayments. EITC noncompliance is identified as taxpayer errors and intent to defraud. IRS and Congress have taken several steps to reduce noncompliance, including the passage of laws that enabled IRS to disallow EITC claims with invalid social security numbers and the implementation of a five-year EITC compliance initiative.

Hanford's aging underground tanks contain about 54 million gallons of highly radioactive waste. DOE currently estimates the total cost of cleaning up the tank waste at more than $50 billion (in actual year dollars). To convert the waste into a form for more permanent storage, the waste will be separated into high-level and low-activity components and then, through a process called vitrification, converted into a glass-like material that can be poured into steel containers where it will harden. The immobilized high-level waste will be stored on-site for eventual shipment to a national repository, while the low-activity waste will be permanently disposed of on the Hanford Site. DOE envisioned that two contractors would build and operate demonstration facilities that would initially treat at least 6 percent of the waste. DOE referred to this part of the waste treatment effort as phase I. DOE estimated that phase I would last at least until 2007 and cost about $3.2 billion and another $1.1 billion in contract support costs, for a total of about $4.3 billion. In September 1996, DOE awarded a fixed-price contract for $27 million to each of the two contractor teams to begin phase I by developing preliminary facility designs and other preliminary project plans. One team was led by BNFL and the other team was led by Lockheed Martin Advanced Environmental Systems (Lockheed). In phase II, contractors would compete for a contract to process the remaining tank waste. DOE's experience during the initial part of phase I led to a change in the contracting approach. In May 1998, after reviewing the preliminary designs and plans submitted by the two competing teams, DOE decided to continue phase I with only one contractor--BNFL. On August 24, 1998, DOE signed a fixed-price contract with BNFL for $6.9 billion to continue with phase I. DOE estimated that its other costs related to supporting BNFL's efforts would be about $2 billion, bringing the project's total estimated cost to about $8.9 billion. DOE's August 1998 contract with BNFL is a substantial departure from DOE's original privatization strategy. According to DOE, changes to its initial approach were made to optimize the technical approach and to make the project financially feasible or to reduce the likelihood of performance failure. These changes fall into four main areas: competition, financial issues, facility issues, and schedule revisions. Unlike DOE's original approach, the project no longer includes competition between contractors. DOE and outside expert reviewers found that the approach set forth by the Lockheed team presented an unacceptably high technical risk in attaining DOE's cleanup goals. In contrast, DOE concluded that BNFL's technical approach was sound, using technologies for waste treatment and vitrification that were well developed and had been used in other waste treatment situations. Therefore, DOE authorized only BNFL to proceed through the remainder of phase I. The extent to which competition will be present in phase II is unknown. DOE's approach to financing the project has shifted from requiring the contractor to obtain all needed financing to a strategy of agreeing to repay BNFL's debts above its equity, insurance, and other limited funds if BNFL defaults on its loans and DOE terminates the contract. DOE officials said that the government's commitment to repay the contractor's debt was needed, in large part, to make the project financially feasible. Government backing of the private debt is an unusual feature for a fixed-price contract because the government normally does not agree to pay a contractor's debt as an allowable cost. Another change was that neither contractor was willing to commit to a fixed-unit price and schedule without adding significant contingency to the price of the contract. The August 1998 contract identified a target price and set August 2000 as the date at which the unit price will be fixed and BNFL's funding commitments will be established. The original proposal included temporary facilities that were estimated to have a useful life of approximately 10 years. According to DOE, however, both BNFL and Lockheed concluded that shorter-term facilities were not feasible and that more permanent facilities were needed to provide the required levels of safety, operability, and maintainability. The contract now requires the waste treatment facilities to be designed to operate for a minimum of 30 years and have the capability to increase capacity. DOE said that although this approach means much more expensive facilities than originally anticipated and, therefore, an increase in project costs for phase I, the more permanent and expandable facilities allow DOE more flexibility and options in how the waste cleanup is completed. In addition to more permanent, costly facilities, the new contract extends the design period and delays the start of construction about 19 months beyond what was originally planned. Both BNFL and Lockheed indicated that additional time was needed to further develop the project's design and plans for meeting regulatory and permitting requirements. The contractors believed that adhering to the original schedule would carry too many uncertainties and that they would be unable to obtain needed financing for the project unless a more realistic schedule could be negotiated. The current schedule and cost estimates for the project are substantially greater than DOE's original estimates. In 1996, DOE estimated that in the first phase of the project, two contractors would process 6 percent of the waste by 2007 and up to 13 percent of the waste by 2011. DOE is now estimating that the first phase will last until at least 2017 and 10 percent of the waste will be processed. Design activities have been extended by 2 years, construction will take about 4 years longer, and the time to process the waste increased from 5 years to about 10 years. Estimated costs for the project have also increased significantly. The total project costs for phase I, including DOE's support costs, increased from $4.3 billion in the original estimate to $8.9 billion in the current estimate (in constant fiscal year 1997 dollars). The waste processing facilities now being designed will cost nearly $1 billion more to build than the demonstration facilities DOE originally proposed. Because of the longer period during which investors will expect a return on investments, equity and debt financing costs are expected to increase from about $1 billion to more than $3 billion. And, the average cost to process waste will double from $760,000 per metric ton to $1.5 million per metric ton. Despite the dramatic increase in estimated costs for this project, in July 1998, DOE estimated that its revised approach for phase I would provide savings of 26 to 36 percent when compared with two alternatives--a management and operations (M&O) contract or a cost-reimbursement contract with performance-based incentives. The savings estimate of 36 percent was based on comparing the proposed BNFL fixed-price approach with an M&O approach based on past Hanford management and operating contractor cost data; the estimate of 26 percent was based on a comparison with the estimated cost for BNFL to perform the work under a cost-reimbursement contract. However, our review of DOE's most recent estimates indicate that the savings amounts should be viewed with considerable caution. Specifically, Comparing its revised approach to a M&O contracting approach is not meaningful because DOE would no longer seriously consider using such an approach. DOE's cost savings analysis could be more meaningful if it included a range of contracting and financing options such as various combinations of government and private financing. For the contract alternatives DOE considered in its analysis, the margin of error was plus or minus 40 percent, meaning that the actual cost could be up to 40 percent less than or greater than the estimate presented. Because the order of magnitude estimates are subject to so much variability, it is difficult to assign much credence to this overall savings estimate. Cost growth estimates were not used consistently. For the comparison between a fixed-price contract and a cost-reimbursement contract with performance incentives, DOE assumed that cost growth would be 68 percent for the cost-reimbursement contract, and the fixed-price contract would have no cost growth. However, other evidence indicates that fixed-price contracts may have greater cost growth than cost-reimbursement contracts. Specifically, a DOE funded study found that fixed-price contracts had greater cost growth than cost-reimbursement contracts. Under the revised contract approach, DOE faces a substantial financial risk that could be in the billions of dollars. This risk comes mainly in the form of an agreement to pay BNFL for much of the debt incurred in constructing and operating the waste treatment facilities if BNFL defaults on its loan payments and DOE terminates the contract. This agreement has the same practical effect as a loan guarantee and is a dramatic departure from the original privatization strategy. If DOE had provided a guarantee for BNFL's loans from a private lender, the Federal Credit Reform Act would have required DOE to estimate the net present value of the subsidy cost of the loan guarantee over the term of the loan and to have budget authority available for this full cost before the guarantee could be provided. The amount of DOE's potential liability is unknown, because the amount of borrowing that will be covered under the commitment will likely not be determined until the contract price is established in August 2000. However, BNFL's vice president and project manager told us that DOE's potential liability could be as much as $3 billion. He said that in the case of a default, $3 billion is about the maximum debt that would be outstanding after BNFL's equity and contingency funds were applied. DOE's financial risks hinge on a number of factors that could potentially affect the project. We identified six main types of factors, which we believe merit continued attention as the project proceeds. BNFL officials acknowledge that although the technology they plan to use has been successfully applied in other settings, it has been tested only on small amounts of Hanford waste in laboratories and has not been used at production facilities to vitrify the unique types of waste at Hanford. Under DOE's original approach, the success of the selected technologies was to be demonstrated in temporary plants; in DOE's revised approach, permanent plants will be built. BNFL has developed various other approaches to deal with the need to ensure that the technology will work. These include conducting tests on certain aspects of the technology at existing facilities at other DOE sites and in the United Kingdom and constructing a prototype melter for the low-activity waste vitrification process. DOE expects to hire experts to review BNFL's demonstration plans and testing results. Under its revised approach, DOE retains a significant part of the risk for the success of this technology. In the worst case, if demonstration activities fail or prove inadequate to ensure the success of full-scale operations, the overall project may fail, and DOE will be liable for paying off a significant portion of BNFL's debt after BNFL's resources are exhausted. If demonstration activities show that the technology is usable but flawed, treatment facilities may require expensive retrofitting to make them viable. This could raise the cost of the fixed-price contract that DOE will negotiate with BNFL. Although the revised approach gives BNFL additional time to design the waste treatment and vitrification facilities, the schedule still poses some potential risk. To give BNFL more time to design the facilities, DOE set back the start of construction by about 2 years. However, even with this change, construction will begin well before all of the design work is completed. BNFL officials estimate that overall design work will be less than 50 percent complete at the start of construction and acknowledged that conducting simultaneous design, construction, and technology testing carries some risk. To reduce this risk, BNFL is performing a periodic risk assessment to ensure that design and technology testing concerns will be addressed as quickly as possible in the next 24 months. Another factor potentially affecting the success of the project--and therefore DOE's financial risk--is whether the safety and other regulatory requirements can be successfully met. For example, DOE's Regulatory Unit raised 90 issues with safety documents that BNFL submitted in January 1998. The manager of the Regulatory Unit described the quality of the BNFL safety documents as poor and said that the next set of safety documents, submitted in August 1998, was also poorly done. Unless the required safety documentation is approved, BNFL will be unable to start construction on schedule. The BNFL project manager attributed the safety documentation problems primarily to the early level of the project's design and said that BNFL will greatly increase the staff addressing safety-related issues during the rest of phase I. BNFL also has recently hired an experienced nuclear facilities licensing manager to lead this effort. DOE has also taken steps to help ensure that BNFL is addressing safety issues. For example, DOE has negotiated into the contract provisions that (1) require periodic meetings between its regulatory staff and BNFL to discuss safety issues and (2) provide for DOE's attendance at BNFL's safety committee facility design review meetings. The project also presents another regulatory challenge. DOE planned to have the Occupational Safety and Health Administration (OSHA) regulate worker safety at the plant. However, in May 1998, OSHA declined to assume responsibility, citing a need first for statutory and regulatory changes to be in place, as well as a full complement of the resources required. If OSHA does not regulate worker safety, then DOE must do so. The manager of DOE's Regulatory Unit said that if this issue is not resolved by January 2000, his unit will assume responsibility for regulating worker safety so that construction can begin on schedule. DOE is responsible for the following major support activities: sampling and analyzing tank waste (characterization); providing infrastructure, which includes roads, water, electricity, and wastewater treatment; retrieving waste, which requires DOE to retrieve waste from the tanks and deliver it to BNFL while keeping the chemical makeup of the waste within specified ranges; and storing and disposing of waste after processing, which requires DOE to temporarily store the high-level waste and permanently store low-activity waste. DOE estimates that support activities will cost about $2 billion, including about $600 million for waste retrieval, $40 million for characterization, and about $370 million for waste storage and disposal. Although support activities are essential to project success, many of them are still in the planning stages and potential problems are not yet apparent. At this time, the areas that appear to be most prone to problems are waste retrieval and waste storage and disposal. DOE's site support contractor concluded that these two problems have a high risk of adversely affecting the project. As a result, DOE could have to make idle facility payments. In response, the site support contractor identified a set of mitigating actions that it believes will reduce the risk that the problems will adversely affect the project. DOE's ability to fund the project within its own budget is an important factor in ensuring that lack of funding does not lead to project termination. DOE estimates that it will need more than $10 billion in actual year dollars from fiscal year 1999 through 2017 to fund the $6.9 billion project cost--an average of $537 million annually. This funding represents a substantially increased need for funding at the Hanford Site, where current annual budgets for all on-site cleanup activities total about $1 billion. If DOE could not provide funding for the privatization project when needed, the contract would likely be terminated, triggering DOE's liability to pay BNFL for the amounts borrowed against the company's assets. DOE officials said they did not yet have a detailed funding plan for how they would find the additional funding within their budget. However, assuming no significant increase from the Congress, DOE indicated that a major source of funds would likely be funding made available when other DOE sites, such as Rocky Flats and Fernald, are cleaned up and closed. Given DOE's track record in completing environmental cleanup projects, however, we are concerned that the funds may not be available when they are needed. Another issue that could potentially affect DOE's ability to ensure that sufficient funding is available for the project relates to how the new contracting approach is classified in the budget. Because of budget limitations contained in the Budget Enforcement Act, cost estimates are prepared for programs, including projects in DOE's privatization program, to ensure that the limitations are not exceeded. If a federal agency offered a federal government guarantee to a private lender for a contractor's debt financing, the agency would have to estimate the subsidy cost of the loan guarantee. This is a complex process and is based on the risk of a default or nonpayment of the loans and other factors. The agency would then need the budget authority for the full net present value of the subsidy cost before it could make the guarantee. Although the tank waste project is not structured as an explicit loan guarantee, there is an increase in the government's potential liability associated with making BNFL's loans an allowable contract cost. Neither DOE nor the Office of Management and Budget has estimated this potential cost. This is of consequence because it affects how much funding DOE will have to have on hand for the project, and when. In an effort to balance risks and realize cost savings, DOE selected a fixed-price contracting approach for the project. Federal acquisition regulation guidelines note that fixed-price contracting works best when the possibility is low for changes with cost and schedule implications. However, the BNFL contract cites at least 15 events, such as regulatory changes or failure to provide waste on a timely basis, that could cause cost or schedule increases. The consequence of such changes is that they would constitute a potential basis for adjusting the fixed price or paying agreed-upon additional amounts. Federal guidelines state that another factor contributing to the successful use of fixed-price contracting is competition, which helps determine a price that minimizes the cost to the government while providing a fair profit to the contractor. DOE's revised approach removes competition as a check on price. Instead, DOE has required BNFL to provide certified cost or pricing information for use in evaluating BNFL's basis for its proposed fixed unit prices. Without competition, however, DOE may not have the same assurance of obtaining the best value for the negotiated price. Managing this large, complex project presents a significant challenge to DOE. The agency's continuing challenge will be to translate the plans it has made into sustainable oversight efforts that are capable of overcoming problems that have plagued many past waste cleanup projects. DOE has had difficulty managing other large projects. Our past reviews have shown a consistent pattern of poor management and oversight by DOE. For example, in our 1996 report on DOE's major system acquisition projects (generally projects costing $100 million or more), we reported that at least half of the ongoing projects and most of the completed ones had cost overruns and/or schedule slippage. Some of the reasons for cost overruns and schedule slippage included inadequate project oversight and insufficient attention to technical, institutional, and management issues. In addition, our reviews of individual DOE cleanup projects such as the Defense Waste Processing Facility at Savannah River, the Pit 9 cleanup at Idaho Falls, and the Spent Fuel Storage Project at Hanford all identified problems with DOE's oversight activities as factors contributing to project difficulties. At least in part to respond to these past difficulties, DOE has developed several systems and processes to manage the tank waste project at Hanford and has subjected its plans to outside review. Despite these efforts, however, outstanding issues concerning technical staff, site support activities, and project administration may keep DOE from being fully prepared to oversee the project. Technical staff: DOE has established a team eventually expected to number about 80 technical and managerial staff to oversee the project. As of August 31, 1998, there were about 30 vacancies, including key staff such as the Deputy Project Manager and five of nine DOE staff in the contract management group. DOE's Director of Contract Reform and Privatization said that the Hanford unit does not have all of the technical skills necessary to ensure success in overseeing the project. He was especially concerned about the shortage of contract expertise related to administering fixed-price contracts. According to DOE's contracting officer at Hanford, none of the current DOE staff are experts in fixed-priced contracting. DOE officials plan to hire these and other needed staff during fiscal year 1999. Site support activities: Also critical to the project's success will be the support that site contractors must provide in preparing infrastructure improvements, retrieving waste, and removing and storing the containers of vitrified material. Outside reviewers commissioned by DOE and the contractor managing the Hanford site have concluded that the support could be provided if adequate funding was forthcoming. However, DOE and tank farm officials said that the project is funded at about $23 million less than needed for fiscal year 1999. DOE has requested full funding for fiscal year 2000, but the budget has not yet been finalized. According to the Director of the Waste Disposal Division, not fully funding support activities in the next couple of years could delay the project. Project administration: Our past work on other DOE projects indicates that carefully administering the contract may also be critical to ensuring that DOE and the contractor work together effectively. DOE has paid considerable attention to developing an approach to overseeing BNFL's operations and among other things has followed a systems engineering process that involved developing 23 "interface control documents" for those areas such as infrastructure, emergency response, and permitting where DOE or the site contractor have interrelationships with the BNFL contract and specified in the contract that BNFL must deliver completed test reports to DOE for numerous activities, such as validation of chemical processes, qualification of proposed products, and effectiveness of a nonradioactive pilot melter. The potential problem is not with DOE's efforts to date but with its willingness to fully implement the oversight plans it has developed for the project. Our work over several years and on a variety of DOE activities has disclosed a consistent pattern of failure on the part of DOE to fully implement the plans that it develops. For example, in 1997 we reportedthat two projects at the Fernald, Ohio, site had weaknesses, including insufficient DOE oversight of the contractor, inadequate testing of the technology, and delays in completing planning documents. These problems contributed to a $65 million cost overrun and almost 6 years of schedule slippage. More recently, in a review of DOE's management of contaminated soils above the groundwater at Hanford, we found that although DOE drafted a management plan by 1994, it never implemented the plan. Four years later, after admitting that the tank waste has leaked into the groundwater, DOE has still not implemented a comprehensive management strategy. Mr. Chairman, in the report we are releasing today, we recommended that DOE take immediate action to fully implement the project's management and oversight plan, and we suggested to the Congress that an additional review of the project at the end of the extended design phase would be appropriate given the many uncertainties and decisions that remain. Thank you, Mr. Chairman and Members of the Subcommittee. That concludes our testimony. We would be pleased to respond to any questions that you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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GAO discussed the challenges facing the Department of Energy (DOE) in cleaning up the waste in the 177 underground storage tanks at Hanford, Washington, focusing on: (1) how DOE's current approach has changed from its original privatization strategy; (2) how this change has affected the project's schedule, cost, and estimated savings over conventional DOE approaches; (3) what risks DOE is now assuming with this change in approach; and (4) what steps DOE is taking to carry out its responsibilities for overseeing the project. GAO noted that: (1) the project as currently envisioned is substantially different from DOE's 1996 initial privatization strategy; (2) the most significant changes include eliminating further competition between contractors, building permanent facilities that could operate for 30 years or more instead of temporary facilities, and extending by 2 years the design phase and the dates for completing project financing arrangements and agreeing on the final contract price; (3) the revised approach extends the completion date for processing the first portion of the waste from 2007 to 2017, and total costs rise from $4.3 billion to $8.9 billion, including $2 billion in DOE's support costs; (4) the increased costs are mainly the result of DOE's decision to build permanent facilities that will take longer and cost more to design and build and the higher financing costs and contractor profits involved in operating these facilities over a longer period of time; (5) DOE estimates that this approach has the potential to save 26 to 36 percent over the contracting approaches it has used in the past; (6) the revised approach represents a dramatic departure from DOE's original privatization strategy of shifting most financial risk to the contractor; (7) the contract now calls for DOE to pay BNFL, Inc. for most of the debt incurred in building and operating the facility if BNFL should default on its loans; (8) DOE agreed to assume this risk because it did not think BNFL would be able to obtain affordable financing unless the government provided some assurance that the loans would be repaid; (9) DOE's financial risks are significant because the project has a number of technical uncertainties such as using waste treatment technology that has yet to be successfully tested at production levels on Hanford's complex and unique wastes, and other management challenges; (10) in an attempt to avoid repeating past mistakes in managing large projects, DOE has identified additional expertise it needs and has developed several management tools to strengthen its oversight of the project; (11) the success of the project, however, will depend heavily on how well DOE implements these plans; and (12) DOE has a history of not fully implementing its management and oversight plans, and there are some early indications on this project that DOE may be having difficulty ensuring that the proper expertise is in place and fully funding project support activities.

While the overall goal of Title II under both HEA and NCLBA is to improve student achievement by improving the teacher workforce, some of the specific approaches differ. For example, a major focus of HEA provisions is on the training of prospective teachers (preservice training) while NCLBA provisions focus more on improving teacher quality in the classroom (in service training) and hiring highly qualified teachers. Also, both laws use reporting mechanisms to increase accountability. However, HEA focuses more on institutions of higher education while NCLBA focuses on schools and school districts. Additionally, HEA focuses on expanding the teacher workforce by supporting recruitment from other professions. In addition, HEA and NCLBA Title II funds are distributed differently. HEA teacher quality funds are disbursed through three distinct types of grants: state, partnership, and recruitment grants. State grants are available for states to implement activities to improve teacher quality in their states by enhancing teacher training efforts, while partnership grants support the collaborative efforts of teacher training programs and other eligible partners. Recruitment grants are available to states or partnerships for teacher recruitment activities. All three types of grants require a match from non-federal sources. For example, states receiving state grants must provide a matching amount in cash or in-kind support from non-federal sources equal to 50 percent of the amount of the federal grant. All three grants are one-time competitive grants; however, state and recruitment grants are for 3 years while partnership grants are for 5 years. HEA amendments in 1998 required that 45 percent of funds be distributed to state grants, 45 percent to partnership grants, and 10 percent to recruitment grants. As of April 2007, 52 of the 59 eligible entities (states, the District of Columbia, and 8 territories) had received state grants. Because the authorizing legislation specifically required that entities could only receive a state grant once, only seven would be eligible to receive future state grants. In our 2002 report, we suggested that if Congress decides to continue funding teacher quality grants in the upcoming reauthorization of HEA, it might want to clarify whether all 59 entities would be eligible for state grant funding under the reauthorization, or whether eligibility would be limited to only those states that have not previously received a state grant. We also suggested that if Congress decides to limit eligibility to entities that have not previously received a state grant, it may want to consider changing the 45 percent funding allocation for state grants. In a 2005 appropriation act, Congress waived the allocation requirement. In 2006, about 9 percent of funds were awarded for state grants, 59 percent for partnership grants, and 33 percent for recruitment. When Congress reauthorizes HEA, it may want to further clarify eligibility and allocation requirements for this program. NCLBA, funded at a much higher level than HEA, provides funds to states through annual formula grants. In 2006, Congress appropriated $2.89 billion through NCLBA and $59.9 million for HEA for teacher quality efforts. While federal funding for teacher initiatives was provided through two other programs prior to NCLBA, the act increased the level of funding to help states and districts implement the teacher qualification requirements. States and districts generally receive NCLBA Title II funds based on the amount they received in 2001, the percentage of children residing in the state or district, and the number of those children in low- income families. After reserving up to 1 percent of the funds for administrative purposes, states pass 95 percent of the remaining funds to the districts and retain the rest to support state-level teacher initiatives and to support NCLBA partnerships between higher education institutions and high-need districts that work to provide professional development to teachers. While there is no formula in NCLBA for how districts are to allocate funds to specific schools, the act requires states to ensure that districts target funds to those schools with the highest number of teachers who are not highly qualified, schools with the largest class sizes, or schools that have not met academic performance requirements for 2 or more consecutive years. In addition, districts applying for Title II funds from their states are required to conduct a districtwide needs assessment to identify their teacher quality needs. NCLBA also allows districts to transfer these funds to most other major NCLBA programs, such as those under Title I, to meet their educational priorities. HEA provides grantees and NCLBA provides states and districts with the flexibility to use funds for a broad range of activities to improve teacher quality, including many activities that are similar under both acts. HEA funds can be used, among other activities, to reform teacher certification requirements, professional development activities, and recruitment efforts. In addition, HEA partnership grantees must use their funds to implement reforms to hold teacher preparation programs accountable for the quality of teachers leaving the program. Similarly, acceptable uses of NCLBA funds include teacher certification activities, professional development in a variety of core academic subjects, recruitment, and retention initiatives. In addition, activities carried out under NCLBA partnership grants are required to coordinate with any activities funded by HEA. Table 1 compares activities under HEA and NCLBA. With the broad range of activities allowed under HEA and NCLBA, we found both similarities and differences in the activities undertaken. For example, districts chose to spend about one-half of their NCLBA Title II funds ($1.2 billion) in 2004-2005 on class-size reduction efforts, which is not an activity specified by HEA. We found that some districts focused their class-size reduction efforts on specific grades, depending on their needs. One district we visited focused its NCLBA-funded class-size reduction efforts on the eighth grade because the state already provided funding for reducing class size in other grades. However, while class-size reduction may contribute to teacher retention, it also increases the number of classrooms that need to be staffed and we found that some districts had shifted funds away from class-size reduction to initiatives to improve teachers' subject matter knowledge and instructional skills. Similarly, Education's data showed that the percent of NCLBA district funds spent on class-size reduction had decreased since 2002-2003, when 57 percent of funds were used for this purpose. HEA and NCLBA both funded professional development and recruitment efforts, although the specific activities varied somewhat. For example, mentoring was the most common professional development activity among the HEA grantees we visited. Of the 33 HEA grant sites we visited, 23 were providing mentoring activities for teachers. In addition, some grantees used their funds to establish a mentor training program to ensure that mentors had consistent guidance. One state used the grant to develop mentoring standards and to build the capacity of trainers to train teacher mentors within each district. Some districts used NCLBA Title II funds for mentoring activities as well. We also found that states and districts used NCLBA Title II funds to support other types of professional development activities. For example, two districts we visited spent their funds on math coaches who perform tasks such as working with teachers to develop lessons that reflected state academic standards and assisting them in using students' test data to identify and address students' academic needs. Additionally, states used a portion of NCLBA Title II funds they retained to support professional development for teachers in core academic subjects. In two states that we visited, officials reported that state initiatives specifically targeted teachers who had not met the subject matter competency requirements of NCLBA. These initiatives either offered teachers professional development in core academic subjects or reimbursed them for taking college courses in the subjects taught. Both HEA and NCLBA funds supported efforts to recruit teachers. Many HEA grantees we interviewed used their funds to fill teacher shortages in urban schools or to recruit new teachers from nontraditional sources-- mid-career professionals, community college students, and middle- and high-school students. For example, one university recruited teacher candidates with undergraduate degrees to teach in a local school district with a critical need for teachers while they earn their masters in education. The program offered tuition assistance, and in some cases, the district paid a full teacher salary, with the stipulation that teachers continue teaching in the local school district for 3 years after completing the program. HEA initiatives also included efforts to recruit mid-career professionals by offering an accelerated teacher training program for prospective teachers already in the workforce. Some grantees also used their funds to recruit teacher candidates at community colleges. For example, one of the largest teacher training institutions in one state has partnered with six community colleges around the state to offer training that was not previously available. Finally, other grantees targeted middle and high school students. For example, one district used its grant to recruit interns from 14 high-school career academies that focused on training their students for careers as teachers. Districts we visited used NCLBA Title II funds to provide bonuses to attract successful administrators, advertise open teaching positions, and attend recruitment events to identify qualified candidates. In addition, one district also used funds to expand alternative certification programs, which allowed qualified candidates to teach while they worked to meet requirements for certification. Finally, some states used HEA funds to reform certification requirements for teachers. Reforming certification or licensing requirements was included as an allowable activity under both HEA and NCLBA to ensure that teachers have the necessary teaching skills and academic content knowledge in the subject areas. HEA grantees also reported using their funds to allow teacher training programs and colleges to collaborate with local school districts to reform the requirements for teacher candidates. For example, one grantee partnered with institutions of higher education and a partner school district to expose teacher candidates to urban schools by providing teacher preparation courses in public schools. Under both HEA and NCLBA, Education has provided assistance and guidance to recipients of these funds and is responsible for holding recipients accountable for the quality of their activities. In 1998, Education created a new office to administer HEA grants and provide assistance to grantees. While grantees told us that the technical assistance the office provided on application procedures was helpful, our previous work noted several areas in which Education could improve its assistance to HEA grantees, in part through better guidance. For example, we recommended that in order to effectively manage the grant program, Education further develop and maintain its system for regularly communicating program information, such as information on successful and unsuccessful practices. We noted that without knowledge of successful ways of enhancing the quality of teaching in the classroom, grantees might be wasting valuable resources by duplicating unsuccessful efforts. Since 2002, Education has made changes to improve communication with grantees and potential applicants. For example, the department presented workshops to potential applicants and updated and expanded its program Web site with information about program activities, grant abstracts, and other teacher quality resources. In addition, Education provided examples of projects undertaken to improve teacher quality and how some of these efforts indicate improved teacher quality in its 2005 annual report on teacher quality. Education also has provided assistance to states, districts and schools using NCLBA Title II funds. The department offers professional development workshops and related materials that teachers can access online through Education's website. In addition, Education assisted states and districts by providing updated guidance. In our 2005 report, officials from most states and districts we visited who use Education's Web site to access information on teacher programs or requirements told us that they were unaware of some of Education's teacher resources or had difficulty accessing those resources. We recommended that Education explore ways to make the Web-based information on teacher qualification requirements more accessible to users of its Web site. Education immediately took steps in response to the recommendation and reorganized information on its website related to the teacher qualification requirements. In addition to providing assistance and guidance, Education is responsible for evaluating the efforts of HEA and NCLBA recipients and for overseeing program implementation. Under HEA, Education is required to annually report on the quality of teacher training programs and the qualifications of current teachers. In 2002, we found that the information collected for this requirement did not allow Education to accurately report on the quality of HEA's teacher training programs and the qualifications of current teachers in each state. In order to improve the data that states are collecting from institutions that receive HEA teacher quality grants, and all those that enroll students who receive federal student financial assistance and train teachers, we recommended that Education should more clearly define key data terms so that states provide uniform information. Further, in 2004, the Office of Management and Budget (OMB) completed a Program Assessment Rating Tool (PART) assessment of this program and gave it a rating of "results not demonstrated," due to a lack of performance information and program management deficiencies. Education officials told us that they had aligned HEA's data collection system with NCLBA definitions of terms such as "highly qualified teacher." However, based on the PART assessment, the Administration proposed eliminating funding for HEA teacher quality grants in its proposed budgets for fiscal years 2006-2008, and redirecting the funds to other programs. Congress has continued to fund this program in fiscal years 2006 and 2007. Education has responded to our recommendations and issues raised in the PART assessment related to evaluating grantee activities and providing more guidance to grantees on the types of information needed to determine effectiveness. When the Congress amended HEA in 1998 to provide grants to states and partnerships, it required that Education evaluate the activities funded by the grants. In 2005, Education established performance measures for two of the teacher quality enhancement programs--state grants and partnership grants--and required grantees to provide these data in their annual performance plans submitted to Education. The performance measure for state grants is the percentage of prospective teachers who pass subject matter tests, while the measure for partnership grants is the percentage of participants who complete the program and meet the definition of being "highly qualified." In addition, in 2006, Education included information in letters to grantees on the types of information that it requires to assess the effectiveness of its teacher quality programs. For example, in its letters to state grantees, Education noted that when reporting on quantitative performance measures, grantees must show how their actual performance compared to the targets (e.g., benchmarks or goals) that were established in the approved grant application for each budget period. In addition, in May 2006, Education issued its final report on HEA's partnership grants, focusing on the 25 grantees of the 1999 cohort. The goal of the study was to learn about the collaborative activities taking place in partnerships. It was designed to examine approaches for preparing new and veteran teachers and to assess the sustainability of project activities after the grant ends. Among its findings, Education reported that partnerships encouraged and supported collaboration between institutions of higher education and schools to address teacher preparation needs. Under NCLBA, Education holds districts and schools accountable for improvements in student academic achievement, and holds states accountable for reporting on the qualifications of teachers. NCLBA set the end of the 2005-2006 school year as the deadline for teachers of core academic subjects, such as math and science, to be highly qualified. Teachers meeting these requirements must (1) have at least a bachelor's degree, (2) be certified to teach by their state, and (3) demonstrate subject matter competency in each core academic subject they teach. Education collects state data on the percent of classes taught by highly qualified teachers and conducts site visits in part to determine whether states appropriately implemented highly qualified teacher provisions. In state reviews conducted as part of its oversight of NCLBA, Education identified several areas of concern related to states' implementation of teacher qualification requirements and provided states feedback. For example, some states did not include the percentage of core academic classes taught by teachers who are not highly qualified in their annual state report cards, as required. In addition, because some states inappropriately defined teachers as highly qualified, the data that these states reported to Education were inaccurate according to a department official. In many states, the requirements for teachers were not sufficient to demonstrate subject matter competency. Since subject matter competency is a key part of the definition of a highly qualified teacher, such states' data on the extent to which teachers have met these requirements could be misleading. Education also found that a number of states were incorrectly defining districts as high-need, in order to make more districts eligible for partnerships with higher education institutions. According to Education, each of these states corrected their data and the department will continue to monitor states to ensure they are using the appropriate data. In addition to Education's oversight efforts, OMB completed a PART assessment of NCLBA Title II in 2005 and rated the program as "moderately effective." While OMB noted that the program is well- managed, it also noted that the program has not demonstrated cost- effectiveness and that an independent evaluation has not been completed to assess program effectiveness. In response to OMB's assessment, Education took steps to more efficiently monitor states and conducted two program studies related to teacher quality. An Education official told us that the program studies had been conducted but the department has not yet released the findings. In conclusion, the nation's public school teachers play a key role in educating 48 million students, the majority of our future workforce. Recognizing the importance of teachers in improving student performance, the federal government, through HEA and NCLBA, has committed significant resources and put in place a series of reforms aimed at improving the quality of teachers in the nation's classrooms. With both acts up for reauthorization, an opportunity exists for the Congress to explore potential interrelationships in the goals and initiatives under each act. While HEA and NCLBA share the goal of improving teacher quality, it is not clear the extent to which they complement each other. Our separate studies of teacher quality programs under each of the laws have found common areas for improvement, such as data quality and assistance from Education. We have also found that states, districts, schools, and grantees under both laws engage in similar activities. However, not much is known about how well, if at all, these two laws are aligned. Thus, there may be opportunities to better understand how the two laws are working together at the federal, state, and local level. For example, exploring links between efforts aimed at improving teacher preparation at institutions of higher education and efforts to improve teacher quality at the school or district level could identify approaches to teacher preparation that help schools the most. Mr. Chairman, this concludes my prepared statement. I welcome any questions you or other Members of this Subcommittee may have at this time. For further information regarding this testimony, please contact me at 202- 512-7215. Individuals making key contributions to this testimony include Harriet Ganson, Bryon Gordon, Elizabeth Morrison, Cara Jackson, Rachel Valliere, Christopher Morehouse, and Jessica Botsford. 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.

Teachers are the single largest resource in our nation's elementary and secondary education system. However, according to recent research, many teachers lack competency in the subjects they teach. In addition, research shows that most teacher training programs leave new teachers feeling unprepared for the classroom. While the hiring and training of teachers is primarily the responsibility of state and local governments and institutions of higher education, the federal investment in enhancing teacher quality is substantial and growing. In 1998, the Congress amended the Higher Education Act (HEA) to enhance the quality of teaching in the classroom and in 2001 the Congress passed the No Child Left Behind Act (NCLBA), which established federal requirements that all teachers of core academic subjects be highly qualified. This testimony focuses on (1) approaches used in teacher quality programs under HEA and NCLBA, (2) the allowable activities under these acts and how recipients are using the funds, and (3) how Education supports and evaluates these activities. This testimony is based on prior GAO reports. We updated information where appropriate. While the overall goal of Title II in both HEA and NCLBA is to improve teacher quality, some of their specific approaches differ. For example, a major focus of HEA provisions is on the training of prospective teachers while NCLBA provisions focus more on improving teacher quality in the classroom and hiring highly qualified teachers. Both laws use reporting mechanisms to increase accountability; however, HEA focuses more on institutions of higher education while NCLBA focuses on schools and districts. In addition, HEA and NCLBA grants are funded differently, with HEA funds distributed through one-time competitive grants, while Title II under NCLBA provides funds annually to all states through a formula. Both acts provide states, districts, or grantees with the flexibility to use funds for a broad range of activities to improve teacher quality, including many activities that are similar, such as professional development and recruitment. A difference is that NCLBA's Title II specifies that teachers can be hired to reduce class-size while HEA does not specifically mention class-size reduction. Districts chose to spend about one-half of their NCLBA Title II funds on class-size reduction in 2004-2005. On the other hand, professional development and recruitment efforts were the two broad areas where recipients used funds for similar activities, although the specific activities varied somewhat. Many HEA grantees we visited used their funds to fill teacher shortages in urban schools or recruit teachers from nontraditional sources, such as mid-career professionals. Districts we visited used NCLBA funds to provide bonuses, advertise open teaching positions, and attend recruitment events, among other activities. Under both HEA and NCLBA, Education has provided assistance and guidance to recipients of these funds and is responsible for holding recipients accountable for the quality of their activities. GAO's previous work identified areas where Education could improve its assistance on teacher quality efforts and more effectively measure the results of these activities. Education has made progress in addressing GAO's concerns by disseminating more information to recipients, particularly on teacher quality requirements, and improving how the department measures the results of teacher quality activities by establishing definitions and performance targets under HEA. While HEA and NCLBA share the goal of improving teacher quality, it is not clear the extent to which they complement each other. States, districts, schools, and grantees under both laws engage in similar activities. However, not much is known about how well, if at all, these two laws are aligned. Thus, there may be opportunities to better understand how the two laws are working together at the federal, state, and local level.

While PNRS, NCIIP, and CBI all provided federal funds for transportation infrastructure projects, they differed somewhat in their goals, methods used for selecting projects, and methods used for distributing the federal funds to states, as indicated in table 1. (See app. V for a list and description of the 153 projects funded by the three programs.) SAFETEA-LU authorized different funding levels for the three programs in each fiscal year of the 5-year authorization period, as shown in table 2; however, the amounts ultimately distributed to the states for those years were adjusted downward for several reasons. The funds authorized for these programs, which come from the federal Highway Trust Fund, represent funds that can be made available to the Secretary of Transportation, acting through FHWA, to carry out these programs. These funds are subject to limitation through the annual appropriations process and deductions may be made for rescissions, among other things. In fiscal years 2005 and 2006, the funding for these three programs was 14 percent less than the authorizations for those 2 years and in fiscal years 2007 and 2008 the funding was 8 percent less than the authorizations for those years. After funds are allocated for these programs and FHWA has reviewed project documentation for completeness and consistency with congressional language, funds may be obligated, or set aside, for the projects. These three programs, like most federal-aid highway programs, distribute federal funds by reimbursement to the states. States spend other funds for eligible project expenses and submit claims to FHWA for review and approval before they receive the federal funds under these programs as reimbursement. Before federal funds are distributed to a state for a project under these three programs, the state must submit a proposal for a PNRS or an NCIIP project, or a project eligibility form for a CBI project, to FHWA. FHWA compares information about the project against the project description included in SAFETEA-LU for PNRS or NCIIP projects and against eligibility criteria as defined in SAFETEA-LU for CBI projects. In addition, FHWA follows the normal steps for reviewing a project application for the use of federal-aid highway program funds. For example, FHWA ensures that the state agrees to apply federal laws as a condition of receiving funds under these and other federal-aid highway programs, such as the environmental assessment provisions of the National Environmental Policy Act (NEPA) and the Davis-Bacon Act's prevailing wage requirements. SAFETEA-LU directed all of the PNRS and NCIIP funds to specific projects. SAFETEA-LU also contained other provisions that set forth a criteria-based, competitive process for selecting PNRS and NCIIP projects; however, this process was superseded by the congressional directives. According to SAFETEA-LU's competitive process, PNRS projects selected for federal funding were to have national and regional significance and benefits that the act described as improving economic productivity by facilitating international trade and relieving congestion, among other things. The criteria for selecting NCIIP projects were that they be located in "corridors of national significance" and that their selection be based on the extent to which a corridor links two existing segments of the Interstate System, is able to facilitate major multistate or regional mobility, and promotes economic growth. Additional criteria for NCIIP funding included the value of commercial vehicle traffic cargo in the corridor and economic costs arising from congestion. Federal funds distributed through the CBI program to states had to be used generally for infrastructure or operational improvements on highways within 100 miles of a border with Canada or Mexico. In addition, states can transfer up to 15 percent or $5 million (whichever is less) of the state's yearly amount of CBI funds to the General Services Administration (GSA), which owns and leases facilities at U.S. land border ports of entry. GSA can use these funds for CBI-eligible projects on its property. Border states can also propose to use CBI funds on projects located in Canada or Mexico that facilitate cross-border movement at an international port of entry in the border region of the state. States established goals for their projects to address capacity, congestion, economic and safety issues. According to the latest data available from FHWA, most PNRS, NCIIP, and CBI projects had been reviewed by FHWA, and funds had been distributed to states; however, some states had not initiated efforts to obtain federal funds for their projects under these programs. The federal contributions to estimated total project costs varied by program. States have used the program funds mainly for highway projects, although some rail and intermodal projects were funded under PNRS. Furthermore, states have used the project funds for various activities and purposes. The 14 states we reviewed established a variety of goals for the national and regional projects funded by the three programs. In broad terms, these goals included increasing transportation capacity, enhancing passenger and freight mobility, reducing congestion, promoting economic development, and improving safety. Table 3 identifies more detailed goals for some projects. As of December 2, 2008, FHWA had received project descriptions for and reviewed and distributed funds for most of the projects funded by congressional directive (46 of 55 projects) under PNRS and NCIIP, as shown in table 4. As of September 30, 2008, 14 of 15 border states had initiated efforts to obtain CBI funds by submitting required descriptions of proposed projects to FHWA. These 14 states had received funds for 98 CBI projects. Since SAFETEA-LU was passed in August 2005, FHWA has distributed most of the funds appropriated for these programs to the states for use on reviewed projects; however, FHWA has set aside, or obligated, only a portion of these funds for specific projects. As shown in table 5, as of September 30, 2008, FHWA had obligated nearly $1.2 billion, or about 33 percent of the $3.6 billion authorized under the three programs through that period. Although FHWA has obligated about a third of the authorized funds for reviewed projects, many of these projects are generally still in preliminary stages. As we have previously reported, FHWA has determined that it typically takes from 9 to 19 years to plan, gain approval for, and construct a new, major, federally funded highway project that has significant environmental impacts. As many as 200 major steps can be involved in developing such a project, from identifying the need for it to starting construction. While states have submitted complete project descriptions to FHWA for most projects and have received funds for them, some states have not done so, including the following: Three states had not submitted descriptions or requested funds for 3 of the 24 PNRS projects, as of December 2, 2008. Transportation officials in Michigan and Minnesota told us they were waiting to complete the environmental impact statement before submitting a project description and requesting PNRS funds for 2 of these projects (Blue Water Bridge Border/Port Huron Plaza project in Michigan and the Union Depot Multimodal Transit Facility in Minnesota). FHWA also did not receive a project description for the PNRS project involving improvements to I-80 in Pennsylvania. Three states and the District of Columbia had not submitted project descriptions or requested funds for 4 of 31 NCIIP projects, as of December 2, 2008. Officials we interviewed in two of those states offered varied reasons for not using the funds. For example, Arizona DOT officials said they did not submit a description for the State Route 85 project because they were trying to identify an appropriate project segment that could meet the NCIIP funding criteria. Wisconsin DOT officials told us they had not yet requested the NCIIP funds for the U.S. 41 project since the NCIIP funds do not have to be used by a specified date. In addition, FHWA has not received NCIIP project descriptions for the Frederick Douglas Memorial Bridge in the District of Columbia and I-80 improvements in Indiana. One of 15 border states (New Hampshire) had not used any of its distribution of CBI funds, as of September 30, 2008. An FHWA official told us that New Hampshire has only one border crossing, and it is not always open; therefore, the New Hampshire DOT is trying to identify a suitable project that meets CBI funding criteria. The federal share of contributions relative to the estimated total project costs varies widely between the PNRS and NCIIP programs and the CBI program, as shown in table 6. For example, under PNRS, the federal funding contributions represented less than 30 percent of the estimated total project cost for the majority of reviewed projects (i.e., for 15 of 19 PNRS projects). Under NCIIP, the federal funding contributions represented less than 30 percent of the estimated total project cost for about half of the reviewed NCIIP projects (i.e., for 13 of 27 NCIIP projects). The federal shares for the congressionally directed PNRS projects that received funding from FHWA varied widely, ranging from about 2 percent for the construction of I-73 between North and South Carolina to 104 percent for a project to relocate freight rail operations from El Paso, Texas, to New Mexico. In contrast, CBI funds represented 80 percent or more of the estimated total project cost for almost half (44 of 98) of reviewed CBI projects selected by the states. Generally, CBI program funds were often used by states for smaller-scope, lower-cost projects--such as resurfacing highway pavement, rehabilitating rest areas, refurbishing tollbooths, or installing guardrails. For high-cost projects--those whose estimated total costs equaled or exceeded $500 million (11 of 19 PNRS projects, 11 of 27 NCIIP projects, and 1 of 98 CBI projects)--PNRS funds averaged about 8 percent of estimated total costs, NCIIP funds averaged about 4 percent of estimated total costs, and CBI funds averaged about 13 percent of estimated total costs. For non-high-cost projects, the range and the average federal share of contributions as a percentage of estimated total project costs is similar for each program. Table 7 presents information on the range and average percentage of estimated total project costs provided by federal funds, by program. States have used the funds from the three national and regional programs mainly for highway projects. As shown in table 8, 137 of 144 total reviewed projects, or 95 percent, involved highways. While some sections of SAFETEA-LU restricted funds from all three programs to highway projects, another section of SAFETEA-LU directed some PNRS funds to nonhighway projects. (See app. V for complete lists of PNRS, NCIIP, and CBI projects.) These nonhighway PNRS projects included an intermodal project in Chicago (the CREATE program) and a rail project in New York (the Cross Harbor Freight Movement project). States have used their PNRS, NCIIP, and CBI project funds for a variety of activities, including conducting environmental studies, planning, preliminary engineering, design, right-of-way acquisition, and construction. Moreover, these project funds can be used for diverse purposes, such as expanding ongoing projects, covering cost increases or revenue shortfalls, or initiating projects and attracting nonfederal funds. The following examples from projects in table 3 illustrate how states have used their project funds: Oregon DOT officials told us PNRS funds enabled the state to undertake additional I-5 bridge repair projects beyond those possible with the previous level of state funding. Because I-5 is the only north-south interstate highway linking Oregon to California and Washington, upgrading the bridges is expected to improve the flow of freight through all three states. Connecticut DOT officials told us that NCIIP funds provide the necessary momentum to continue the Pearl Harbor Memorial Bridge project. Without these federal funds, the officials said, other transportation projects would have had to be postponed until Connecticut could finish this project. Officials stated that Connecticut actively seeks federal funding for large transportation projects so that it can direct state funds to other transportation projects. Finally, some states have used the program funds to initiate projects and attract other state and local funds. For example, the California DOT used a portion of its CBI funding to attract state funds for the Brawley Bypass project. According to California DOT officials, if federal funds had not been distributed to this project, it would have not have qualified for state funds--under California law, a project sponsor must obtain nonstate matching funds before it can obtain state funds--and the project would have been more difficult to complete. In discussing the three programs, stakeholders discussed a wide variety of both advantages and challenges, but they cited advantages less often than challenges. Specifically, in our interviews with 56 stakeholders, there were 47 instances in which stakeholders cited advantages of these programs and 66 instances in which they cited challenges. The advantages were primarily related to the benefits of the programs' funding, while the more numerous challenges included funding issues but also addressed problems in complying with federal requirements and in not using the criteria-based competitive process established in SAFETEA-LU to select projects. When asked about the advantages of the three programs, the stakeholders we interviewed focused primarily on the funding the programs provided. (See app. II for a complete list of these advantages and the number of interviews in which each advantage was mentioned by a stakeholder group.) The most frequently cited advantage was the support the programs provided to initiate projects and to advance those that were already under construction. For example, as stated earlier, Connecticut DOT officials told us that NCIIP funds allowed them to continue work on the Pearl Harbor Memorial Bridge project without having to stop other transportation projects that would otherwise have had to be postponed until the bridge could be completed. The second most frequently cited advantage was the opportunity the programs provided to address high-cost projects and issues the stakeholders considered to be of national importance. For example, one stakeholder said that PNRS funding enabled it to address a high-cost project that required multiple funding partnerships, and another stakeholder said the CBI funding allowed it to undertake a project that serves regional and national needs by facilitating cross-border commercial truck traffic. Two additional advantages, both related to the programs' funding, were the third most frequently cited. These included the direction of PNRS funds to nonhighway projects and the ability of the program funds to attract additional nonfederal funds, as follows: Stakeholders viewed the direction of some PNRS funds to nonhighway projects as an advantage in addressing some states' transportation priorities because such projects would not otherwise have been eligible for PNRS funds under current law. Some stakeholders cited the ability of PNRS or NCIIP funds to attract additional nonfederal funds. For example, some stakeholders mentioned that because federal funds were directed toward a specific project, nonfederal funds were distributed by the state and local government to satisfy the state and local match requirements. While stakeholders cited some advantages, there were more instances in which stakeholders cited challenges associated with these three programs. (See app. III for the list of challenges and the number of instances that each challenge was cited in a stakeholder interview.) The challenges most frequently cited were related to funding, including the uncertainty of future federal funding, the relatively limited amounts of funding provided for large projects, and the impact of inflation. Funding uncertainty presents a challenge because almost all PNRS and NCIIP projects were funded below their full cost and project sponsors do not know whether they will receive additional federal funds beyond fiscal year 2009 to complete their projects. According to one stakeholder, states need a reliable funding stream in order to plan and obtain nonfederal funding. As a result, some stakeholders told us they planned to seek additional federal funds beyond fiscal year 2009 to complete their projects. The percentage of total estimated project costs provided by the three programs also presents a challenge to projects' completion. As noted, under the PNRS program, the federal funding contributions represented less than 30 percent of the estimated total project costs for the majority of reviewed projects. Under the NCIIP program, the federal funding contributions represented less than 30 percent of the estimated total project costs for about half of the reviewed projects. For high-cost projects, PNRS funds averaged about 8 percent of the estimated total costs, and NCIIP funds averaged about 4 percent of the estimated total costs. According to some stakeholders, certain projects will be placed on hold unless they receive additional federal funds. Inflation poses a challenge because it reduces the value of the federal funds from these programs over time. One stakeholder reported that the rising cost of right-of-way acquisition has increased project planning uncertainty. Some stakeholders reported that inflation has also greatly increased the cost of construction materials over time. According to the Bureau of Labor Statistics, the producer price index for highway and street construction increased by about 41 percent from August 2005 to August 2008 (the latest month for which these data are available). The second most frequently cited challenge was difficulty in complying with federal requirements. For example, the stakeholders who cited compliance with federal and environmental requirements as a challenge noted the additional time and expense involved. In the view of some state and local transportation officials, these requirements may be too onerous to justify the use of the program funds. One stakeholder stated that the environmental review process, established under NEPA, takes a long time and that the Davis-Bacon prevailing wage requirements require higher- than-market wages, resulting in increased project costs. Stakeholders also reported that it can be difficult to obtain state and local funds to match the federal funds, as required. One stakeholder reported that it was still trying to obtain enough state and local funding to meet the matching requirements. The third most frequently cited challenge was not using the criteria-based competitive process in SAFETEA-LU to select PNRS and NCIIP projects. According to the stakeholders, it was difficult to determine whether the congressionally directed projects addressed national and regional priorities because the projects were not evaluated against the act's criteria. For example, DOT officials said not using the criteria-based competitive process made it difficult to assess the national transportation system across modes to determine where strategic improvements should be made. According to our interviews with program stakeholders and our prior work on federal surface transportation programs, clearly defining the federal role in surface transportation is an important step toward focusing these three programs. Once the federal role has been clarified, two approaches that have been used in the past could be used to distribute federal transportation funds to projects that are consistent with that role-- criteria-based competition or formula-based distribution. Both approaches have a range of characteristics; however, our interviews with stakeholders and our prior work suggest that a criteria-based competition could enhance these programs by targeting federal investments in accordance with a more clearly defined federal role and directing funds to stated program goals. In addition, Congress could still direct funds to specific projects as it did in two of the three programs. Some stakeholders we interviewed also suggested a wide range of both broad and specific program enhancements (see app. IV). Stakeholders from all the groups we spoke with for this engagement said that a clear definition of the federal role in transportation could help guide federal investments toward achieving national transportation priorities. Stakeholders mentioned several different ways the federal role could be better defined--from reducing the federal role in transportation infrastructure financing by giving more responsibility to individual states for the transportation system, to focusing more resources on fewer transportation programs, to concentrating federal resources on large transportation projects that affect multiple states. In our prior work, we have frequently called for more clearly defining the federal role in surface transportation. We have found that multiple federal roles can be inferred from the variety of surface transportation programs the federal government funds, but there is no single definition or set of priorities to use to focus federal surface transportation spending. In 2008, we called for a fundamental reexamination of the nation's surface transportation system, noting that the federal goals are unclear, the federal funding outlook for surface transportation is uncertain, and the efficiency of the transportation system is declining. We have also found that the lack of a defined federal role in transportation is a reason why many current federal transportation programs are ineffective in addressing key transportation challenges, and we have identified federal transportation funding as a high-risk area. Additionally, in a May 2007 forum convened by the Comptroller General on transportation policy, participating experts stated that the nation's transportation policy has lost focus and that a better definition of overall transportation goals is needed to better meet current and future infrastructure needs. The two primary approaches that are available and have been used historically to distribute federal funds to transportation infrastructure projects--criteria-based competition and formula-based distribution-- have a range of characteristics that include both advantages and disadvantages. Table 9 shows the characteristics of each approach as identified by stakeholders we interviewed and through our prior work. Regardless of the approach selected, Congress could still direct funds to individual transportation projects as it did in two of the three programs. According to some stakeholders, congressional directives circumvent the established state transportation planning process and may indirectly divert nonfederal resources as states and others reprioritize their funds in order to use the directed federal funds. However, other stakeholders described congressional directives as a way to distribute federal funds more quickly than through a competition and as a way to provide funds for projects that might otherwise not receive funding through the established state transportation planning process. According to stakeholders we interviewed and our prior work, a criteria- based, competitive approach, such as the competitive process included in SAFETEA-LU for PNRS and NCIIP, could provide the best opportunity to enhance these programs by better targeting federal investments in transportation infrastructure. Such targeting is important for these three programs because they were designed to direct federal funds toward projects for enhancing transportation infrastructure that has national and regional impacts. While this approach has a range of characteristics, including some disadvantages, stakeholders stated that it allows each project to be evaluated on its merits, and it incorporates stakeholders' views and input. We have previously testified that a fiscally sustainable surface transportation program will require targeted investments in the transportation system from federal and nonfederal stakeholders. Moreover, with regard to freight transportation, we recommended in our prior work that DOT define the federal role for the use of federal funds, establish clear roles for stakeholders, and focus federal funding to support the federal role in a cost-effective manner. In addition, we have found that having more federal programs operate competitively could help tie funds to performance. Canada's Asia-Pacific Gateway and Corridor Initiative (APGCI) offers an example of how the three programs discussed here could be restructured as criteria-based, competitive programs. The Canadian government's vision for its program is to invest in critical freight transportation projects that facilitate the movement of freight from Asia to Canada and through to the United States. Transport Canada, the federal Canadian government's transportation agency, identifies key transportation projects through analytical studies or decides to fund projects submitted by provinces or towns using program criteria and freight transportation data. The criteria that were developed focused on objectives in support of the program's vision, such as enhancing efficiency, safety, and security and minimizing environmental impacts. According to a Transport Canada official, using data on freight flows assisted Transport Canada in determining the extent to which specific projects would support international trade with Asia. The official further noted that the specific criteria enabled Transport Canada to take a rigorous approach, be selective, and thus deliver on the key objectives. Additionally, the official said, previous programs had less focused objectives, allowing a considerably wider variety of projects to be funded. Transport Canada works with public and private stakeholders to define what a project will entail, identify other nonfederal funding sources, complete a cost-benefit analysis, monitor the project, and evaluate the impact of the project after it is complete. Since October 2006, APGCI has leveraged a federal investment of $860 million into a total federal and nonfederal investment of $2.3 billion in 20 transportation projects. The federal share for these projects has ranged between 33 and 50 percent of total project costs. Our national transportation network faces many challenges. As demands for greater passenger and freight mobility increase and transportation infrastructure continues to show signs of age, fatigue, and congestion, governments at the federal, state, and local levels need to prioritize their limited resources to meet these demands. The three programs established in SAFETEA-LU were intended to address national and regional priorities by helping to fund a range of high-cost infrastructure projects or could not easily or specifically be addressed within existing federal surface transportation programs. As Congress prepares for the reauthorization of federal surface transportation programs in 2009, it will need to reexamine the relative contributions of these three programs and all other surface transportation programs to solving our nation's transportation problems and achieving federal goals. With regard to PNRS and NCIIP, the relatively small federal share, especially for higher-cost projects, the number of projects, and the distribution of projects across the country, have raised concerns that the federal government did not maximize the impact of its limited transportation funds. We have similar concerns about the CBI program in that it was used by states for smaller-scope, lower-cost projects. In addition, some of the program enhancements mentioned by stakeholders could also improve all three programs. However, without a clearly defined federal role and a competitive, criteria-based process for distributing federal funds, it is unclear whether or how these programs can meet national or regional transportation priorities or maximize the benefits of investing increasingly scarce federal funds in our transportation infrastructure. In order to enhance these three programs, we concluded that Congress should consider taking the following three actions when considering the reauthorization of federal surface transportation programs: Define the federal role in surface transportation in accordance with the national and regional transportation priorities that these three programs are designed to meet. Implement a criteria-based, competitive project selection process for these three programs, in concert with other selection criteria. Work with the Secretary of Transportation to develop any specific program enhancements that could help these programs meet identified priorities and achieve the highest return on federal investments. We provided a draft of this report to DOT for review and comment. On January 22, 2009, we received comments on the report from DOT officials, including FHWA, FRA, and MARAD officials, in an e-mail from DOT's Office of Audit Relations. The officials generally agreed with the information in this report and stated that the department would be happy to assist Congress as it considers the proposed matters. In addition, DOT provided technical clarifications, which we incorporated in the report as appropriate. We are sending copies of this report to congressional committees with responsibilities for transportation issues and to the Secretary of Transportation. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 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 that made key contributions to this report are listed in appendix VI. In this report, we assessed three federal transportation programs established by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), enacted in August 2005, to target funds to infrastructure projects that have high costs, involve national or regional impacts, and cannot easily or specifically be addressed within existing federal surface transportation programs. The programs, administered by the Federal Highway Administration (FHWA), include the Projects of National and Regional Significance (PNRS), the National Corridor Infrastructure Improvement Program (NCIIP), and the Coordinated Border Infrastructure (CBI) program. As requested, we addressed the following questions: (1) What are the goals, funding status, and types of projects and activities funded for the three programs? (2) What advantages and challenges did stakeholders say were associated with these three programs? (3) What approaches are available for enhancing the three programs? In addressing these questions, our overall approach was to (1) review federal law, proposed regulations, FHWA's program guidance and information, FHWA status reports on each program, and a Department of Transportation (DOT) report on the PNRS program; (2) review pertinent documentation, including some of the project proposals, plans, and information submitted to DOT for projects funded by these programs; and (3) interview officials from 56 "stakeholder" entities to understand the programs' advantages, challenges, and possible enhancements. Stakeholders broadly have interest and expertise in one or more of the three programs, in a specific transportation project funded by one of these programs, or in federal surface transportation policy generally. The stakeholders we interviewed included officials from the following entities, which are also listed in table 10 at the end of this appendix: DOT headquarters in Washington, D.C., including the Office of the Secretary; FHWA; the Federal Railroad Administration (FRA); and the Maritime Administration (MARAD); as well as FHWA division offices in eight states, for a total of 12 DOT entities; and 16 state transportation departments, 16 local government agencies (including port authorities and metropolitan planning organizations), and 12 transportation associations or other expert organizations. We conducted some of these interviews as part of our site visits to eight states--California, New York, New Jersey, Connecticut, Illinois, Wisconsin, Washington, and Oregon--where we met with officials who manage projects funded through the three programs. In selecting our sites, we considered geographic diversity, the funding authorized by states for these programs, and the characteristics of the projects funded. The 16 state transportation departments we selected for interviews included 14 states that collectively accounted for 86 projects funded by the three programs and 2 states, Florida and Wyoming, that did not have projects funded by these three programs. Also, for comparison, we contacted Transport Canada, the transportation department of the federal Canadian government, and the Ministry of Transportation and Infrastructure of the Canadian province of British Columbia, to obtain information about similar infrastructure investment programs. In addition, to address the first question on funding status, we reviewed FHWA's data on amounts authorized, appropriated, and obligated for PNRS, NCIIP, and CBI. To assess the reliability and quality of FHWA's financial data, we analyzed related documentation and interviewed knowledgeable agency officials. Through these efforts, we determined that the data were sufficiently reliable for this report. We relied extensively on our interviews with transportation stakeholders and our prior work on surface transportation to identify not only the goals and types of projects and activities funded by these programs and the characteristics of individual restructuring approaches for them, but also a wide array of program enhancements. To address the second question on advantages and challenges, we analyzed our stakeholder interviews, and to respond to the third question, we relied on both our prior work and our stakeholder interviews to identify potential enhancements to the three programs. We conducted this performance audit from December 2007 to February 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. Finally, table 10 identifies the stakeholder entities included in our study. Number of instances in which the advantage was identified in an interview (number in parenthesis is the total number of interviewees in the group) DOT (12) States (16) Local governments (16) and experts (12) Total (56) Addressed high-cost projects and issues of national importance. Directed some PNRS funds to nonhighway projects. Made a broad array of project costs eligible for PNRS and NCIIP funds. Distributed CBI funds by formula or ability to use funds in Canada. Federal involvement helped enable interstate cooperation. Made DOT think system wide instead of locally. Funds did not reduce a state's distribution of formula funds or funding for other high-cost projects. Allowed for geographically targeted funding. Congressional directives reduce time to get funds to projects. States could use other funds for the state and local match requirement. Established no maintenance of effort requirement for states. Number of instances in which the challenge was identified in the an interview (number in parenthesis is the total number of interviewees in the group) DOT (12) States (16) Local governments (16) and experts (12) Total (56) Funding issues (such as uncertainty, small funding amounts for large projects, and inflation). Criteria-based competitive process in SAFETEA-LU for PNRS and NCIIP was not used to select projects. States had to reprioritize projects to use program funds. Funds can only be used as indicated in the project description for PNRS and NCIIP congressionally directed projects. Use of cost-benefit analysis and performance measures is limited. Coordination among multiple stakeholders. Project descriptions were not submitted for some PNRS and NCIIP projects which delayed the release of funds. Number of interviews in which the enhancement was identified (number in parenthesis in the heading is the total number of interviewees in the group) DOT(12) (16) (16) (12) Implement PNRS and NCIIP as written in SAFETEA-LU using a criteria-based competition with DOT recommending to Congress which projects should be funded. Use cost-benefit analysis to evaluate projects before investment and performance metrics after investments. Make the full amount of the authorization available in the first year to get projects completed faster. Retain or increase the program's ability to invest in different modes. Distribute more federal funds to the programs. Reduce the number of federal programs. Have different areas compete for different pots of funds to introduce more equity between different-sized states or metro areas. Establish a multimodal Highway Trust Fund account. Require projects to be included in federally mandated state and local transportation improvement plans. Reduce the amount of nonfederal matching funds required to obtain federal funds. Use full funding grant agreements to increase the certainty of federal funds for selected projects. Allow CBI funds to be used for environmental reviews and for multimodal projects and increase the amount of CBI funds that can be transferred to the General Services Administration (GSA) in any given year. Focus more on core federal-aid highway programs. Reduce federal rescissions to increase the amount of federal funds that will go toward the selected projects. Make some amount available for congressional directives. Fund fewer projects with the same amount of funds. Allow funds to be transferred between projects during the authorization period as long as the full authorized amount is allocated by the end of the authorization period to increase the flexibility of the funds. Use a consistent definition of the border area to ensure states use CBI funds consistently. Number of interviews in which the enhancement was identified (number in parenthesis in the heading is the total number of interviewees in the group) DOT(12) (16) (16) (12) Freight fees, taxes, or tolls could go to a commission that would identify freight projects. Allow more states to conduct environmental impact statements. High-cost projects need funding that spans acts. High-cost projects should submit finance plans. Increase the federal reimbursement rate to states. Provide incentives to consider more than just "pavement." Establish an expiration date for federal funds to help ensure that projects with firm plans and nonfederal commitments are selected and to get projects completed faster. Appendix V: PNRS, NCIIP, and CBI Projects and Their Funding Not available. Not available. Not available. In addition to the individual named above, Rita Grieco, Assistant Director; Amy Abramowitz; Derrick Collins; Elizabeth Eisenstadt; Gregory Hanna; Carol Henn; Susan Irving; Bert Japikse; Thanh Lu; Sara Ann Moessbauer; Michelle Sager; and Laura Shumway made key contributions to this report.

To help meet increasing transportation demands, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) created three programs to invest federal funds in national and regional transportation infrastructure. As requested, this report provides (1) an overview of the goals, funding status, and types of projects and activities funded by the three programs; (2) advantages and challenges identified by program stakeholders; and (3) potential program enhancements. GAO reviewed pertinent federal laws and rules; examined plans for selected projects; conducted site visits; and interviewed officials, stakeholders, and experts. The goals of the projects funded by the three national and regional infrastructure programs--Projects of Regional and National Significance (PNRS), the National Corridor Infrastructure Improvement Program (NCIIP), and the Coordinated Border Infrastructure (CBI) program--are varied, most projects have been reviewed and funded, most projects are for highway improvements, and funds have been applied toward various related activities. PNRS and NCIIP funds were distributed by congressional directive, and CBI funds were distributed by formula. The states GAO visited or whose officials GAO interviewed had established a variety of project goals, including increasing capacity and enhancing mobility. As of December 2008, the Federal Highway Administration had reviewed most projects submitted by states and had obligated $1.2 billion, or about 33 percent of the $3.6 billion authorized for the three programs through September 30, 2008. However, some states had not initiated efforts to obtain available funding. The officials GAO interviewed cited various reasons for not pursuing the funds, such as trying to complete an environmental impact statement and trying to identify a project that met the program's funding criteria. The programs' contributions to projects' estimated total costs varied, from less than 30 percent of the estimated total costs for the majority of reviewed PNRS projects and about half of the reviewed NCIIP projects to 80 percent or more of the estimated total costs for almost half of the reviewed CBI projects. Furthermore, for high-cost projects--those expected to cost over $500 million--the programs' funding contributions ranged from about 4 to 13 percent of the estimated total project cost. States have used the program funds mainly for highway projects and for various related activities, such as conducting environmental studies and expanding ongoing projects. In discussing the three programs, stakeholders cited advantages less often than challenges. The most frequently cited advantage was the funding the programs provided to support and move projects forward. The most commonly cited challenge also involved funding and included funding uncertainty. This was a challenge because project sponsors did not know whether they would receive additional federal funds to complete their projects--especially high-cost projects. According to GAO's interviews and prior work, clearly defining the federal role in surface transportation is an important step in enhancing these programs. Two historical approaches could then be used to distribute federal funds--a criteria-based competition or a formula-based distribution. GAO's interviews and prior work suggest that a criteria-based competition could enhance these programs. Some interviewees also called for a wide range of other enhancements, from broad proposals to increase investment in different transportation modes to specific suggestions, such as using cost-benefit analysis in selecting projects. The Department of Transportation generally agreed with the report's information and conclusions and offered to work with Congress on GAO's three proposed matters.

The U.S. currency, reportedly the most widely held in the world, is susceptible to counterfeiting. High foreign inflation rates and the relative stability of the dollar have contributed to the increasing use of U.S. currency outside the United States. Of the $380 billion of U.S. currency in circulation, the Federal Reserve estimates that over 60 percent may be held outside the United States. The widespread use of U.S. currency abroad, together with the outdated security features of the currency, makes it a vulnerable target for international counterfeiting. Excluding two changes introduced in 1990, the overt security features of the currency have not substantially changed since 1929. This situation has resulted in the U.S. dollar's becoming increasingly vulnerable to counterfeiting. Widespread counterfeiting of U.S. currency could undermine confidence in the currency and, if done on a large enough scale, could even have a negative effect on the U.S. economy. The United States benefits from the international use of its currency. When U.S. currency remains in circulation, it essentially represents an interest-free loan to the U.S. government. The Federal Reserve has estimated that the existence of U.S. currency held abroad reduces the need of the government to borrow by approximately $10 billion a year. The Treasury, including the Secret Service and the Bureau of Engraving and Printing, and the Federal Reserve have primary responsibilities for addressing the counterfeiting of U.S. currency. The Secretary of the Treasury is responsible for issuing and protecting U.S. currency. The Secret Service conducts investigations of counterfeiting activities and provides counterfeit-detection training. The Secret Service is also the U.S. agency responsible for anticounterfeiting efforts abroad. The Bureau of Engraving and Printing designs and prints U.S. currency and incorporates security features into the currency. The Federal Reserve's role is to distribute and ensure the physical integrity, including the authenticity, of U.S. currency. A diverse group of perpetrators uses a variety of methods to counterfeit U.S. currency. And, although counterfeiting is carried out primarily for economic gain, it is sometimes linked with other more nefarious criminal endeavors, such as drug trafficking, arms dealing, and alleged terrorist activities. According to law enforcement officials, counterfeiters run the gamut from office workers to organized crime and terrorist groups, and the equipment used for counterfeiting U.S. currency ranges from photocopiers to sophisticated offset presses. Moreover, the quality of counterfeit notes varies significantly. Even those notes made using the same method vary according to the sophistication of the perpetrator and the type of equipment used. Of increasing concern is the fact that certain foreign counterfeiters are becoming extremely sophisticated and are now producing very high-quality counterfeit notes that are more difficult to detect than any previous counterfeits. The highest-quality family of counterfeits known today is commonly referred to as the Superdollar. While many allegations have been made about the Superdollar, little evidence in support of these allegations has been made public. In the Middle East, a group, allegedly a foreign government, is said to be sponsoring production of the Superdollar. According to reports by the House Republican Task Force on Terrorism and Unconventional Warfare, the Superdollar is printed in the Middle East on "high-tech state-owned presses with paper only acquired by governments." Also according to the task force, the Superdollar is "designed for direct infiltration into the U.S. banking system and has become a major instrument in facilitating the flow of militarily useful nuclear materials and equipment and various weapons systems." A few of the foreign law enforcement and financial institution officials we spoke with believed the Superdollar was being circulated through various terrorist organizations around the world. This belief was primarily based on reports of detections involving individuals with links to terrorist organizations. However, according to the Secret Service, the task force has provided almost no evidence to support its allegations. According to the Treasury, no evidence exists to show that the Superdollar is printed with paper acquired only by governments and that it is designed for direct infiltration into the U.S. banking system. The Treasury also maintained that support for the remaining allegations concerning the Superdollar was inconclusive. Furthermore, although the task force reported that between $100 million and billions of Superdollars are in circulation, the report provided no evidence to support these allegations. Since the Superdollar's initial detection in fiscal year 1990, Superdollar detections have represented a small portion of total counterfeit currency detections, according to the Treasury and Secret Service. While high-quality counterfeit notes, such as the Superdollar, have received the most attention from the media, Treasury officials told us that their biggest concern was the rapid advances in photographic and printing devices. According to a 1993 National Research Council report requested by the Treasury, the counterfeiting problem will increase as these technologies improve and are made more accessible to the public. The Treasury has planned to combat such counterfeiting through changes to the U.S. currency design, expected to be introduced in March 1996. The criminal nature of the activity precludes determination of the actual extent to which U.S. currency is being counterfeited abroad. The best data available to reflect actual counterfeiting are Secret Service counterfeit-detection data. Using these data, Treasury officials concluded that counterfeiting of U.S. currency was economically insignificant. Secret Service officials told us that they supplemented the counterfeit-detection data that they gathered with intelligence information and field experience and that these data demonstrated an increase in counterfeiting activity abroad. However, our analysis of the same counterfeit-detection data proved inconclusive. Secret Service data have limitations and thus provide only a limited measure of the extent of counterfeiting activities. Foreign officials' views about the seriousness of the problem of counterfeit U.S. currency were mixed. On the basis of the number of Secret Service counterfeit detections, Treasury officials concluded that counterfeiting of U.S. currency was economically insignificant and thus did not pose a threat to the U.S. monetary system. According to Secret Service and Treasury officials, detected counterfeits represented a minuscule portion of U.S. currency in circulation. Secret Service and Federal Reserve data showed that, in fiscal year 1994, of the $380 billion in circulation, $208.7 million had been detected as counterfeit notes. This figure represented less than one one-thousandth of the currency in circulation. However, while Treasury and Secret Service officials agreed that, overall, counterfeiting was not economically significant, they considered any counterfeiting to be a serious problem. The Secret Service used counterfeit-detection data, supplemented with intelligence information and field experience, to report that counterfeiting of U.S. currency abroad was increasing. In one analysis, it reported that the amount of counterfeit currency detected abroad increased 300 percent, from $30 million in fiscal year 1992 to $121 million in fiscal year 1993, thereby surpassing domestic detections in the same period. The Secret Service has also reported that, in recent years, a larger dollar amount of the notes detected in circulation domestically has been produced outside the United States. Since 1991, the dollar amount of counterfeit U.S. notes detected while in circulation and produced abroad has exceeded the dollar amount of those produced domestically. In fiscal year 1994, these foreign-produced notes represented approximately 66 percent of total counterfeits detected in circulation domestically. The true dimensions of the problem of counterfeiting of U.S. currency abroad could not be determined. The Treasury and the Secret Service use Secret Service counterfeit-detection data to reflect the actual extent of counterfeiting. However, although these data are the best available, they have limitations. Specifically, they are incomplete and present only a partial picture of counterfeiting. If these limitations are not disclosed, the result may be misleading conclusions. First of all, the actual extent of counterfeiting could not be measured, primarily because of the criminal nature of this activity. Secret Service data record only those detections that are reported to the Secret Service; they do not measure actual counterfeiting. As a result, the data provide no information about the number of counterfeiters operating in any given year or the size and scope of their operations. More importantly, these data could not be used to estimate the volume of counterfeit currency in circulation at any point in time. In the case of counterfeit currency appearing abroad, reasons for this include the following: (1) the data do not distinguish between how much counterfeit currency was seized and how much was passed into circulation; (2) the data could not provide information about how long passed counterfeits remained in circulation before detection; and (3) most critically, the data provide no indication of how much counterfeit currency was passed into circulation and not detected. Second, counterfeit detection data may in part only reflect where the Secret Service focuses its efforts. Use of these data thus may not identify all countries with major counterfeiting activity, but simply countries where agents focused their data collection efforts. For example, in fiscal year 1994, almost 50 percent of detections abroad occurred in the six countries where the Secret Service was permanently located. In other countries, counterfeit-detection statistics tend to be more inconsistent. Third, detection data for high-quality notes may be underreported. The Secret Service has said that, because so few Superdollars have been detected, this indicates that there are not many in circulation. However, according to the House Republican Task Force on Terrorism and Unconventional Warfare reports, the majority of Superdollars are circulating outside the formal banking system and therefore would not be reported to the Treasury if detected. Also, as we discovered on our overseas visits, many foreign law enforcement and financial organization officials had inconsistent and incomplete information on how to detect the Superdollar. Thus, financial institutions abroad may be recirculating the Superdollars. Fourth, reported increases in counterfeiting abroad, as supported by Secret Service detection data, may be based on a number of factors other than increased counterfeiting activity. For example, in 1993, the Secret Service changed its reporting practices abroad to be more proactive in collecting counterfeit-detection data. Instead of relying solely on reports from foreign officials, agents abroad began to follow up on Interpol reports and intelligence information in order to collect additional data. Also, according to Treasury officials, foreign law enforcement officials have improved their ability to detect counterfeit U.S. currency and report it to the Secret Service. Furthermore, the increase in domestic detections of counterfeits produced abroad is also subject to interpretation. For example, rather than foreign-produced notes increasing, it is possible that the Secret Service's ability to determine the source of counterfeit currency has simply improved over time. Fifth and finally, counterfeit-detection data fluctuate over time, and one large seizure can skew the data, particularly for detections abroad. For example, according to the Secret Service, several large seizures accounted for the jump from $14 million in counterfeit detections abroad in fiscal year 1988 to $88 million in fiscal year 1989. The following year, the data indicated a significant drop in detections. For detections outside the United States, the Secret Service has relied heavily on information provided by foreign law enforcement organizations, and has obtained little information from financial organizations. According to Secret Service officials, they supplemented their counterfeiting detection data with knowledge their agents gained through field experience and the sharing of intelligence information. Some of this information was not available or was considered too sensitive for an unclassified report. Our work did yield some information on the unclassified activities. For example, the Secret Service told us that it was conducting vault inspections during its joint international study team visits with Treasury and Federal Reserve officials. According to a Secret Service agent who performs the vault inspections, they include the checking of all U.S. currency in the vault for counterfeits. According to Federal Reserve and Secret Service officials, vault inspections had been conducted in only one of the six locations the Secret Service visited during the time of our review. Secret Service officials told us that the inspections had been conducted only in Argentina and were discontinued because of the limited results obtained there. The officials told us that the inspections might be reinstituted in other countries if it was decided that the effort was warranted. Overseas law enforcement and financial organization officials' views on the extent of the problem of counterfeit U.S. currency varied. Foreign law enforcement officials tended to be more concerned about counterfeit U.S. currency than foreign financial organization officials. Financial organization officials we met with said that they had experienced minimal chargebacks, and most expressed confidence in the ability of their tellers to detect counterfeits. Furthermore, we heard few reports from foreign financial organization and foreign law enforcement officials about U.S. currency not being accepted overseas because of concerns about counterfeiting. Most foreign law enforcement officials we spoke with believed that the counterfeiting of U.S. currency was a problem, but their opinions on the severity of the problem differed. Swiss, Italian, and Hungarian law enforcement officials said that it was a very serious problem. French and English law enforcement officials said that the problem fluctuated in seriousness over time. And German, French, and Polish officials said that the counterfeiting of U.S. currency was not as serious a problem as the counterfeiting of their own currencies. Some of these law enforcement officials expressed concern over increases in counterfeiting in Eastern Europe and the former Soviet Union. Some also expressed particular worry about their ability, and the ability of financial organizations in their countries, to detect the Superdollar. Conversely, most foreign financial organization officials we spoke with were not concerned about the counterfeiting of U.S. currency. Of the 34 organizations we visited in 7 countries, officials from 1 Swiss and 1 French banking association and 2 Hungarian banks viewed the counterfeiting of U.S. currency as a current or increasing problem. According to other foreign financial organization officials, they were not concerned about U.S. counterfeiting activity because it did not have a negative impact on their business. For example, none of the 16 financial organization officials with whom we discussed chargebacks told us that they had received substantial chargebacks due to counterfeit notes that they had failed to detect. In addition, some of these officials cited other types of financial fraud and the counterfeiting of their own currency as more significant concerns. For example, officials from one French banking association were more concerned with credit card fraud, and officials from two financial organizations in Germany and one financial organization in France said counterfeiting of their country's currency was a greater problem. Furthermore, foreign financial organization officials we spoke with were confident about their tellers' ability to detect counterfeits and, in some countries, tellers were held personally accountable for not detecting counterfeits. In most of the countries we visited, detection of counterfeit U.S. currency relied on the touch and sight of tellers, some of whom were aided by magnifying glasses or other simple detection devices, such as counterfeit detection pens. Other counterfeit-detection devices used abroad, like ultraviolet lights, did not work effectively on U.S. currency. While foreign financial organizations appeared confident of their tellers' ability to detect counterfeits, some of these organizations had incomplete information on how to detect counterfeit U.S. currency, particularly the Superdollar. Finally, foreign financial organization and law enforcement officials provided a few isolated cases in which U.S. currency was not accepted abroad. For example, when it first learned about the Superdollar, one U.S. financial organization in Switzerland initially stopped accepting U.S. $100 notes, although it later resumed accepting the U.S. notes from its regular customers. Also, Swiss police and Hungarian central bank and French clearing house officials reported that some exchange houses and other banks were not accepting $100 notes. We were unable to confirm these reports. However, a State Department official commented that, because drug transactions tended to involve $100 notes, some foreigners were reluctant to accept this denomination, not because of counterfeiting concerns, but rather because of the notes' potential link to money laundering. The U.S. government, primarily through the Treasury Department and its Secret Service and the Federal Reserve, has been increasing its counterfeiting deterrence efforts. These efforts include redesigning U.S. currency; increasing exchanges of information abroad; attempting to increase the Secret Service presence abroad; and attempting to stop production and distribution of counterfeit currency, including the Superdollar. To combat counterfeiting both domestically and abroad, the Treasury is redesigning U.S. currency to incorporate more security features intended to combat rapid advances in reprographic technology. This change, the most significant in over 50 years, is long overdue, according to some U.S. and foreign officials. The redesigned currency is planned for introduction in 1996 starting with changes to the $100 note, with lower denominations to follow at 9- to 12-month intervals. According to Treasury officials, the currency redesign will be an ongoing process, because no security features are counterfeit-proof over time. These officials also said that the old currency would not be recalled and would retain its full value. Moreover, the Treasury is leading a worldwide publicity campaign to facilitate introduction of the redesigned currency, ensure awareness and use of the overt security features, and assure the public that the old currency will still be accepted in full. Through this campaign, the Federal Reserve hopes to encourage the public to turn in old currency for the redesigned notes. In addition, the Secret Service, through its team visits abroad in company with Treasury Department and Federal Reserve officials, has gathered further information on counterfeiting and provided counterfeit-detection training. As of May 1995, the team had met with law enforcement and financial organization officials in Buenos Aires, Argentina; Minsk, Belarus; London, England; Zurich, Switzerland; Hong Kong; and Singapore. According to Secret Service officials, their visits were successful because they were able to develop better contacts, obtain further information about foreign financial institutions' practices, learn more about tellers' ability to detect counterfeits, and provide counterfeit-detection training seminars for both law enforcement and financial organization officials. Since May 1995, the team has taken initial trips to Moscow, St. Petersburg, and Novgorod (Russia); Ankara and Istanbul, Turkey; Cairo, Egypt; Bahrain; Abu Dhabi; Dubai; and Riyadh, Saudi Arabia. Further, the Secret Service has been attempting to increase its presence abroad, although it has encountered difficulties in obtaining approval. The Secret Service has over 2,000 agents stationed in the United States, but it has fewer than 20 permanent positions abroad. The Secret Service first requested additional staff in February 1994 for permanent posting abroad beginning in fiscal year 1996. However, due to uncertainties about the funding of the positions and to other priorities within the Treasury Department, as of June 21, 1995, the Secret Service had secured approval for only 6 of 28 requested positions abroad. After our discussions with the Secret Service, the Treasury, and State, on July 21, 1995, the Treasury approved the remainder of the positions and sent them to the State Department for approval. As of November 30, 1995, the respective State Department chiefs of mission had approved only 13 of the 28 positions, and only 1 agent had reported to his post abroad. The U.S. government has undertaken special efforts to eradicate the highest-quality counterfeit note--the Superdollar. These efforts include an interagency task force led by the Secret Service, an overseas Secret Service task force, and diplomatic efforts between senior policy level officials of the involved countries. Due to the sensitivity and ongoing nature of this investigation, we were made generally aware of these efforts but were not given specific information. In a February 1994 Secret Service request to the Treasury for funding under the 1994 Crime bill, the Secret Service stated that, for the past 4 years, it had spearheaded a multiagency effort to suppress the most technically sophisticated note detected in the history of that agency. According to the request, this initiative has prompted an unprecedented forensic effort, utilizing the resources of the Secret Service, other government offices, and several national laboratories. The efforts of senior policy level officials in the U.S. government involve ongoing diplomatic contacts concerning the Superdollar with Middle Eastern government officials, according to a State Department official. This official said that, in May 1995, our government asked these foreign governments to provide a show of good faith in improving relations by locating the printing plants and perpetrators involved in producing the Superdollar. He added that these efforts did not specifically implicate these governments in the production of the Superdollar, but that, at a minimum, they were believed to be tolerating this illegal activity within their borders. U.S. and Interpol officials we interviewed stated that final resolution of cases similar to that of the Superdollar, should such cases occur, were beyond the purview of law enforcement and would require diplomatic solutions. According to U.S. and Interpol officials, jurisdictional constraints may prevent law enforcement agencies from dealing effectively with cases of foreign-condoned or -sponsored counterfeiting of U.S. currency. In such cases, the Secret Service would only be able to identify and assist in suppressing the distribution of the counterfeit notes. In countries where the United States has no diplomatic relations, U.S. law enforcement has no leverage to help deter counterfeiting. U.S. and Interpol officials agreed that the decision on how to suppress a foreign government-condoned or government-sponsored counterfeiting plant would need to be made at a senior U.S. government level. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. 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GAO discussed U.S. efforts to combat international counterfeiting of U.S. currency. GAO noted that: (1) U.S. currency is vulnerable to international counterfeiting because it is widely used abroad and lacks updated security features; (2) counterfeiters range from office workers to organized crime and terrorist groups using equipment ranging from simple photocopiers to sophisticated offset presses; (3) the U.S. government is particularly concerned about a high-quality counterfeit note known as the "Superdollar" and rapid advances in photographic and printing devices; (4) U.S. agencies' and foreign governments' views on the extent and significance of counterfeit U.S. notes vary, and U.S. counterfeit-detection activities are limited and inconclusive; and (5) to deter international counterfeiting, the Department of the Treasury is redesigning U.S. currency to incorporate more security features, the Secret Service has gathered additional information on counterfeiting and provided counterfeit-detection training, and the U.S. government is using international and interagency task forces and diplomatic efforts to eradicate the Superdollar.

A working capital fund relies on sales revenue rather than direct appropriations to finance its continuing operations. A working capital fund is intended to (1) generate sufficient revenue to cover the full costs of its operations and (2) operate on a break-even basis over time--that is, not make a profit nor incur a loss. Customers use appropriated funds, primarily Operations and Maintenance appropriations, to finance orders placed with the working capital fund. DOD estimates that in fiscal year 2001, the Defense Working Capital Fund--which consists of the Army, Navy, Air Force, Defense-wide, and Defense Commissary Agency working capital funds--will have revenue of about $74.3 billion. The Defense Working Capital Fund finances the operations of two fundamentally different types of support organizations: stock fund activities, which provide spare parts and other items to military units and other customers, and industrial activities, which provide depot maintenance, research and development, and other services to their customers. Because carryover is associated only with industrial operations, this report discusses the results of our review on Defense's Working Capital Fund industrial operations. Carryover is the dollar value of work that has been ordered and funded (obligated) by customers but not yet completed by working capital fund activities at the end of the fiscal year. Carryover consists of both the unfinished portion of work started but not yet completed, as well as requested work that has not yet commenced. To manage carryover, DOD converts the dollar amount of carryover to months. This is done to put the magnitude of the carryover in proper perspective. For example, if an activity group performs $100 million of work in a year and had $100 million in carryover at year-end, it would have 12 months of carryover. However, if another activity group performs $400 million of work in a year and had $100 million in carryover at year-end, this group would have 3 months of carryover. The congressional defense committees and DOD have acknowledged that some carryover is necessary at fiscal year-end if working capital funds are to operate in an efficient and effective manner. For example, if customers do not receive new appropriations at the beginning of the fiscal year, carryover is necessary to ensure that the working capital fund activities have enough work to ensure a smooth transition between fiscal years. Too little carryover could result in some personnel not having work to perform at the beginning of the fiscal year. On the other hand, too much carryover could result in an activity group receiving funds from customers in one fiscal year but not performing that work until well into the next fiscal year or subsequent years. By minimizing the amount of carryover, DOD can use its resources in the most effective manner and minimize the "banking" of funds for work and programs to be performed in subsequent years. DOD has a 3-month carryover standard for all but one working capital fund activity group, but Office of the Under Secretary of Defense (Comptroller) and military service officials could not provide, and we could not identify, any analytical basis for this standard. We did not determine how much carryover individual activity groups would need in order to ensure a smooth flow of work at the end of the fiscal year. However, because the activity groups perform different types of work and have different business practices, the use of the same carryover standard for all activity groups is likely not appropriate. Military service officials and activity group managers also questioned the use of a uniform standard. For example, because the Army's ordnance activity group is involved in the manufacture and assembly of munitions and weapon systems and requires a long lead time to obtain material, Army officials believe that group's carryover standard should be more than 3 months. Similarly, much of the work that customers request from Navy research and development activities is actually accomplished by contractors. Consequently, Navy research and development activity group managers believe they should be able to subtract work that is to be accomplished by contractors from their reported carryover balances or, if they must include this work in their totals, to have a longer carryover period. A 1987 DOD carryover study also raised questions about the use of a uniform carryover standard. This study defined the optimum level of carryover as "the minimum amount of work needed in order to ensure that there is no interruption of the average work cycle." As part of its 1987 carryover study, DOD asked the military departments to provide information on their working capital fund activity groups. Specifically, for each activity group they were to provide (1) information on the types of services provided and (2) data on the average time between commencement and completion of projects. Data developed for Army, Air Force, and DOD-wide activity groups showed that (1) the minimal carryover level varied significantly from one activity group to another and (2) in some instances the minimal carryover level was considerably less than 3 months. However, the study noted that its analysis did not consider either administrative or material lead times and acknowledged that both of these factors could have a significant impact on carryover requirements. When we discussed the 3-month carryover standard with officials of the Office of the Under Secretary of Defense (Comptroller), they acknowledged that they do not have an analytical basis for it. They informed us that the 3-month standard (1) was based on management judgment and that 3 months (one-fourth of the fiscal year) should be enough time to ensure a smooth flow of work during the transition from one fiscal year to the next, (2) had been in effect for many years, and (3) was reviewed during a 1996 DOD carryover study when DOD representatives visited various working capital fund activities to solicit the opinions of managers regarding the carryover standard and reviewed data substantiating those opinions. They also said that only in unusual situations should an activity group need more than 3 months of carryover. Finally, they questioned the benefit of performing an analysis for each activity group since it would require time and effort and would need to be updated periodically. However, without a sound analytical basis for carryover standards, we believe questions will continue to be raised about how much carryover is needed. The military services have not consistently implemented DOD's guidance for determining whether an activity group has exceeded the 3-month carryover standard. One contributing factor for the inconsistency is that DOD's guidance is vague concerning how certain items should be treated and/or calculated. Specifically, DOD's guidance is not clear regarding what is to be included or not included in the contractual obligation and the revenue dollar amounts used in the formula for determining the number of carryover months. As a result, year-end carryover data provided to decisionmakers who review and use this data for budgeting--the Office of the Under Secretary of Defense (Comptroller) and congressional defense committees--are misleading and not comparable across the three services. For example, our analysis of the fiscal year 2001 budget estimates showed that policy changes that affected the use of certain adjustments to the calculations had (1) no impact on the Air Force's reported year-end carryover because the Air Force did not make any adjustments, (2) reduced the Army's reported year-end carryover by less than 1 month, and (3) reduced the Navy's reported year-end carryover balance for some activity groups by 2 to 4 months. Further details on the methods used by the services to calculate carryover can be found in appendix II. Prior to 1996, if working capital fund activity groups' budgets projected more than a 3-month level of carryover, their customers' budgets could be, and sometimes were, reduced by the Office of the Secretary of Defense and/or congressional defense committees. However, in 1996, the Under Secretary of Defense (Comptroller) directed a joint Defense review of carryover because the military services had expressed concerns about (1) the methodology used to compute months of carryover and (2) the reductions that were being made to customer budgets to help ensure that activity groups did not exceed the 3-month carryover standard. Based on the work of the joint study group, DOD decided to retain the 3-month carryover standard for all working capital fund activity groups except Air Force contract depot maintenance. For Air Force contract depot maintenance, it set a 4.5-month carryover standard because of the additional administrative functions associated with awarding contracts. Furthermore, based on the joint study group's work and concerns expressed by the Navy, DOD also approved several policy changes that had the effect of increasing the carryover standard for all working capital fund activities. Specifically, under the policy implemented after the 1996 study, certain categories of orders, such as those from non-DOD customers, and contractual obligations, such as Army arsenals' contracts with private sector firms for the fabrication of tool kits, can be excluded from the carryover balance that is used to determine whether the carryover standard has been exceeded. These policy changes were documented in an August 2, 1996, DOD decision paper that provided the following formula for calculating the number of months of carryover (see figure 1). The impact of DOD's 1996 decision to exclude contract obligations and certain categories of orders from reported carryover varied significantly among the services. For example, our analysis of the military services' fiscal year 2001 budget estimates showed that this change (1) had no effect on the Air Force depot maintenance activity group's reported year-end carryover balance because the Air Force did not make any adjustments, (2) resulted in a $70.1 million reduction in the Army depot maintenance and ordnance activity groups' reported year-end carryover, and (3) as illustrated in table 1, allowed the Navy to reduce its depot maintenance and research and development activity groups' reported year-end carryover by about $1.9 billion. Our work showed that these differences were due primarily to the fact that the military services have treated contract obligations differently when calculating carryover. This problem, in turn, is due to the fact that DOD has not provided clear guidance on whether (1) the revenue used in the carryover formula should be reduced when adjustments are made for contract obligations and (2) material requisitions submitted to DOD supply activities should be considered contract obligations. Because the Army and Navy are reducing the amount of carryover but not the amount of revenue, the number of months of carryover they are reporting is understated. We found differences in the way the military services make adjustments for contractual services. DOD's formula for calculating months of carryover is based on the ratio of adjusted orders carried over to revenue. The formula specifies that carryover should be reduced by the amount of contractual obligations. However, the policy does not address whether downward adjustments for the revenue associated with these contractual services should also be made. Unless this is done, the number of months will be understated. The Army and Navy reduced their carryover balances by the amount of contractual obligations, but they did not reduce the revenue associated with these contractual services. On the other hand, the Air Force depot maintenance activity group in effect did reduce the revenue associated with contractual obligations because (1) it segregates its contract operations' carryover and revenue from its in-house operations' carryover and revenue and (2) DOD has established separate carryover standards for the Air Force in-house and contract depot maintenance operations. The Air Force depot maintenance activity group's approach ensures that data on in-house operations is not distorted by data on contract operations. On the other hand, the Army and Navy's approach allows activity groups to reduce their reported months of carryover by simply increasing the amount of work contracted out. Our work showed that the months of carryover reported by the Army and Navy activity groups would more accurately reflect the actual backlog of DOD in-house work if adjustments for contractual obligations affected both contract carryover and contract revenue. In discussing this matter with officials from the Office of the Under Secretary of Defense (Comptroller), they stated that we had a valid point and indicated that DOD would need to review its carryover policy to determine whether it needs to be revised. Similarly, we found that differences in the way the military services treat outstanding material requisitions has a significant effect on the dollar value of carryover that is reported. Specifically, our analysis showed that Navy activity groups and some Army activities consider material requisitions to be contract obligations and that they, therefore, subtract the dollar value of outstanding requisitions from their carryover balances. However, the Air Force depot maintenance activity group, which had about $448 million of material on requisition as of September 30, 2000, did not make any such adjustments. Office of the Under Secretary of Defense (Comptroller) officials informed us that outstanding material requisitions were not intended to be included as contractual obligations for carryover purposes. In fact, they told us that when the policy to allow carryover to be adjusted for contract obligations was established in 1996, the intent was that only contracts with private industry would be included as contract obligations when calculating the number of months of carryover. The inconsistencies in the military services' implementation of DOD's 1996 guidance affected the actions that congressional decisionmakers took on fiscal year 2001 budget estimates. For example, the Air Force's fiscal year 2001 budget showed that the unadjusted months of year-end carryover for in-house depot maintenance operations was 3.3 months. Because the 3-month carryover standard was exceeded, the Congress reduced the Air Force's Operation and Maintenance appropriation by $52.2 million. However, our analysis showed that the Air Force's estimate would have been less than DOD's 3-month standard if it had subtracted the dollar value of outstanding material requisitions from its carryover estimates--as the Navy does. Because the Navy adjusted its year-end carryover estimates for both contract obligations and certain types of orders, its reported year- end carryover balances were less than the 3-month standard. As a result no action was taken on the Navy's budget. DOD policy requires each individual working capital fund activity to record as carryover any unfilled work orders the activity has accepted. Some of these orders are received from other working capital fund activities. For example, a Navy working capital fund activity (activity 1) may perform part of the work a customer has ordered and "subcontract" part of the work out to another working capital fund activity (activity 2). In this situation, both activities--the activity originally accepting the customer order (activity 1) and the activity receiving part of the work to be performed (activity 2)--record the unfilled order as carryover. In order to eliminate any double counting of carryover, DOD's policy allows an activity, as shown in figure 1, to adjust or reduce its carryover for orders received from other working capital fund activities (inter/intra fund orders). However, Navy working capital fund activities and some Army activities categorized orders they sent to other working capital fund activities as contract obligations and used these obligations to reduce reported year-end carryover. As a result, not only did the Navy and Army eliminate the double counting of such orders, they eliminated all these orders from its calculation to determine the number of months of carryover and, thereby, did not follow DOD guidance on calculating carryover for inter/intra fund orders. Further complicating the congressional budget review of carryover is that some activity groups have underestimated their budgeted year-end carryover year after year, thereby providing decisionmakers misleading carryover information and resulting in more funding being provided than was intended. As previously discussed, the 3-month standard has never been validated and the services do not use the same method for calculating carryover. Therefore, the number of months of budgeted and actual carryover that the services have reported are not comparable. Nevertheless, each year, the services' budget submissions include information on budgeted and actual year-end carryover for each activity group. Decisionmakers in the service headquarters, Office of the Under Secretary of Defense (Comptroller), and congressional defense committees use this information to determine whether the activity groups have too much carryover. If the groups do, the decisionmakers may reduce the customer budgets that finance new orders. Actual reported year-end carryover levels for the Army and Air Force depot maintenance activity groups and the Army ordnance activity group exceeded DOD's carryover standard many times during fiscal years 1996 through 2000. Further, our analysis showed that in many of these instances, the budget estimate for year-end carryover was less than the DOD standard. If carryover estimates for the Army's activity groups and the Air Force's contract depot maintenance operations had been more accurate, the service headquarters, the Office of the Under Secretary of Defense (Comptroller), and/or the congressional defense committees might have taken action to reduce customer funding for new orders as has been done in the past. Table 2 shows that the actual reported year-end carryover for Army's depot maintenance and ordnance activity groups exceeded the 3-month carryover standard consistently from fiscal year 1996 through fiscal year 2000. Table 2 also shows that the Army's budget consistently underestimated the amount of actual year-end carryover for each year from fiscal year 1998 through fiscal year 2000 for the two activity groups. Since the Army's budgeted year-end carryover exceeded the 3-month standard for fiscal year 2001, the Department of Defense Appropriations Act, 2001, reduced the Army's fiscal year 2001 Operation and Maintenance appropriation by $40.5 million. Concerning the Army depot maintenance activity group, Army officials provided us several reasons to explain why the reported actual year-end carryover exceeded the 3-month carryover standard and budget projections. For fiscal year 1998, Army officials could not explain why the actual fiscal year-end carryover for the depot maintenance activity group was above the 3-month standard and budget projection. They stated that the detailed data needed to determine the reasons had not been retained. For fiscal year 1999, Army officials stated that the depot maintenance activity group (1) received an inordinate number of new orders at year-end and (2) was unable to adjust its production schedules to mitigate the effect of the late receipt of new orders. For fiscal year 2000, Army officials stated that there were four reasons that the actual reported year-end carryover balance exceeded the standard and budget projection. Some depots could not obtain the parts needed in a timely manner, so that less work was performed than planned. Some depots did not accurately estimate the time and resources needed to complete jobs. Emergency situations, such as unplanned orders to perform safety-of- flight work, delayed work on orders already accepted by the depots. The composition and size of the workload changed from the budget projections due to changes in customer funding and priorities. Concerning the Army ordnance activity group which also exceeded the 3-month carryover standard, Army officials informed us that the group's primary focus is on manufacturing and that the 3-month standard should not apply. They stated that a longer carryover time frame is needed to accommodate the longer time needed for the manufacturing process and the long lead-time involved in buying certain types of material. Table 3 shows that several times since fiscal year 1996 the Air Force's actual reported carryover for (1) in-house depot maintenance operations exceeded the 3-month standard and (2) contract depot maintenance operations exceeded the 4.5-month standard. Table 3 also shows that the Air Force's budget for contract depot maintenance underestimated the amount of actual year-end carryover for fiscal years 1997, 1999, and 2000. As stated previously, because the budgeted year-end carryover exceeded the carryover standard for fiscal year 2001, the Department of Defense Appropriations Act, 2001, reduced the Air Force fiscal year 2001 Operation and Maintenance appropriation by $52.2 million. Air Force officials informed us that developing accurate carryover budgets and executing those budgets during the late 1990s was difficult because the depot maintenance activity group underwent significant downsizing. Specifically, the activity group (1) reduced maintenance personnel by more than one-third as it closed three repair centers and (2) realigned 40 percent of its in-house workload. In developing budgets for those years, the activity group's productivity estimates were optimistic resulting in the activity group accomplishing less work than budgeted, and, therefore, was unable to stay within the carryover standard. In addition to the productivity problem, the activity group could not always obtain the material it needed in a timely manner. As a result, it could not complete work as scheduled and the amount of carryover increased. In developing its fiscal year 2002 budget request, the Air Force determined that the initial year-end carryover budget estimate for its contract depot maintenance operations exceeded the 4.5-month carryover standard by $92.5 million. To help ensure that the actual carryover would not be over the 4.5-month standard at the end of fiscal year 2002, Air Force officials reduced the activity group's customers' budget request by $92.5 million. Thus, in theory, customers should order less work from the activity group in fiscal year 2002, resulting in less carryover than initially budgeted. Our analysis showed that customer order levels would have been about $2.9 billion less than the amount budgeted if a 30-day carryover policy had been in effect during the fiscal year 2001 budget review process. Further, as previously discussed, the amount of carryover needed to ensure a smooth flow of work during the transition from one fiscal year to the next varies significantly from one activity group to the next. Military service officials and working capital fund managers stated that a 30-day carryover policy would have a potentially adverse effect on the operations of most working capital fund activities. However, because (1) DOD has not performed the analysis necessary to validate its existing 3-month carryover standard and (2) the actual impact would depend on a number of unknown factors--such as the amount and type of work requested by customers and the timing of the requests--it is difficult, if not impossible, to predict the operational impact of reducing the carryover standard. If DOD were to reduce its carryover standard to less than 3 months, a corresponding reduction would occur in both the amount of carryover allowed and the level of customer orders accepted. As noted in the previous paragraph, our analysis showed that customer order levels would have been about $2.9 billion less than the amount actually budgeted if a 30- day carryover policy had been in effect during the fiscal year 2001 budget review process. If the standard had been reduced to 60 days or 75 days, projected customer order levels would have been about $1.6 billion or $1.0 billion less, respectively, than the amount budgeted. The amount of carryover exceeding 90 days was about $700 million. Although they have no analytical data to support their views, working capital fund managers at the headquarters level believe a 30-day carryover policy would have the potential of significantly impairing their operations. Working capital fund officials at the activities we visited indicated that a 30-day policy would (1) restrict their ability to accept orders during the fourth quarter of the fiscal year as they act to ensure that actual carryover levels do not exceed the 30-day standard, (2) complicate the tasks of planning and scheduling work, and (3) create "pockets of inefficiency" where direct-labor employees are without work and must, therefore, charge their time to overhead. They also indicated that these problems, in turn, would adversely affect their ability to provide timely support to their customers, increase the unit cost of the work that is accomplished, and cause operating losses. Our work showed that, because the amount of carryover needed to ensure a smooth flow of work varies significantly from one activity group to the next, the effect of a 30-day carryover standard on a group's efficiency and effectiveness would likewise vary significantly. For example, in its August 1996 decision paper, which addresses the carryover standard, DOD points out that the Air Force's contract depot maintenance operations could not operate with a 30-day standard because the average administrative time associated with awarding a contract is more than 30 days. Conversely, Navy records indicate that the Naval Research Laboratory's actual reported carryover during fiscal years 1996 through 2000 averaged about 0.9 months, and laboratory officials indicated that these low carryover levels have not had an adverse impact on their operations. Finally, our work indicates that the impact of a 30-day policy depends largely on what action DOD ultimately takes to ensure consistent carryover reporting. For example, at the end of fiscal year 2000, the Air Force depot maintenance activity group reported actual year-end carryover levels of 4.8 months for contract operations and 2.8 months for its in-house operations. However, if it had used the Navy's carryover reporting policies and procedures, the activity group would have reported an overall carryover level of about 1.6 months. Conversely, although Navy activity groups frequently reported actual year-end carryover balances of less than 2 months during fiscal years 1996 through 2000, their managers indicated that even a 3-month standard would not be enough if they implemented DOD's carryover formula in the same manner as the Air Force. Decisionmakers do not have the information they need to make informed decisions on fiscal year-end carryover balances because (1) there is no analytical basis for the 3-month carryover standard, (2) the services use different methods to calculate the carryover balances, and (3) some activity groups consistently underestimate their budgeted carryover when developing their budgets. Until these weaknesses are resolved, concerns will continue to be raised about whether an activity group has too much or not enough carryover. These concerns will affect not only the working capital fund activity groups' operations but also customer operations because they finance the orders placed with the working capital fund activities. We recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to determine the appropriate carryover standard for the depot maintenance, ordnance, and research and development activity groups because these groups account for about 90 percent of the dollar amount of carryover. The carryover standard should be based on the type of work performed by the activity group and its business practices, such as whether it performs the work in- house or contracts it out. As part of this effort, DOD needs to have a sound analytical basis for determining the appropriate level of carryover. direct the Under Secretary of Defense (Comptroller) to clarify the carryover policy to obtain consistency in calculating the amount of carryover for use in determining whether the activity groups have exceeded the carryover standard. Specifically, in calculating the number of months of carryover, the policy needs to clarify (1) the type of obligations to be included in the contractual obligation category, such as contracts with private industry and outstanding material requisitions, and (2) that the revenue used must be adjusted for certain purposes, such as revenue earned for work performed by contractors. All internal and external reporting of carryover should be done using the same methodology. direct the Under Secretary of Defense (Comptroller) to ensure that the military services calculate carryover consistently during the budget review process so that the carryover figures are comparable. direct the Under Secretary of Defense (Comptroller) and the Acting Secretaries of the military services to enforce the current policy that specifies that one activity should report carryover on interfund and intrafund orders. direct the Acting Secretaries of the military services to use more realistic carryover figures in developing their budgets by considering historical actual carryover data. In its comments on a draft of this report, DOD agreed with our five recommendations and stated that it will take actions in the near future to clarify the policies and formula to properly ascertain a uniform approach in examining the backlog of funded work in its Financial Management Regulations. In addition, DOD said it will revalidate the appropriate carryover standards that should be applied to the depot maintenance, ordnance, and research and development activity groups. We are sending copies of this report to the Honorable Donald H. Rumsfeld, Secretary of Defense, and the Acting Secretaries of the Army, Navy, and Air Force. We will also make copies available to others upon request. Please contact Greg Pugnetti at (703) 695-6922 if you or your staff have any questions concerning this report. GAO contact and staff acknowledgments to this report are listed in appendix IV. To determine the reasons and the basis for DOD's 3-month carryover policy, we met and discussed the policy with officials from the Office of the Under Secretary of Defense (Comptroller), Army, Navy, and Air Force. We also requested and reviewed documentation and/or analysis that supported the rationale for the 3-month carryover standard. In addition, we obtained and analyzed DOD studies, including the 1996 carryover study and budget documents that discussed DOD's carryover policy and the need for a 3-month period. We did not determine how much carryover individual activity groups would need in order to ensure a smooth flow of work at the end of the fiscal year. To determine if the services were calculating carryover in a consistent manner and, if not, the reasons for any differences, we obtained and analyzed the services' calculations for the (1) fiscal year 1996 through fiscal year 2000 reported year-end actual carryover balances and (2) fiscal year 1996 through fiscal year 2001 budgeted year-end carryover balances. We met with officials from the Army, Navy, and Air Force to discuss the methodology they used to calculate carryover. We obtained (1) explanations about why the services made adjustments in calculating the dollar amount of carryover balances as well as the number of months of carryover and (2) determined the impact of those adjustments on the carryover figures. To determine if the military services' budgeted and reported actual carryover amounts exceeded the 3-month standard at fiscal year-end, we obtained and analyzed (1) budgeted year-end carryover data for fiscal year 1996 through fiscal year 2001 and (2) reported actual year-end carryover data for fiscal year 1996 through fiscal year 2000. When the budgeted and/or actual carryover data exceeded the 3-month standard, we met with responsible budgeting and/or accounting officials to ascertain why. To determine whether applying the carryover authority to not more than a 30-day quantity of work would be sufficient to ensure uninterrupted operations at the working capital fund activities early in a fiscal year and what the impact on these activities would be if the carryover policy were reduced from 3 months to 30 days, we calculated what the potential financial impact on customer orders would have been if a 30, 60, 75, or 90- day carryover standard had been in effect for fiscal year 2001. We also met with (1) headquarters officials from the Office of the Under Secretary of Defense (Comptroller), Army, Navy, and Air Force and (2) Army, Navy, and Air Force officials at individual working capital fund activity groups and activities to obtain their views on what the impact on their operation would be if the carryover policy were reduced from 3 months to 30 days. However, because (1) DOD has not performed the analysis necessary to validate its existing 3-month carryover standard and (2) the actual impact would depend on a number of unknown factors, such as the amount and type of work requested by customers and the timing of the requests, it is difficult, if not impossible, to predict the operational impact of reducing the carryover levels. In performing our work, we obtained carryover information on the following Defense Working Capital Fund activity groups: (1) Air Force depot maintenance (in-house and contract), (2) Army depot maintenance, (3) Army ordnance, (4) Naval aviation depots, (5) Naval shipyards, and (6) Naval research and development. The Naval research and development activity group consists of the following five subgroups: Naval Air Warfare Center, Naval Surface Warfare Center, Naval Undersea Warfare Center, Naval Research Laboratory, and the Space and Naval Warfare Systems Center. We performed our review at the following locations. Office of the Under Secretary of Defense (Comptroller), Washington, D.C. Army Headquarters, Washington, D.C. Army Materiel Command, Alexandria, Virginia Army Communications-Electronics Command, Fort Monmouth, New Corpus Christi Army Depot, Corpus Christi, Texas Tobyhanna Army Depot, Tobyhanna, Pennsylvania The reported actual year-end carryover information used in this report was produced from DOD's systems, which have long been reported to generate unreliable data. We did not independently verify this information. The Defense Inspector General has cited system deficiencies and internal control weaknesses as major obstacles to the presentation of financial statements that would fairly present the Defense Working Capital Fund financial position for fiscal years 1993 through 2000. Our review was performed from September 2000 through April 2001 in accordance with U.S. generally accepted government auditing standards. However, we did not validate the accuracy of the accounting and budget information, all of which was provided by the Army, Navy, and Air Force. We requested comments on a draft on this report from the Secretary of Defense or his designee. We have reprinted the comments in appendix III of this report. DOD's carryover guidance does not address how certain items should be treated and/or calculated and, as a result, it is a contributing factor to the military services' inconsistent implementation of DOD's formula for determining the number of months of carryover. This appendix discusses the different methods the services used to determine compliance with DOD's 3-month carryover standard. Prior to the fiscal year 2002 budget, the Air Force did not make any adjustments to its figures when determining the number of months of carryover and whether the Air Force had exceeded the 3-month standard. An Air Force official said they did not implement the 1996 carryover guidance sooner because the deductions would have had little or no impact on the number of months of carryover. Beginning with the fiscal year 2002 budget, the Air Force official informed us that they were making the adjustments so that the Air Force would be in compliance with DOD's 1996 carryover policy. In making the adjustments for the fiscal year 2002 budget, the Air Force reduced its year-end carryover figure by the amount associated with certain types of orders, such as orders from foreign countries and non- DOD sources. However, unlike the Navy and Army, as discussed below, the Air Force (1) did not make adjustments for contractual obligations such as outstanding requisitions for material and (2) reduced the revenue figure used in the calculation by the amount of revenue related to those certain types of orders excluded from the carryover figure. An Air Force official told us that they adjusted the revenue figure so that the Air Force would be consistent in making the adjustments. That is, they reduced both the numerator (the carryover figure) and denominator (the revenue figure) part of the equation. The Navy has been making the allowable adjustments to its year-end carryover figures since 1996. The Navy has been reducing orders carried over into the next fiscal year for (1) carryover associated with certain types of orders, such as orders from foreign countries and non-DOD sources and (2) any contractual obligations incurred against those orders, which includes contracts with private industry, outstanding material requisitions with DOD supply activities, and orders placed with other working capital fund activities. However, unlike the Air Force, the Navy did not reduce or make any adjustments to the revenue figure used in the calculation. Because it did not adjust the revenue figure, the Navy's method resulted in a lower monthly carryover figure than did the method used by the Air Force. Navy officials informed us that they used total revenue in their calculation because total revenue represented the full operating capability of a given activity to accomplish a full year's level of workload. Further, the Navy's reason for not removing contract-related revenue from the denominator of the calculation was that the numerator of the calculation included carryover (funds) related to work for which contracts would eventually be awarded but which had not yet been awarded at fiscal year-end. The Army has also been making the allowable adjustments to its carryover figures since 1996. That is, the Army has been reducing orders carried over into the next fiscal year for (1) carryover associated with certain types of orders, such as orders from foreign countries and non-DOD sources and (2) any contractual obligations incurred against those orders, which include contracts with private industry, outstanding material requisitions with DOD supply activities, and orders placed with other working capital fund activities. Like the Navy, the Army also did not reduce or make any adjustments to the revenue figure used in the calculation. Army officials told us that they did not adjust the revenue figure because (1) DOD's guidance states that current year revenue should be used when calculating months of carryover and (2) doing so reflects the rate of actual workload execution for the entire year. However, in discussing this issue with Army headquarters and depot officials, they stated that it did not make much sense to adjust the carryover figure in the formula (numerator) for contractual obligations and other orders and not make a corresponding adjustment to the revenue figure in the formula (denominator) for the related revenue. Further, Army working capital fund activities where we performed work did not all calculate carryover the same way. For example, at least one Army activity did not use contractual obligations when calculating the number of months of carryover, even though the activity had such obligations. In addition, another Army activity did not use contractual obligations when computing the months of carryover until recently when it calculated its actual carryover for fiscal year 2000. In addition, Karl Gustafson, William Hill, Ron Tobias, and Eddie Uyekawa made key contributions to this report.

This report examines the working capital fund activities for the Department of Defense (DOD). GAO (1) identifies potential changes in current management processes or policies that, if made, would result in a more efficient operation and (2) evaluates various aspects of the DOD policy that allow Defense Working Capital Fund activities to carry over a 3-month level of work from one fiscal year to the next. GAO found that DOD lacks a sound analytical basis for its current 3-month carryover standard. DOD established a 3-month carryover standard for most working capital fund activity groups, although it has not done the analysis necessary to support the 3-month standard. Without a validation process, neither DOD nor congressional decisionmakers can be sure that the 3-month standard is providing activity groups with reasonable amounts of carryover to ensure a smooth transition from one fiscal year to the next or whether the carryover is excessive. In addition, carryover information currently reported under the 3-month standard is not comparable between services and is misleading to DOD and congressional decisionmakers. Specifically, results can differ markedly because the military services use different methods to calculate the number of months of carryover. Further complicating the congressional budget review of carryovers is that some activity groups have underestimated their budgeted carryover year after year, thereby providing decisionmakers with misleading year-end carryover information and resulting in more funding being provided than was intended. GAO also reviewed the potential financial impact of reducing the amount of fiscal year-end carryover permitted by DOD policy. GAO's analysis showed that if a 30-day, 60-day or 75-day carryover policy had been in effect during the fiscal year 2001 budget review process, the amount of budgeted customer orders could have been reduced by about $2.9 billion, $1.6 billion, or $1.0 billion, respectively.

Identification, investigation, and cleanup of hazardous substances under DOD's FUDS program are authorized by the Defense Environmental Restoration Program (DERP). Such actions must be carried out consistent with the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), which established DERP. The goals of the program also include the correction of environmental damage. To fund the program, SARA set up the Defense Environmental Restoration Account. DOD has established specific goals for the cleanup of properties, including FUDS, that have hazardous, toxic, and radioactive wastes in the soil and water. These goals include having an approved cleanup process in place or cleanup complete at 100 percent of all such properties by the end of fiscal year 2014. DOD has not yet set any goals for projects involving hazardous, toxic, and radioactive waste in containers, unexploded ordnance, other explosive wastes, or unsafe building demolition. Total spending for the FUDS cleanup program since fiscal 1984 is $2.6 billion. During the most recent past five fiscal years (1997-2001), annual program funding for FUDS cleanup averaged about $238 million, with program funding in fiscal year 2001 of $231 million. The Corps' estimate of the additional cost to complete cleanup of the 4,467 currently identified projects is about $13 billion, not including program management or support costs or inflation beyond fiscal year 2007. Also omitted from the estimated cost is a revised cost projection for the cleanup of unexploded ordnance, which resulted from a recent survey of DOD training ranges. According to Corps officials, the revised cost projection for ordnance cleanup would add another $5 billion or more, depending on the level of cleanup selected, to the estimated cost to complete all FUDS projects. By the time all projects are completed, the Corps estimates that it will spend at least $15 billion to $20 billion cleaning up FUDS properties. At the current funding level, the Corps does not expect to meet the established goal of cleaning up FUDS properties with hazardous, toxic, and radioactive waste by fiscal year 2014, even if work could be deferred on all other projects, such as containerized wastes, unexploded ordnance, and building demolition, for which no goals have been established. In deciding which actions, if any, need to be taken at a potential FUDS property, the Corps generally follows the process established for cleanup actions under CERCLA. The process usually includes the following phases: Preliminary assessment of eligibility--The Corps determines if the property is eligible for the FUDS cleanup program based on whether there are records showing that DOD formerly owned, leased, possessed, or operated the property or facility. The Corps also identifies any potential hazard on the property related to DOD activities. The results of this assessment are detailed in an Inventory Project Report. If the property is eligible but there is no evidence of hazards, the property is categorized as requiring "no further action." Site inspection--The Corps inspects the site to confirm the presence, extent, and source(s) of hazards. Remedial investigation and feasibility study--The Corps evaluates the risk associated with the hazard; determines whether cleanup is needed; and, if so, selects alternative cleanup approaches. Remedial action--The Corps designs the remedy, performs the cleanup, and conducts long-term monitoring if necessary. When all of these steps have been completed for a given project, or if no cleanup is needed, the Corps considers the project to be "response complete." After all projects at a property are designated as response complete, the property can then be closed out. Property closeout may require concurrence by federal or state regulators depending on the type of hazard involved. A flow chart showing the decision process in the preliminary assessment of eligibility phase is shown in figure 1. Upon completion of the preliminary assessment of eligibility phase, a property enters the site inspection phase. The site inspection phase involves a more detailed examination of the property and related records to confirm that a hazard exists and that a cleanup project is required to remove or reduce the hazard to a safe level. After the site inspection phase, the Corps conducts a remedial investigation to assess the risk posed by the hazard and determine if a cleanup is necessary. A feasibility study is then performed to select a cleanup approach. The Corps develops more detailed plans for constructing and carrying out the selected cleanup approach during the remedial design phase. A project next moves into the remedial action phase. The remedial action phase can involve several steps including constructing or installing the selected cleanup approach, operating the approach, and long-term monitoring, if necessary. A flow chart for the site inspection through long-term monitoring process is shown as figure 2. Corps review of potential FUDS properties found that many properties are ineligible because they are still part of an active DOD installation or there are no records available showing that DOD ever owned or controlled the property. Many of the eligible properties did not require cleanup under the FUDS program because the Corps determined that no DOD-related hazards existed. As of October 1, 2000, there were 9,171 properties that had been identified by the Corps, the states, or other parties as potentially eligible for cleanup under the FUDS program. Of these properties, 9,055 had received a preliminary assessment of eligibility, 42 were still being assessed, and 74 properties had not been assessed yet. Based on preliminary assessments, the Corps determined that 6,746 properties were eligible and that 2,309 of the properties--more than a quarter of those assessed--were ineligible. In most cases, properties were ineligible either because the properties were still under DOD control (915) or because there were no records found showing that DOD had ever controlled the property (787). Table 1 shows the reasons that properties were found to be ineligible. Although the Corps initially found that 6,746 properties were eligible for cleanup, the Corps subsequently determined, on the basis of site inspections, that most of these properties do not require cleanup after all. Specifically, the Corps determined that 4,070 properties either do not have any hazards requiring DOD cleanup or else have hazards that do not meet the level requiring cleanup. Hazards requiring cleanup were found on 2,676 of the eligible properties. Figure 3 shows the breakout of properties by eligibility and those where hazards were found. The Corps identified 4,467 distinct projects requiring cleanup at the 2,676 properties that were identified as having hazards needing cleanup. At 25 of these properties, no specific projects have been identified as yet. However, after further investigation the Corps determined that projects identified at 405 properties were ineligible because other outside parties were responsible for contaminating the properties after DOD relinquished control. At another 33 properties, the identified projects were not recommended for further action or were not approved. The reasons for not recommending a project for further action or not approving a project varied. For example, the current landowner might have refused access to the property or might have already addressed the problem. The remaining 2,213 eligible properties had 3,736 projects requiring investigation and cleanup. Of these projects, 284 were not yet scheduled for action, 1,844 projects were under way or planned, and 1,608 were completed. Figure 4 depicts the status of FUDS projects with hazards that required cleanup actions. DOD reports on the status of its various environmental cleanup programs in an annual report to the Congress. However, as of the date of this report, DOD had not yet released its report for fiscal year 2000--the most recently completed fiscal year. According to the Corps' FUDS database, there were 2,382 completed FUDS projects as of the end of fiscal year 2000, or about 53 percent of the nearly 4,500 FUDS projects that required cleanup. The completed projects figure includes those removed from the active inventory either as a result of a study or an administrative action or as the result of an actual cleanup action such as removing toxic wastes or treating contaminated groundwater. In fact, our analysis showed that over 57 percent of the projects reported as complete did not require any actual cleanup and were reported as complete on the basis of a study or an administrative decision. For example, 183 of the 205 unexploded ordnance projects reported as complete were closed based on a study, while only 22 required an actual cleanup phase. Further, the completed figure includes 774 projects that were ineligible for cleanup as part of the FUDS program. The Corps initially thought that these projects were eligible but later determined that they were ineligible because the contamination was caused by other parties after DOD relinquished control of the properties. The Corps made an administrative decision to classify these projects as "response complete" to remove them from its tracking system. If only the number of projects actually believed to require cleanup--3,148--was used as the basis for calculating cleanup progress, then only 1,020 projects or about 32 percent of those requiring cleanup have actually been cleaned up. Further, according to Corps officials, most of the projects cleaned up to date were the least complex and least expensive ones, such as removing underground storage tanks (668 completed projects) or demolishing buildings (198 completed projects). On the other hand, many of the remaining cleanup projects are high cost and technologically difficult. Consequently, cleanup of the approximately 2,100 remaining projects will require at least $13 billion (revised estimates may raise this to $18 billion or more) and take more than 70 years to complete based on current planned funding of about $200 million per year. According to Corps officials, reporting of completed FUDS projects follows DOD's reporting policies for all its environmental cleanup areas such as base closures and active installations. The more than 9,000 properties identified as potential candidates for cleanup as FUDS are distributed across every state, the District of Columbia, and six U.S. territories and possessions. However, there are large concentrations of potential FUDS properties in certain states. For example, 10 states account for almost 52 percent of all the properties, while 27 states have more than 100 properties each and represent over 81 percent of all the properties. Figure 5 shows the geographic distribution of potential FUDS properties. Unexploded ordnance and other explosive wastes were believed to contaminate over 1,600 FUDS properties, of which 753 were associated with former training ranges according to a recent DOD survey. Our review of the over 800 properties not designated as training ranges in DOD's survey results showed that there may be 200 or more additional properties with training ranges that should be included in DOD's range survey results. As discussed previously, most of the 9,171 potential FUDS are either ineligible for the cleanup program (2,309 properties) or do not require any environmental cleanup (4,070 properties) according to assessments made by the Corps; 116 properties were still being reviewed for eligibility and potential hazards. The remaining 2,676 properties were found to have sufficiently high levels of hazards to require cleanup. Of these, 463 properties were excluded because other parties were deemed responsible for the hazard (405 properties), or because no specific project had been identified as yet (25 properties), or because no projects had been identified or approved for further action (33 properties). Table 2 summarizes the eligibility status of the potential FUDS by geographic location. For the remaining 2,213 properties, a total of 3,736 projects were identified and approved for further action. The status of these projects varies from those that were only recently identified and have had no cleanup action taken as yet to those that are completed. Information on individual properties, by state, including the property name, location, congressional district, eligibility, existence of hazards, number of eligible projects, estimated costs incurred to date, and estimated cost to complete cleanup is contained in appendix I. Information on individual projects, by state, including the property name, location, congressional district, project number, type(s) of hazard, risk level, status of cleanup, cleanup remedy used, costs incurred to date, and estimated cost to complete cleanup is contained in appendix II. These appendixes are available only on the Internet at http://www.gao.gov/GAO- 01-1012SP/. In response to the Senate Armed Service's Committee direction to develop more complete information on the estimated cost to conduct environmental cleanup at training ranges, DOD conducted a survey of training ranges at its active, closing, and closed facilities to determine which ones might contain unexploded ordnance. Because DOD does not have a complete inventory of its training ranges, the amount of funding necessary to clean up training ranges has been unreliable and is believed to be significantly understated. DOD's survey results indicated that 753 FUDS properties that might contain unexploded ordnance should be classified as training ranges. For a variety of reasons, over 800 FUDS properties were not included in DOD's survey. Many of these properties were excluded because the Corps had previously decided that, although there might be unexploded ordnance or other explosive wastes present, no further action was needed to address the hazards at these properties. We reviewed basic information about these properties, such as the name of the property and the project description, to see if there could be additional ranges not reported as part of DOD's survey. For example, if a project with ordnance or explosive wastes was located at property that was named "Bombing Range" or "Bombing Target" or was described as an ordnance or explosive wastes cleanup project at a bombing range or bombing target, we concluded that these properties were likely training ranges. We found over 200 properties that could be ranges based on such criteria. DOD's annual report on the status of its environmental restoration activities can provide a misleading picture of FUDS program accomplishments. In its annual report, DOD accounts of completed projects include projects that were determined to be ineligible or that did not involve any actual cleanup effort, as well as projects that required actual cleanup actions to complete. As a result, it appears that after 15 years and expenditures of $2.6 billion, over 50 percent of the FUDS projects have been completed. In reality, only about 32 percent of those projects that required actual cleanup actions have been completed, and those are the cheapest and least technologically challenging. The Corps estimates that the remaining projects will cost over $13 billion and take more than 70 years to complete. The Corps' reporting of completed FUDS projects reflects DOD's reporting policies for all of its environmental cleanup programs, including those at closing bases and active installations. As such, progress on those cleanup programs may not be accurately pictured either. In addition, DOD's range survey did not include all FUDS properties that may contain unexploded ordnance and could be former training ranges. Consequently, DOD's inventory of FUDS training ranges is likely incomplete, and its estimated cost to clean up these ranges is likely understated. The Secretary of Defense should clarify DOD's reporting of the cleanup progress at FUDS and for other DOD cleanup activities by excluding projects from its "completed" list that were closed solely as a result of a study or administrative action and did not require actual cleanup. Such projects should instead be reported as eligible properties where a hazard either was not found or did not require cleanup because it was below the threshold level or because it resulted from another party's actions. Similarly, DOD's annual report should exclude projects from its "completed" list that were determined to be ineligible for cleanup under the FUDS program. To improve the accuracy of DOD's FUDS training range survey results and its estimate of the costs related to environmental cleanup at these ranges, the Secretary of Defense should direct the Corps to review the FUDS properties that were excluded in DOD's initial survey to determine if any are training ranges that should be included in the survey. DOD provided oral comments that generally agreed with the need to clarify reporting on the status of the FUDS program and to review the unexploded ordnance projects that were excluded from its initial training range survey. DOD did not agree with the need to exclude from the list of completed projects those projects closed either as the result of a study or because they were determined to be ineligible. However, DOD did agree that it needs to clarify in future annual reports to the Congress that the restoration efforts on some projects were completed with a study phase and not a cleanup action. DOD did not specifically address how it would report on the ineligible projects that were being reported as completed. DOD also provided a number of technical comments and clarifications related to specific numbers and dollar figures in the report, which we addressed as appropriate in the body of the report. The scope of this review encompassed all potentially eligible properties included in DOD's FUDS inventory as of the end of fiscal year 2000. To obtain information on the number of potential FUDS properties that are eligible and require or have required cleanup and on the geographic distribution, by state, of FUDS properties, we relied primarily on the Corps database of FUDS properties. To obtain information on those FUDS properties that contain or contained ordnance and other explosive wastes, we also relied on the Corps database of FUDS properties and on a database constructed by the Corps to respond to DOD's range survey. We then compared those databases to determine which properties were included as part of the range survey and which were not. For those that were not included, we reviewed the property name and project description information to determine if there were additional properties that could be ranges based on these descriptors. The data in this report represent a static point in time--the end of fiscal year 2000. The Corps database of FUDS properties is used by the Corps on a daily basis to plan, schedule, and monitor the FUDS program, so there are constant changes and updates. Consequently, the numbers presented in this report may vary somewhat from other published sources; however, such variations represent the changing status of individual properties and projects, not material changes in the overall program status. On an overall level and as a measure of the FUDS program's scope and efforts, we believe that these data represent a reasonable picture of the program at the end of fiscal year 2000. The Corps database of FUDS properties incorporates data from a previous Corps effort that did not contain all of the various categories of data in the current database. Consequently, for some properties and projects, particularly those that are no longer active, some information is dated and may not reflect current property conditions. We reviewed the Corps' policies and procedures to verify the reliability of these data and found them to be reasonably accurate for our use. To the extent that we found material errors in the data, we worked with the Corps to correct those errors. We did not, however, attempt to independently assess the reliability of the data. We also acquired and reviewed program documents and interviewed Corps officials from headquarters, division, and district offices to obtain information about the FUDS program. We did not ask state officials to verify or confirm the Corps data for this review. We also contacted DOD and Environmental Protection Agency officials about aspects of the FUDS program. We conducted our review from November 2000 through May 2001 in accordance with generally accepted government auditing standards. As arranged with your offices, 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 the Secretary of Defense; the Director, Office of Management and Budget; the appropriate congressional committees; and other interested parties. We will also provide copies to others on request. Appendix I contains summary data on all 9,171 properties identified for potential inclusion in the FUDS cleanup program. The properties are listed by state, the District of Columbia, and six U.S. territories and possessions. For each property, the data include the property name, Corps' property number, the county and congressional district where the property is located, the eligibility status, and whether hazards are present. Also included for eligible properties with hazards are the number of eligible cleanup projects, the actual cleanup-related costs incurred to date, and the estimated cost to complete the cleanup projects. All information is reported as of the end of fiscal year 2000. Appendix I is available only on the Internet at http://www.gao.gov/ GAO-01-1012SP/.

The U.S. Army Corps of Engineers estimates that it will spend as much as $20 billion to clean up contamination at thousands of properties that were once owned, leased, or operated by the Defense Department (DOD). These properties contain hazardous, toxic, and radioactive wastes in the soil and water or in containers, such as underground storage tanks. The Corps is responsible for cleaning up the hazards, including removing underground storage tanks. DOD's annual report on its environmental restoration activities can provide a misleading picture of the Corps' accomplishments. DOD's accounts of completed projects include projects that were ineligible or that did not involve any actual cleanup effort. As a result, the impression is that--after 15 years and expenditures of $2.6 billion--more than half of the projects at formerly used defense sites have been completed. In reality, only about 32 percent of those projects that required actual cleanup actions have been completed, and those are the cheapest and least technologically challenging. The Corps estimates that the remaining projects will cost more than $13 billion and take upwards of 70 years to complete. The Corps' reporting of completed projects reflects DOD's reporting policies for all of its environmental cleanup programs, including those at closing bases and active installations. As such, progress on those cleanup programs may not be accurately pictured either. In addition, DOD's range survey did not include all formerly used defense sites properties that may contain unexploded ordnance and could be former training ranges. Consequently, DOD's inventory of training ranges is likely incomplete, and its estimated cost to clean up these ranges is likely understated.

The judiciary's system of courts consists of the Supreme Court, 12 regional circuit courts of appeals, 94 district courts, and 91 bankruptcy courts, as well as courts of special jurisdiction and including the Court of Appeals for the Federal Circuit, the Court of International Trade, and the Court of Federal Claims. The judiciary also includes the following agencies: Administrative Office of the U.S. Courts (AOUSC): provides a variety of support services to U.S. courts, including administrative, technological and legal services. Federal Judicial Center (FJC): an independent agency within the judiciary that provides research and evaluation of judicial operation and provides education and training. U.S. Sentencing Commission (USSC): an independent agency within the judiciary that provides education and training on sentencing, and promulgates sentencing policies, practices, and guidelines for the federal criminal justice system. From fiscal years 2003 through 2014, judiciary obligations for travel ranged from $45.3 million to $82.8 million, or 0.72 to 1.16 percent of total judiciary obligations. Table 1 shows total and travel obligations for the judiciary from fiscal years 2003 through 2014. During the fiscal year 2013 sequestration, judiciary obligations for travel decreased from $66.3 million, which had been the obligation in fiscal year 2012, to $50.2 million (a decrease of approximately 24 percent). This decrease in the travel obligations is consistent with an overall decrease in the total judiciary obligations during the fiscal year 2013 sequestration (from $7.3 billion in fiscal year 2012 to $6.9 billion in fiscal year 2013). Judiciary travel regulations require judges to report their NCR travel. Each judge must prepare and file a report disclosing the NCR travel undertaken by the judge during the previous calendar year utilizing the Judges' Non-Case-Related Travel Reporting System. This system, which is administered by AOUSC, requires judges to report the details about their NCR travel, specifically dates of travel, total expense or cost of travel, name of sponsor of travel or funder, sources of funds expended for travel, and purpose of NCR travel. Judges' NCR travel, in some instances, may be paid for by entities other than the judiciary; for example, agencies within the executive branch or private organizations to support extrajudicial activities. According to AOUSC officials, the judiciary implemented reporting requirements for judges' NCR travel in response to periodic congressional requests AOUSC received related to judges' NCR travel. As directed by the Judicial Conference of the United States, AOUSC amended its travel regulations for judges in 1999 to include a requirement for judges to annually report instances of NCR travel. According to AOUSC officials, since the inception of the Judges' Non-Case-Related Travel Reporting System in 1999, NCR travel data have been used on four occasions as the source of information to respond to specific inquiries from Members of Congress about certain conferences or specific courts. Courts and judicial agencies conduct conferences provided for by statute. The Judicial Conference of the United States is statutorily required to meet annually, but may meet as many times as the Chief Justice of the United States may designate. Circuit judicial conferences are authorized to meet annually or biennially as determined by the chief judge of each circuit. The purpose of a circuit judicial conference is to consider the business of courts and administration of justice within that circuit. FJC conducts conferences for continuing education and training for personnel of the judicial branch as authorized by statute. USSC conducts conferences, including seminars and workshops related to federal sentencing guidelines and training programs related to sentencing education for judicial and probation personnel. Unlike executive branch agencies, courts and judicial agencies are generally not subject to executive branch regulations, memorandums, or circulars that may apply to conference spending. However, AOUSC promulgates conference planning and administration policies for the judiciary, through the direction of the Judicial Conference of the United States, based in part on executive branch policies. The Judicial Conference of the United States issued changes to its conference policies in 2012 similar to policies recently enacted by the executive branch to implement cost savings. The new policy is generally patterned after policies and practices adopted by executive branch agencies, including a memorandum issued by the Office of Management and Budget directing executive branch agencies to report on conference spending and reduce travel expenditures. Judiciary conference planning and administration policy also states that each judicial entity must issue annually a publically available report on each conference costing over $100,000, including information such as the number of attendees paid for by the judiciary and cost of the conference to the government or judiciary. Judiciary conference planning and administration policy also states that conference planners must consider minimizing meeting-related costs and adopt procedures to ensure the standards set forth in this policy are met. The policy includes the following specific guidance considerations and requirements: Cost considerations: suggested consideration of various cost-saving practices such as securing the lowest conferee travel, lodging, meeting room, administrative, and technology costs. Management considerations and internal controls: required documentation of basic internal controls of management oversight and approval of conference planning, and suggested additional management considerations. Conference site comparisons: required conference planners to perform cost comparisons of at least two potential conference sites and maintain written documentation of their rationale for site selection. Annual NCR travel costs averaged $8.8 million per year, with a range of $7.2 million to $10.2 million for fiscal years 2003 through 2014. We also found the annual NCR travel costs reported specifically for judiciary- associated conferences averaged $5.9 million, or 67 percent of average total annual NCR travel costs, with a range of $4.9 million to $6.8 million for fiscal years 2003 through 2014. On the basis of our review of the NCR travel data and statements made by AOUSC officials, we found NCR travel data were sufficiently reliable to report on the average and range of judges' reported NCR travel costs across fiscal years 2003 through 2014. However, because of limitations we identified in the data in the NCR travel-reporting system, we were not able to determine the extent to which those reported costs were paid using judiciary funds rather than other federal or private sources as discussed below. While AOUSC tracks the costs of all official travel paid for by the judiciary in its accounting system of record, AOUSC's NCR travel-reporting system does not collect judges' information in a way that enables it to determine the costs to the judiciary rather than to private entities and other federal agencies. Judiciary Travel Regulations for United States Justices and Judges specify annual NCR reporting requirements for judges and justices, which include reporting the name of funder and type of funds to support each instance of NCR travel. We found that data fields for entering information in the Judges' Non-Case-Related Travel Reporting System about the name of funder of NCR travel lacked controls to standardize responses. Specifically, when users entered data on the name of the funder of NCR travel, they did not consistently record whether NCR travel was paid for by a court or judicial agency versus other federal agencies or private entities. In addition, when reporting/entering information about the type of funds used for NCR travel, users could not record whether NCR travel was paid for using judiciary funds versus other funding sources because the system requires the user to choose from the following three options to identify the type of funds used to pay for judges' NCR travel: federal, mixed, and private. Since the federal category could encompass judiciary, legislative, and executive branch entities, this data field does not allow AOUSC to readily identify or report the NCR travel costs paid using judiciary funds. Standards for Internal Control in the Federal Government states that internal controls are integral for effective information technology management to ensure useful, reliable, and continuous recording and communication of information. Such controls may include systems controls that standardize data entry so the data are useful for reporting purposes. For NCR travel data, AOUSC could improve the Judges' Non- Case-Related Travel Reporting System to allow collection of cost information directly attributable to the judiciary. By implementing controls, for example, to standardize responses regarding the name of the funder, AOUSC could more readily determine which entity, including judiciary entities, paid for an instance of NCR travel. In addition, by revising the categories for type of funds to account for judiciary funds, AOUSC could more easily identify instances of NCR travel that are being paid for with judiciary funds. According to AOUSC officials, as of November 2015, AOUSC has not decided to change the way the Judges' Non-Case-Related Travel Reporting System collects judges' NCR travel information, but is considering making improvements to the system to better collect judges' NCR travel information, including collecting the judiciary's costs of judges' NCR travel. AOUSC officials also stated that any specific options it may develop for changing the Judges' Non-Case-Related Travel Reporting System will be submitted to the Judicial Conference of the United States for consideration. According to the 2015 Strategic Plan for the Federal Judiciary, Issue 6, the Judiciary's Relationships with the Other Branches of Government, the judiciary must provide Congress timely and accurate information about issues affecting the administration of justice and demonstrate that the judiciary has a comprehensive system of oversight and review. By improving its travel-reporting system, AOUSC officials would be able to better collect required NCR travel information from judges and identify and report the costs to the judiciary of judges' NCR travel in response to congressional member requests. In accordance with judiciary policy on conference planning and administration, AOUSC issued publically available reports on conferences spending across all courts and judicial agencies for fiscal years 2013 and 2014 for conferences costing over $100,000. These reports indicated that the judiciary spent $11.5 million on 61 conferences costing over $100,000 in fiscal years 2013 and 2014. Specifically, the judiciary spent $4.6 million in fiscal year 2013 and $6.9 million in fiscal year 2014 for these conferences. For more information about the conferences listed in the fiscal year 2013 and 2104 conference reports, see appendix I. According to AOUSC officials, they are taking steps to improve their procedures for developing the publically available annual report on judiciary conferences costing over $100,000. AOUSC initially published the fiscal years 2013 and 2014 conference reports in October 2014 and April 2015, respectively. AOUSC subsequently revised both reports in September 2015 in response to errors it discovered in the original reports. The initial conference reports published by AOUSC contained errors in their required reporting information for number of attendees paid for by the judiciary, cost of the conference to the government or judiciary, and number of reportable conferences. For example, the initial reports published by AOUSC for fiscal years 2013 and 2014 conferences did not include approximately $300,000 in conference costs paid for by the judiciary. AOUSC officials told us these costs were omitted because of errors in how AOUSC utilized financial databases for purposes of reporting its annual conference costs, and how judiciary employees tracked conference expenses, including the number of attendees for inclusion in its publically available conference reports. According to AOUSC officials, it has developed and implemented new procedures for how to correctly utilize financial databases for the development of the fiscal year 2015 publically available conference report. Additionally, officials said for fiscal year 2016, they will issue revised guidance to conference planners within the judiciary for how to correctly enter pertinent data to better track the number of attendees and conference costs for the annual reports. We sampled 8 conferences held in fiscal years 2013 and 2014 costing over $100,000. The total cost from judiciary appropriated funds for these conferences ranged from $182,733 to $305,607. For more information about the 8 conferences we sampled, see table 2. Our results cannot be generalized to all conferences costing over $100,000 conducted by the judiciary. However, our analysis provides insights into the judiciary's compliance with its conference policies. The 8 conferences we sampled followed judiciary policy guidance for conference planning and administration including cost considerations, management considerations and internal controls, and site selection. Judiciary policy guidance states, among other things, that each organization must adopt internal controls and procedures to ensure the standards set forth in this policy are met. These judiciary internal control standards require documentation of management oversight, but other management factors are suggested to be considered by planners, as appropriate for their conference. The 8 conferences we sampled complied with judiciary policy for minimizing the cost of meetings. Judiciary policy for conference planning and administration states that in planning meetings, consideration must be given to minimizing the meeting costs incurred by the government, and provides 10 examples of such cost considerations. Officials who planned the 8 conferences we sampled provided examples of how they considered these various cost considerations and employed various strategies to reduce administrative, conferee travel, lodging, meeting room, and technology costs. For example: Attendees' common carrier expenses: The sponsors of the 2014 USSC Seminar on Sentencing Guidelines kept common carrier costs down by identifying the venue that had the greatest number of potential attendees within driving distance. Cost of hotel rooms and meeting room costs: Officials who planned the Fourth, Eighth, and Eleventh Circuit Judicial Conferences and 2013 FJC National Workshop for Bankruptcy Judges negotiated hotel and conference price concessions to achieve hotel and meeting room discounts. Planners of the Second Circuit Judicial Conference negotiated with the prospective hotel to not be charged for meeting rooms because their room block filled the hotel. Printing costs: Officials who planned the Second, Eighth, and Eleventh Circuit Judicial Conferences reduced printing costs through a variety of initiatives, such as printing materials themselves, utilizing the Government Publishing Office, and using web-based material or flash drives for registration and conference materials. USSC and FJC inaugurated a smart phone application that allowed attendees to find conference information on their phones rather than relying on hard copy handouts and used on-line applications, syllabi, course materials, and agendas. Planners for the 2014 Sex Offender Supervision Management Conference communicated all notifications and event information through the Internet -- there were no mailing costs. Conference planners for all 8 conferences we sampled complied with judiciary requirements for internal controls and management oversight, including consideration of, as appropriate, 15 specific strategies suggested by judiciary policy. Some of these strategies overlap with the requirements for cost and site selection considerations, described previously and in the rest of this section. Judiciary guidance for conferences requires management oversight of conference planning but suggested other management factors be considered as appropriate. In addition, meetings costing over $100,000 also are required to be approved by agency leadership in advance. Officials who planned the 8 conferences provided us the required documentation of management oversight and approval by the appropriate senior managers. For example: Planners for the Second, Fourth, Eighth, and Eleventh Circuit Judicial Conferences, as well as the Sex Offender Supervision Management Conference, provided documentation, largely in the form of e-mails generated by the Meeting and Event Planning and Reporting Tool, showing review and approval by the AOUSC Director and Deputy Director. For both of the FJC conferences, the National Workshop for Bankruptcy Judges, and the National Educational Conference for Bankruptcy Court Employees, officials provided documentation of review and signed approval by senior managers and the FJC Director. Officials for 2014 USSC National Seminar on the Federal Sentencing Guidelines reported that they consulted with the Chair of the commission at all stages of the seminar planning and provided supporting documentation. Both judiciary guidance and written responses from all 8 conference planners underscored the importance of site comparisons when planning a conference. On the basis of our review, conference planners for the 8 conferences we sampled performed cost comparisons of at least two potential conference sites and provided documentation of the alternative sites considered and the rationale used for selecting the conference site as required. For example: 2013 Fourth Circuit Judicial Conference: Officials compared site and hotel options for their judicial conference by calculating the costs of transportation and lodging across different cities located within their region to determine which site had the lowest overall travel and hotel costs for judiciary attendees. 2014 Sex Offender Management Conference: Officials chose a centralized meeting location within driving distance of a majority of the attendees, thus reducing the travel costs for federal probation officers attending the conference. 2014 USSC National Seminar on the Federal Sentencing Guidelines: USSC officials minimized travel costs by tabulating the number of probation officers within 2.5 hours' driving distance of several prospective venues. They held the conference in Philadelphia after determining it was more convenient than other cities for the greatest number of probation officers. FJC conferences: Planners provided a written summary of their site and hotel selection rationale and documented that the program leader had confirmed that the selection process was in compliance with judiciary policy. Throughout the year, judges engage in NCR travel for judicial administration conferences and training that are not directly associated with adjudicating cases. Collecting information on this category of travel spending is important to the judiciary for maintaining the quality of information required under its policies and for congressional oversight. Specifically, taking steps to improve AOUSC's travel cost collection system would help the judiciary collect and readily identify the costs of judges' NCR travel that are paid by the judiciary. Strengthening the system would also better enable the judiciary respond to congressional requests for such information. To better report information to Members of Congress on judiciary NCR travel costs, the Director of AOUSC should improve its data collection system to collect and identify NCR travel costs paid by the judiciary. We provided a draft report to AOUSC, the Federal Judicial Center, and the U.S. Sentencing Commission for review and comment. AOUSC concurred with our recommendation and provided written comments, which are printed in full in appendix II. These agencies also provided technical comments that we incorporated as appropriate. In its comment letter, AOUSC stated it agreed with our recommendation that it should enhance its reporting mechanisms to better distinguish certain travel that is funded by the judiciary from that funded by other government agencies. It stated that the judiciary has already adopted the change we recommended and is planning to add a new functionality in the judges' non-case-related travel reporting tool. AOUSC also stated that it was pleased that GAO has found that the judiciary has followed applicable policies and procedures with regard to the travel studied in this report. We are sending copies of this report to the Judicial Conference of the United States, the Directors of the Administrative Office of the U.S. Courts and Federal Judicial Center, Staff Director of the U.S. Sentencing Commission, 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, 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. National Workshop for Magistrate Judges I 2013 Federal Judicial Center National Educational Conference for Bankruptcy Court Clerks, Bankruptcy Administrators, Bankruptcy Appellate Panel Clerks, and Bankruptcy Court Chief Deputy Clerks 2013 Federal Judicial Center National Educational Conference for District Court Clerks, District Court Executives, and District Court Chief Deputy Clerks Experienced Supervisors Seminar: Targeting Leadership Excellence Leadership Development Program Concluding Workshop (Class XI) In addition to the contact named above, Glenn Davis (Assistant Director), Daniel Rodriguez, Carl Potenzieri, Jennifer Bryant, Kathleen Donovan, Susan Hsu, Tracey King, Amanda Miller, and Janet Temko-Blinder made key contributions to this report.

The federal judiciary consists of a system of courts that has the critical responsibility of ensuring the fair and swift administration of justice in the United States. Employees and judges within the judiciary travel for a variety purposes, including attending conferences for training and conducting judicial administration. For judges, travel not directly related to adjudicating cases has been termed NCR travel. GAO was asked to review the judiciary's costs of judges' NCR travel and conferences. This report examines the following: (1) What has been the cost of judges' NCR travel from fiscal years 2003 through 2014 and to what extent does the judiciary collect information on its costs for judges' NCR travel? (2) How much did the judiciary spend on all conferences over $100,000 for its employees in fiscal years 2013 and 2014, and to what extent did selected conferences conform to judiciary policy on conferences? GAO analyzed judges' NCR travel data from fiscal years 2003 through 2014, reviewed procedures for collection of NCR travel information, and interviewed judiciary officials. GAO reviewed judiciary policy for conference planning and administration, information from a non-generalizable sample of eight conferences, and interviewed judicial officials responsible for planning the conferences. From fiscal years 2003 through 2014, judges have used a separate system to report their non-case-related (NCR) travel costs paid for by government and private sources. These NCR travel costs averaged $8.8 million per year. However, while the Administrative Office of the U.S. Courts (AOUSC) tracks the costs of all official travel in its accounting systems of record, the NCR system does not collect specific information on the direct costs to the federal judiciary for judges' NCR travel. GAO found that AOUSC's data collection system for judges' NCR travel information lacked controls to standardize responses to accurately record whether NCR travel was paid for by a court or judicial agency versus other federal agencies or private entities. As a result of these limitations in the NCR travel data, GAO was not able to determine the extent to which those reported costs were paid using judiciary funds rather than other federal or private sources. According to AOUSC officials, as of November 2015, AOUSC has not decided to change the way the Judges' Non-Case-Related Travel Reporting System collects judges' NCR travel information, but is considering making improvements to the system to better collect judges' NCR travel information, including collecting the judiciary's costs of judges' NCR travel. According to the 2015 Strategic Plan for the Federal Judiciary, the judiciary must provide Congress timely and accurate information about issues affecting the administration of justice. By improving the system, AOUSC officials would be able to better collect required NCR travel information from judges and identify and report the judiciary's costs for judges' NCR travel in response to future congressional member requests. The judiciary spent $11.5 million on 61 conferences costing over $100,000 in fiscal years 2013 and 2014. AOUSC began collecting information on judiciary conference spending across all courts and judicial agencies in fiscal year 2013 for conferences costing over $100,000. This information was used to develop publically available reports and indicated the judiciary spent $4.6 million in fiscal year 2013 and $6.9 million in fiscal year 2014 for conferences costing over $100,000. The judiciary followed its policies for conference planning and administration. GAO sampled 8 conferences from the 61 conferences held in fiscal years 2013 and 2014 costing over $100,000 and determined the extent to which those conferences conformed to judiciary policy on conference planning and administration. GAO's results cannot be generalized to all conferences costing over $100,000 conducted by the judiciary, but do provide insight into the judiciary's compliance with its conference policies. Conference planners for the 8 conferences GAO sampled followed judiciary policy for conference planning and administration including (1) cost considerations-- suggested strategies to reduce administrative, conferee travel, lodging, meeting room, and technology costs-- (2) management considerations and internal controls: judiciary requirements for internal controls and management oversight of conference planning and implementation-- and (3) conference site selection-- a requirement to perform cost comparisons of at least two potential conference sites and document alternative sites considered and the rationale used for selecting the conference site. GAO recommends AOUSC improve its data collection system to collect and identify judges' NCR travel costs paid by the judiciary. AOUSC agreed with our recommendation.

The credibility of USDA's efforts to correct long-standing problems in resolving customer and employee discrimination complaints has been undermined by faulty reporting of complaint data, including disparities we found when comparing various ASCR sources of data. When ASCR was created in 2003, there was an existing backlog of complaints that had not been adjudicated. In response, the Assistant Secretary for Civil Rights at that time called for a concerted 12-month effort to reduce this backlog and to put lasting improvements in place to prevent future complaint backlogs. In July 2007, ASCR reported that it had reduced its backlog of 690 complaints and held the complaint inventory to manageable levels through fiscal year 2005. However, the data ASCR reported lack credibility because they were inconsistent with other complaint data it reported a month earlier to a congressional subcommittee. The backlog later surged to 885 complaints, according to ASCR data. Furthermore, the Assistant Secretary's letter transmitting these data stated that while they were the best available, they were incomplete and unreliable. In addition, GAO and USDA's OIG have identified other problems with ASCR's data, including the need for better management controls over the entry and validation of these data. In addition, some steps that ASCR took to speed up its investigations and decisions on complaints in 2004 may have adversely affected the quality of its work. ASCR's plan called for USDA's investigators and adjudicators, who prepare agency decisions, to nearly double their normal pace of casework for about 12 months. ASCR's former Director, Office of Adjudication and Compliance, stated that this increased pace led to many "summary" decisions on employees' complaints that did not resolve questions of fact, with the result that many decisions were appealed to the Equal Employment Opportunity Commission. This official also said these summary decisions "could call into question the integrity of the process because important issues were being overlooked." In addition, inadequate working relationships and communications within ASCR, as well as fear of retaliation for reporting management-related problems, complicated ASCR's efforts to produce quality work products. In August 2008, ASCR officials stated they would develop standard operating procedures for the Office of Adjudication and Compliance and had provided USDA staff training on communication and conflict management, among other things. While these are positive steps, they do not directly respond to whether USDA is adequately investigating complaints, developing thorough complaint decisions, and addressing the problems that gave rise to discrimination complaints within ASCR. The Food, Conservation, and Energy Act of 2008 (2008 Farm Bill), enacted in June 2008, states that it is the sense of Congress that all pending claims and class actions brought against USDA by socially disadvantaged farmers and ranchers should be resolved in an expeditious and just manner. In addition, the 2008 Farm Bill requires USDA to report annually on, among other things, the number of customer and employee discrimination complaints filed against each USDA agency, and the length of time the agency took to process each complaint. In October 2008, we recommended that the Secretary of Agriculture take the following actions related to resolving discrimination complaints: Prepare and implement an improvement plan for resolving discrimination complaints that sets time frame goals and provides management controls for resolving complaints from beginning to end. Develop and implement a plan to ensure the accuracy, completeness and reliability of ASCR's databases on customer and employee complaints, and that provides for independent validation of ASCR's data quality. Obtain an expert, independent, and objective legal examination of the basis, quality, and adequacy of a sample of USDA's prior investigations and decisions on civil rights complaints, along with suggestions for improvement. USDA agreed with the first two recommendations, but initially disagreed with the third, asserting that its internal system of legal sufficiency addresses our concerns, works well, and is timely and effective. Given the substantial evidence of civil rights case delays and questions about the integrity of USDA's civil rights casework, we believe this recommendation remains valid and necessary to restore confidence in USDA's civil rights decisions. In April 2009, ASCR officials said that USDA now agrees with all three of the recommendations and that the department is taking steps to implement them. These steps include hiring a consultant to assist ASCR with setting timeframe goals and establishing proper management controls; a contractor to help move data from ASCR's three complaint databases into one; and a firm to provide ASCR with independent legal advice on developing standards on what constitutes a program complaint and actions needed to adjudicate those complaints. As required by the 2002 farm bill, ASCR has published three annual reports on the participation rate of socially disadvantaged farmers and ranchers in USDA programs. The reports are to provide statistical data on program participants by race and ethnicity, among other things. However, much of these data are unreliable because USDA lacks a uniform method of reporting and tabulating race and ethnicity data among its component agencies. According to USDA, to collect standardized demographic data directly from participants in many of its programs, it must first obtain OMB's approval. In the meantime, most of USDA's demographic data are gathered by visual observation of program applicants, a method that is inherently unreliable and subjective, especially for determining ethnicity. To address this problem, ASCR published a notice in the Federal Register in 2004 seeking public comment on its plan to collect standardized data on race, ethnicity, gender, national origin, and age for all its programs. However, while it received some comments, ASCR has not moved forward to finalize this rulemaking and obtain OMB's approval to collect these data. The 2008 Farm Bill contains several provisions related to reporting on minority farmers' participation in USDA programs. First, it requires USDA to annually compile program application and participation rate data for each program serving those farmers. These reports are to include the raw numbers and participation rates for the entire United States and for each state and county. Second, it requires USDA to ensure, to the maximum extent practicable, that the Census of Agriculture and studies by USDA's Economic Research Service accurately document the number, location, and economic contributions of minority farmers in agricultural production. In October 2008, to address underlying data reliability issues, as discussed, and potential steps USDA could take to facilitate data analysis by users, we recommended that the Secretary of Agriculture work expeditiously to obtain OMB's approval to collect the demographic data necessary for reliable reporting on race and ethnicity by USDA program. USDA agreed with the recommendation. In April 2009, ASCR officials indicated that a draft Federal Register notice requesting OMB's approval to collect these data for Farm Service Agency, Natural Resources Conservation Service, and Rural Development programs is being reviewed within USDA. These officials said they hoped this notice, which they considered an initial step toward implementing our recommendation, would be published and implemented in time for USDA's field offices to begin collecting these data by October 1, 2009. According to these officials, USDA also plans to seek, at a later time, authority to collect such data on participants in all USDA programs. In light of USDA's history of civil rights problems, better strategic planning is vital. Results-oriented strategic planning provides a road map that clearly describes what an organization is attempting to achieve and, over time, it can serve as a focal point for communication with Congress and the public about what has been accomplished. Results-oriented organizations follow three key steps in their strategic planning: (1) they define a clear mission and desired outcomes, (2) they measure performance to gauge progress, and (3) they use performance information for identifying performance gaps and making program improvements. ASCR has started to develop a results-oriented approach as illustrated in its first strategic plan, Assistant Secretary for Civil Rights: Strategic Plan, Fiscal Years 2005-2010, and its ASCR Priorities for Fiscal Years 2007 and 2008. However, ASCR's plans do not include fundamental elements required for effective strategic planning. In particular, we found that the interests of ASCR's stakeholders--including representatives of community-based organizations and minority interest groups--are not explicitly reflected in its strategic plan. For example, we found that ASCR's stakeholders are interested in improvements in (1) USDA's methods of delivering farm programs to facilitate access by underserved producers; (2) the county committee system, so that stakeholders are better represented in local decisions; and (3) the diversity of USDA employees who work with minority producers. A more complete list of these interests is included in the appendix. In addition, ASCR's strategic plan does not link to the plans of other USDA agencies or the department and does not discuss the potential for linkages to be developed. ASCR could also better measure performance to gauge progress, and it has not yet started to use performance information for identifying USDA performance gaps. For example, ASCR measures USDA efforts to ensure USDA customers have equal and timely access to programs by reporting on the numbers of participants at USDA workshops rather than measuring the results of its outreach efforts on access to benefits and services. Moreover, the strategic plan does not make linkages between levels of funding and ASCR's anticipated results; without such a discussion, it is not possible to determine whether ASCR has the resources needed to achieve its strategic goal of, for example, strengthening partnerships with historically black land-grant universities through scholarships provided by USDA. To help ensure access to and equitable participation in USDA's programs and services, the 2008 Farm Bill provided for establishing the Office of Advocacy and Outreach and charged it with, among other things, establishing and monitoring USDA's goals and objectives to increase participation in USDA programs by small, beginning, and socially disadvantaged farmers and ranchers. As of April 2009, ASCR officials indicated that the Secretary of Agriculture plans to establish this office, but has not yet done so. In October 2008, we recommended that USDA develop a results-oriented department-level strategic plan for civil rights that unifies USDA's departmental approach with that of ASCR and the newly created Office of Advocacy and Outreach and that is transparent about USDA's efforts to address stakeholder concerns. USDA agreed with this recommendation. In April 2009, ASCR officials said they plan to implement this recommendation during the next department-wide strategic planning process, which occurs every 5 years. Noting that the current plan runs through 2010, these officials speculated that work on the new plan will start in the next few months. Our past work in addressing the problems of high-risk, underperforming federal agencies, as well as our reporting on results-oriented management, suggests three options that could benefit USDA's civil rights performance. These options were selected based on our judgment that they (1) can help address recognized and long-standing problems in USDA's performance, (2) have been used previously by Congress to improve aspects of agency performance, (3) have contributed to improved agency performance, and (4) will result in greater transparency over USDA's civil rights performance. These options include (1) making USDA's Assistant Secretary for Civil Rights subject to a statutory performance agreement, (2) establishing an agriculture civil rights oversight board, and (3) creating an ombudsman for agriculture civil rights matters. Our prior assessment of performance agreements used at several agencies has shown that these agreements have potential benefits that could help improve the performance of ASCR. Potential benefits that performance agreements could provide USDA include (1) helping to define accountability for specific goals and align daily operations with results- oriented programmatic goals, (2) fostering collaboration across organizational boundaries, (3) enhancing use of performance information to make program improvements, (4) providing a results-oriented basis for individual accountability, and (5) helping to maintain continuity of program goals during leadership transitions. Congress has required performance agreements in other federal offices and the results have been positive. For example, in 1998, Congress established the Department of Education's Office of Federal Student Aid as the government's first performance-based organization. This office had experienced long-standing financial and management weaknesses and we had listed the Student Aid program as high-risk since 1990. Congress required the office's Chief Operating Officer to have a performance agreement with the Secretary of Education that was transmitted to congressional committees and made publicly available. In addition, the office was required to report to Congress annually on its performance, including the extent to which it met its performance goals. In 2005, because of the sustained improvements made by the office in its financial management and internal controls, we removed this program from our high-risk list. More recently, Congress has required statutory performance agreements for other federal executives, including for the Commissioners of the U.S. Patent and Trademark Office and the Under Secretary for Management of the Department of Homeland Security. A statutory performance agreement could benefit ASCR. The responsibilities assigned to USDA's Assistant Secretary for Civil Rights were stated in general terms in both the 2002 Farm Bill and the Secretary's memorandum establishing this position within USDA. The Secretary's memorandum stated that the Assistant Secretary reports directly to the Secretary and is responsible for (1) ensuring USDA's compliance with all civil rights laws and related laws, (2) coordinating administration of civil rights laws within USDA, and (3) ensuring that civil rights components are incorporated in USDA strategic planning initiatives. This set of responsibilities is broad in scope, and it does not identify specific performance expectations for the Assistant Secretary. A statutory performance agreement could assist in achieving specific expectations by providing additional incentives and mandatory public reporting. In October 2008, we suggested that Congress consider the option of making USDA's Assistant Secretary for Civil Rights subject to a statutory performance agreement. USDA initially disagreed with this suggestion, in part stating that the Assistant Secretary's responsibilities are spelled out in the 2002 and 2008 farm bills. In response, we noted, in part, that a statutory performance agreement would go beyond the existing legislation by requiring measurable organizational and individual goals in key performance areas. In April 2009, ASCR officials indicated that the department no longer disagrees with this suggestion. However, these officials expressed the hope that the actions they are taking or planning to improve the management of civil rights at USDA, such as obtaining an independent external analysis of program delivery, will preclude the need for this mechanism. Congress could also authorize a USDA civil rights oversight board to independently monitor, evaluate, approve, and report on USDA's administration of civil rights activities, as it has for other federal activities. Oversight boards have often been used by the federal government--such as for oversight of public accounting, intelligence matters, civil liberties, and drug safety--to provide assurance that important activities are well done, to identify weaknesses that may need to be addressed, and to provide for transparency. For example, Congress established the Internal Revenue Service (IRS) Oversight Board in 1998 to oversee IRS's administration of internal revenue laws and ensure that its organization and operation allow it to carry out its mission. At that time, IRS was considered to be an agency that was not effectively serving the public or meeting taxpayer needs. The board operates much like a corporate board of directors, tailored to fit the public sector. The board provides independent oversight of IRS administration, management, conduct, and the direction and supervision of the application of the internal revenue code. We have previously noted the work of the Internal Revenue Service Oversight Board--including, for example, the board's independent analysis of IRS business systems modernization. Currently, there is no comparable independent oversight of USDA civil rights activities. In October 2008, we suggested that Congress consider the option of establishing a USDA civil rights oversight board to independently monitor, evaluate, approve, and report on USDA's administration of civil rights activities. Such a board could provide additional assurance that ASCR management functions effectively and efficiently. USDA initially disagreed with this suggestion, stating that it would be unnecessarily bureaucratic and delay progress. In response, we noted that a well-operated oversight board could be the source of timely and wise counsel to help raise USDA's civil rights performance. In April 2009, ASCR officials said that the department no longer disagrees with this suggestion. However, these officials expressed the hope that the actions they are taking or planning to address our recommendations to improve the management of civil rights at USDA will preclude the need for this mechanism. An ombudsman for USDA civil rights matters could be created to address the concerns of USDA customers and employees. Many other agencies have created ombudsman offices for addressing employees' concerns, as authorized by the Administrative Dispute Resolution Act. However, an ombudsman is not merely an alternative means of resolving employees' disputes; rather, the ombudsman is a neutral party who uses a variety of procedures, including alternative dispute resolution techniques, to deal with complaints, concerns, and questions. Ombudsmen who handle concerns and inquiries from the public--external ombudsmen--help agencies be more responsive to the public through impartial and independent investigation of citizens' complaints, including those of people who believe their concerns have not been dealt with fairly and fully through normal channels. For example, we reported that ombudsmen at the Environmental Protection Agency serve as points of contact for members of the public who have concerns about certain hazardous waste cleanup activities. We also identified the Transportation Security Administration ombudsman as one who serves external customers and is responsible for recommending and influencing systemic change where necessary to improve administration operations and customer service. Within the federal workplace, ombudsmen provide an informal alternative to existing and more formal processes to deal with employees' workplace conflicts and other organizational climate issues. USDA faces concerns of fairness and equity from both customers and employees--a range of issues that an ombudsman could potentially assist in addressing. A USDA ombudsman who is independent, impartial, fully capable of conducting meaningful investigations and who can maintain confidentiality could assist in resolving these civil rights concerns. As of April 2007, 12 federal departments and 9 independent agencies reported having 43 ombudsmen. In October 2008, we recommended that USDA explore the potential for an ombudsman office to contribute to addressing the civil rights concerns of USDA customers and employees, including seeking legislative authority, as appropriate, to establish such an office and to ensure its effectiveness, and advise USDA's congressional oversight committees of the results. USDA agreed with this recommendation. In April 2009, ASCR officials indicated that the Assistant Secretary for Civil Rights has convened a team to study the ombudsman concept and to make recommendations by September 30, 2009, to the Secretary of Agriculture for establishing an ombudsman office. USDA has been addressing allegations of discrimination for decades and receiving recommendations for improving its civil rights functions without achieving fundamental improvements. One lawsuit has cost taxpayers about a billion dollars in payouts to date, and several other groups are seeking redress for similar alleged discrimination. While ASCR's established policy is to fairly and efficiently respond to complaints of discrimination, its efforts to establish the management system necessary to implement the policy have fallen short, and significant deficiencies remain. Unless USDA addresses several fundamental concerns about resolving discrimination complaints--including the lack of credible data on the numbers, status, and management of complaints; the lack of specified time frames and management controls for resolving complaints; questions about the quality of complaint investigations; and concerns about the integrity of final decision preparation--the credibility of USDA efforts to resolve discrimination complaints will be in doubt. In addition, unless USDA obtains accurate data on minority participation in USDA programs, its reports on improving minority participation in USDA programs will not be reliable or useful. Furthermore, without better strategic planning and meaningful performance measures, it appears unlikely that USDA management will be fully effective in achieving its civil rights mission. Given the new Administration's commitment to giving priority attention to USDA's civil rights problems, various options may provide a road map to correcting long-standing management deficiencies that have given rise to these problems. Specifically, raising the public profile for transparency and accountability through means such as a statutory performance agreement between the Secretary of Agriculture and the Assistant Secretary for Civil Rights, a civil rights oversight board, and an ombudsman for addressing customers' and employees' civil rights concerns would appear to be helpful steps because they have proven to be effective in raising the performance of other federal agencies. These options could lay a foundation for clarity about the expectations USDA must meet to restore confidence in its civil rights performance. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Lisa Shames, Director, Natural Resources and Environment, (202) 512-2649 or [email protected]. Key contributors to this statement were James R. Jones, Jr., Assistant Director; Kevin S. Bray; Nancy Crothers; Nico Sloss; and Alex M. Winograd. USDA outreach programs for underserved producers could be much better. Systematic data on minority participation in USDA programs are not available. The 10708 Report and Minority Farm Register have been ineffective. Partnerships with community-based organizations could be better used. Methods of USDA program delivery need to better facilitate the participation of underserved producers and address their needs. USDA could do more to provide assistance in accessing markets and programs. USDA could better address cultural and language differences for providing services. Some USDA program rules and features hinder participation by underserved producers. Some USDA employees have little incentive to work with small and minority producers. County offices working with underserved producers continue to lack diversity, and some have poor customer service or display discriminatory behaviors toward underserved producers. USDA lacks a program that addresses farmworker needs. There continue to be reports of cases where USDA has not processed loans for underserved producers. Some Hmong poultry farmers with guaranteed loans facilitated by USDA are experiencing foreclosures. The county committee system does not represent minority producers well. Minority advisers are ineffective because they have no voting power. USDA has not done enough to make underserved producers fully aware of county committee elections, and underserved producers have difficulties winning elections. There is a lack of USDA investment in research and extension services that would determine the extent of minority needs. The Census of Agriculture needs to better count minority producers. USDA may continue to be foreclosing on farms belonging to producers who are awaiting decisions on discrimination complaints. ASCR needs authority to exercise leadership for making changes at USDA. USDA and ASCR need additional resources to carry out civil rights functions. Greater diversity among USDA employees would facilitate USDA's work with minority producers. Producers must still access services through some USDA employees who discriminated against them. The Office of Adjudication and Compliance needs better management structure and function. Backlogs of discrimination complaints need to be addressed. Alternative dispute resolution techniques to resolve informal employee complaints should be used consistently and documented. Civil rights compliance reviews of USDA agencies are behind schedule and should be conducted. USDA's Office of General Counsel continues to be involved in complaint cases. U.S. Department of Agriculture: Recommendations and Options to Address Management Deficiencies in the Office of the Assistant Secretary for Civil Rights. GAO-09-62. Washington, D.C.: October 22, 2008. U.S. Department of Agriculture: Management of Civil Rights Efforts Continues to Be Deficient Despite Years of Attention. GAO-08-755T. Washington, D.C.: May 14, 2008. Pigford Settlement: The Role of the Court-Appointed Monitor. GAO-06-469R. Washington, D.C.: March 17, 2006. Department of Agriculture: Hispanic and Other Minority Farmers Would Benefit from Improvements in the Operations of the Civil Rights Program. GAO-02-1124T. Washington, D.C.: September 25, 2002. Department of Agriculture: Improvements in the Operations of the Civil Rights Program Would Benefit Hispanic and Other Minority Farmers. GAO-02-942. Washington, D.C.: September 20, 2002. U.S. Department of Agriculture: Resolution of Discrimination Complaints Involving Farm Credit and Payment Programs. GAO-01-521R. Washington, D.C.: April 12, 2001. U.S. Department of Agriculture: Problems in Processing Discrimination Complaints. T-RCED-00-286. Washington, D.C.: September 12, 2000.

For decades, there have been allegations of discrimination in the U.S. Department of Agriculture (USDA) programs and workforce. Reports and congressional testimony by the U.S. Commission on Civil Rights, the U.S. Equal Employment Opportunity Commission, a former Secretary of Agriculture, USDA's Office of Inspector General, GAO, and others have described weaknesses in USDA's programs--in particular, in resolving complaints of discrimination and in providing minorities access to programs. The Farm Security and Rural Investment Act of 2002 authorized the creation of the position of Assistant Secretary for Civil Rights (ASCR), giving USDA an executive that could provide leadership for resolving these long-standing problems. This testimony focuses on USDA's efforts to (1) resolve discrimination complaints, (2) report on minority participation in USDA programs, and (3) strategically plan its efforts. This testimony is based on new and prior work, including analysis of ASCR's strategic plan; discrimination complaint management; and about 120 interviews with officials of USDA and other federal agencies, as well as 20 USDA stakeholder groups. USDA officials reviewed the facts upon which this statement is based, and we incorporated their additions and clarifications as appropriate. GAO plans a future report with recommendations. ASCR's difficulties in resolving discrimination complaints persist--ASCR has not achieved its goal of preventing future backlogs of complaints. At a basic level, the credibility of USDA's efforts has been and continues to be undermined by ASCR's faulty reporting of data on discrimination complaints and disparities in ASCR's data. Even such basic information as the number of complaints is subject to wide variation in ASCR's reports to the public and the Congress. Moreover, ASCR's public claim in July 2007 that it had successfully reduced a backlog of about 690 discrimination complaints in fiscal year 2004 and held its caseload to manageable levels, drew a questionable portrait of progress. By July 2007, ASCR officials were well aware they had not succeeded in preventing future backlogs--they had another backlog on hand, and this time the backlog had surged to an even higher level of 885 complaints. In fact, ASCR officials were in the midst of planning to hire additional attorneys to address that backlog of complaints including some ASCR was holding dating from the early 2000s that it had not resolved. In addition, some steps ASCR had taken may have actually been counter-productive and affected the quality of its work. For example, an ASCR official stated that some employees' complaints had been addressed without resolving basic questions of fact, raising concerns about the integrity of the practice. Importantly, ASCR does not have a plan to correct these many problems. USDA has published three annual reports--for fiscal years 2003, 2004, and 2005--on the participation of minority farmers and ranchers in USDA programs, as required by law. USDA's reports are intended to reveal the gains or losses that these farmers have experienced in their participation in USDA programs. However, USDA considers the data it has reported to be unreliable because they are based on USDA employees' visual observations about participant's race and ethnicity, which may or may not be correct, especially for ethnicity. USDA needs the approval of the Office of Management and Budget (OMB) to collect more reliable data. ASCR started to seek OMB's approval in 2004, but as of May 2008 had not followed through to obtain approval. ASCR staff will meet again on this matter in May 2008. GAO found that ASCR's strategic planning is limited and does not address key steps needed to achieve the Office's mission of ensuring USDA provides fair and equitable services to all customers and upholds the civil rights of its employees. For example, a key step in strategic planning is to discuss the perspectives of stakeholders. ASCR's strategic planning does not address the diversity of USDA's field staff even though ASCR's stakeholders told GAO that such diversity would facilitate interaction with minority and underserved farmers. Also, ASCR could better measure performance to gauge its progress in achieving its mission. For example, it counts the number of participants in training workshops as part of its outreach efforts rather than access to farm program benefits and services. Finally, ASCR's strategic planning does not link levels of funding with anticipated results or discuss the potential for using performance information for identifying USDA's performance gaps.

Department of Defense policy states that, to reduce the reaction time and to sustain combat forces until resupply channels are established, war materiel inventories shall be sized, managed, and positioned to maximize flexibility to respond, while minimizing the investment in inventories. The U.S. Army Materiel Command is responsible for managing war materiel, including war reserve spare parts, with policy guidance from the War Reserve Division of the Army's Office of the Deputy Chief of Staff for Logistics. The Army plans to rely heavily on its specifically designated war reserve weapon systems, equipment, and spare parts when its units arrive in a combat theater of operations. For the Army, war reserves consist of major end items such as trucks and secondary items such as spare parts, food, clothing, medical supplies, and fuel. Spare parts for maintenance represent the largest dollar value of the Army's war reserve secondary item requirements. War reserves are protected go-to-war assets that are not to be used to improve peacetime readiness or to fill unit shortages. Some of these assets are prepositioned in Southwest Asia, the Pacific, Europe, and on special war reserve ships. The Army would also use available peacetime stocks and what industry could promptly supply. As part of their budget submission process, the services are to develop information on what they need to effectively implement the Department of Defense war materiel inventory policy. During the 1990s, the Army focused on acquiring its major end items for war reserves but funded few associated spare parts. In the Fiscal Years 2000-2005 Program Objective Memorandum for its fiscal year 2000 budget submission, the Army developed plans to fund $265 million for spare parts, with most of the funding planned for the later years. However, for fiscal year 2000, the Army reported that it had obligated $95 million for war reserve spare parts. The Army reports its war reserve status in the Department of Defense's Quarterly Readiness Report to the Congress. These reports assess each service's readiness to fight various war scenarios, including the two major theater war scenario. The status of equipment availability and spare parts is included in these assessments. The Department of Defense also prepares an annual report on industry's capabilities to support the military needs. The U.S. Army Materiel Command is responsible for determining requirements for war reserve spare parts. It uses a computer model to do this. The model takes war-planning guidance from the Department of Defense as well as Army information on anticipated force structure. It combines this data with a list of the end items and associated spare parts planned to be used in war. For each end item or part, the model uses data on expected end-item use and spare parts consumption rates due to breakage, geography, and environment. Also, the model uses data on rates of equipment loss due to battle damage. The most recent Quarterly Readiness Report to the Congress (October-December 2000) indicates that the current status of the Army's war reserve parts is of strategic concern. This strategic concern was raised for the first time in the unclassified version of this report, although prior reports' classified Annexes A have addressed spare parts concerns. The report states that the Army is between 85 and 95 percent filled in its prepositioned equipment, but shortages still exist in spare parts. The report points out that warfighting and functional commanders in chief of the unified commands continue to express strategic concerns over the status of some prepositioned stockpiles of spare parts. However, the report says that the Department of Defense has taken action to address the critical shortfalls in this area. We were told by a Department official that the action referred to is the Army's planned future funding for war reserve spare parts. The report concludes that forces can execute the National Military Strategy, but the risk caused by parts shortages and other problems to the first war is moderate and to the second remains high. The risk is defined as the likelihood of failing to accomplish theater objectives within planned timelines and means an increase in the potential for higher casualties to U.S. forces. During our review, we found Army documents that provide more information on spare parts shortages. For example, in a May 2000 information paper, the Chief of the Army War Reserve Division in the Office of the Deputy Chief of Staff for Logistics advised the Office of Management and Budget that the planned funding for spare parts would result in moderate risk of not having the needed parts in the first major theater war and greater risk in the second. In addition, an internal Army Materiel Command analysis of war reserve spare parts on hand shows the Army has on hand only about 35 percent of its stated prepositioned war reserve spare parts requirement as of the December 2000 budget stratification report done by the Army Materiel Command, expressed in monetary terms, not number of parts. Another internal document dated November 1999 prepared by the Army War Reserve Division also addressed the availability of spare parts for war reserves. The purpose of this document was to show the requirement and shortfall for war reserve spare parts, based on parts on hand or expected to be available in the future for the Army's Fiscal Years 2000-2005 Program Objective Memorandum. It indicates that the Army has a stated requirement of $3.3 billion in spare parts needed for two major theater wars. To meet this requirement, the Army calculates that it has $1.3 billion in parts prepositioned or otherwise set aside for war reserve, it has $0.627 billion in on-hand peacetime inventory that could be used to meet its requirement, and it expects to acquire $0.131 billion in parts from the industrial base. This leaves a shortfall of about $1.24 billion. However, the Army expects to get $0.265 billion in future years budget authority through fiscal year 2005 (mostly in the out-years) to help address war reserve spare parts needs. This would still leave a shortfall of about $0.975 billion. Notwithstanding the apparent shortfall in funding for war reserve spare parts, our review found uncertainties about the accuracy of the Army's requirements in that area. How the Army determines its war reserve spare parts requirements has been a matter of concern within the Department of Defense for several years. After considerable effort to improve the process, the central improvement--using better consumption factors in the requirements calculations-- has not been widely implemented. Other issues raise further concerns about the validity of the Army's stated requirements for war reserve spare parts. They include (1) the potential mismatch between the Army's methodology for calculating spare parts requirements and the way it intends to maintain and repair equipment on the battlefield, (2) the contributions the industrial base can provide in the way of spare parts support, and (3) the effect of emerging issues such as force structure actions on spare parts requirements. In the 1990s, the Office of the Secretary of Defense expressed concern about the Army's stated requirements for war reserve spare parts and questioned the determination process used to arrive at those requirements. These concerns were related to the rate at which spare parts would be consumed during wartime. To assuage these concerns, the Army indicated in 1998 that it would change its process for calculating requirements by updating its consumption factors to obtain more realistic information. The change is to replace prior consumption factors that were based on peacetime usage with new factors, referred to as Equipment Usage Profiles and Mean Usage Between Replacement factors, that would better reflect expected usage of parts in wartime. Studies by the Institute for Defense Analyses in 1997 and Coopers & Lybrand in 1998 endorsed the use of the new consumption factors in calculating the requirements. We found that the Army has been slow in implementing this new determination process. To date, about 85 percent of the Army's stated requirements has not been updated using the new consumption factors. After we brought this condition to the Army's attention, Army officials in the War Reserve Division of the Office of the Deputy Chief of Staff for Logistics and the Army Materiel Command's Readiness Division told us that they plan to make all new factors available to those doing the calculations so that the fiscal year 2004 to 2009 Program Objective Memorandum budget package will be based on more accurate data. We found that Army-sponsored studies made in 1997 and 1998 showed that some requirements increased while others decreased when the new consumption factors were tested. For example, the Coopers and Lybrand study sampled various parts requirements and found that aviation parts requirements increased from $78 million to $160 million, while non- aviation parts requirements decreased from $531 million to $218 million. Using a limited analysis for the M1 tank, the Institute for Defense Analyses study found that the parts requirements for this end item decreased by over 50 percent. Until the Army fully incorporates the best consumption factors into its requirements determination process, it cannot ensure that it is not buying the wrong amounts of individual items and consequently failing to adequately supply the spare parts needed for the two major theaters of war scenario. A potential mismatch exists between the results from the Army's process for determining spare parts requirements for the war reserve and how the Army plans to repair equipment on the battlefield. The Army has specified that war reserve parts requirements calculations are to optimize parts requirements for specified readiness goals at the least cost, based on Department of Defense guidance. What this means in practice is that the Army's stated requirements include numerous parts to repair components and subassemblies rather than the components and subassemblies themselves. However, the Army's current maintenance policy calls for fighting units to remove and replace components and subassemblies rather than repair them on the battlefield. The policy of removing and replacing components and subassemblies appears to conflict with the results of the readiness based sparing methodology. After we discussed this apparent inconsistency with Army officials, we were told that the Army is currently evaluating this issue and that it plans to change the next parts requirements calculation to reflect the current maintenance policy. Army officials in the War Reserve Division of the Office of the Deputy Chief of Staff for Logistics and the Army Materiel Command's Readiness Division could not tell us when this evaluation is to be completed, but they expect the evaluation will change the specific parts and quantities required. Currently, the Army is relying on an internal estimate of what industry might contribute in the way of spare parts needed for two major theater wars, rather than well-defined information from industry. The Army estimates that about 4 percent of the stated spare parts requirement will be derived from the industrial base. This estimate was developed by using generic information on percentages of administrative and production lead times for delivery of parts. According to Army officials, industry data is not being used in developing this estimate because, in the past, few companies responded to the Army's industry spare parts surveys. The validity of the Army's estimate of the amount of parts to be available from industry ($131 million of the $3.3 billion total requirement) is open to question. For example, a 1998 Army study raised concerns about whether industry could support certain spare parts requirements. It found that some requirements assumed to be supported by industry could not be and some that were assumed not to be supported by the industrial base were. The study pointed out that of 86 items (valued at $73 million), 44 of them (valued at $51 million) were found not available from the industrial base, although the Army assumed them to be available. The study further indicated that of 218 items (valued at $60 million), 176 (valued at $54 million) were found to have existing industrial base production capacity, although the Army assumed the items would not be available. The Department of Defense's most recent Annual Industrial Capabilities Report to Congress, dated January 2001, intended to address industrial concerns, does not address the ability of industry to supply Army critical spare parts for a wartime scenario. The contributions the industrial base can provide have a great bearing on what the Army needs to have in its war reserve, but the Army's assessments of industrial capability are limited to selected weapon systems or major end items, such as the Comanche weapon system. The Army and the other services have expressed concerns about existing shortages of spare parts for current operations, caused, in part, by firms going out of business or being reluctant to recreate a production line to produce parts for aging equipment. Emerging issues associated with (1) the Army's logistics reform initiatives resulting from its biennial analysis of force requirements known as Total Army Analysis, (2) the Army's planned transformation to a lighter, more strategically responsive force, and (3) the statutorily mandated Quadrennial Defense Review could significantly change the kinds and numbers of spare parts that will be needed. Because of implementation of technological improvements in battlefield distribution and the fielding of various logistic enablers, the Army, in its most recent Total Army Analysis, estimates a 15-percent reduction in spare parts needed in-theater by 2007. Every 2 years the Army performs its Total Army Analysis to (1) determine the number and types of support forces needed by combat forces and (2) allocate end-strength to these requirements. In the Total Army Analysis, the Army uses a series of models to simulate the two nearly simultaneous major theater wars described in the National Military Strategy. The analysis cites the implementation of technological improvements in battlefield distribution and the fielding of various logistic enablers as the reasons for the possible reduction in spare parts. The Army's planned transformation to a more strategically responsive force is expected to reduce the number of divisional combat systems by 25 percent and consequently reduce the number of parts needed. In October 1999, the Army announced plans to radically change to a lighter, more strategically responsive force. The Army's stated vision was to be able to deploy (1) a combat capable brigade in 96 hours, (2) a division in 120 hours, and (3) five divisions in 30 days. The Army plans to validate the capabilities of the first restructured brigade and then take a number of years to complete the entire conversion to a restructured force. Part of this plan is to reduce the number of combat systems from 58 to 45 and personnel by 3,000 in heavy divisions. It also expects its new weapon systems will have a greater commonality of parts. While the conversion will likely require the acquisition of yet to be determined spare parts for war reserves, the greater commonality should reduce the amount of spare parts required in the long term. However, we were also told that the number of parts needed in the shorter term would not necessarily be reduced because there would be both old and new systems in the force during the transition to the new structure. The Quadrennial Defense Review for 2001, as well as the Secretary of Defense's strategic review, could significantly affect the Army's war reserve requirements. The statutorily mandated Quadrennial Defense Review is intended to provide a comprehensive examination of such things as potential threats, force structure, readiness posture, military modernization programs, and infrastructure and develop options for key decision-makers. The previous Quadrennial Defense Review addressed such decisions as reducing the number of active duty personnel and fostered plans to reduce the amount of logistic support to be provided. Any changes in the Army's force structure, its utilization of certain weapon systems, or the National Military Strategy itself would consequently affect the kinds and quantities of spare parts needed in the Army's war reserve. In part because of the Army's significant shortfall in meeting its reported war reserve spare parts requirement and its current funding plans, there is some risk associated with executing the two major theater war scenario, assuming requirements have been adequately identified. Because of limitations in the Army's process for determining war reserve spare parts requirements, uncertainties exist regarding the accuracy of the war reserve spare parts requirements and funding needs. These limitations include (1) not using the best available data on the rate at which spare parts would be consumed during wartime for its war reserve spare parts requirements calculations, (2) having a potential mismatch between the Army's process for determining spare parts requirements for war reserves and how the Army plans to repair equipment on the battlefield, and (3) lacking a fact-based assessment of industrial base capacity to provide needed parts for the two major theaters of war scenario. Some uncertainties are likely to remain for the foreseeable future as the Army contemplates a significant transformation of its forces and other changes are considered affecting military strategy and force structure. However, improvements in the above areas could lessen the degree of uncertainties that exist. We recommend that the Secretary of Defense assess the priority and level of risk associated with the Army's plans for addressing the reported shortfall in Army war reserve spare parts. To provide accurate calculations of the Army's war reserve spare parts requirements, we recommend that the Secretary of Defense direct the Secretary of the Army to promptly develop and use the best available consumption factors (i.e., Equipment Usage Profiles and Mean Usage Between Replacement factors) in calculating all spare parts requirements for the Army's war reserve; eliminate potential mismatches in how the Army calculates its war reserve spare parts requirements and the Army's planned battlefield maintenance practices; and develop fact-based estimates of industrial base capacity to provide the needed spare parts in the two major theater war scenario time frames. We further recommend that the Secretary of Defense include in future industrial capabilities reports more comprehensive assessments on industry's ability to supply critical spare parts for two major theater wars. The Acting Deputy Under Secretary of Defense for Logistics and Materiel Readiness provided written comments to a draft of this report. The Department's comments are reprinted in appendix I. The Department generally agreed with the report and our recommendations. It agreed that the Army must validate war reserve requirements and prioritize the support for those requirements. It also agreed that developing a strategy for determining industrial base capability was an important step in this process. While the Department outlined actions planned to address these issues, additional actions will be needed to fully address all of the recommendations. The Department concurred with the intent of our recommendation that the Secretary of Defense assess the priority and level of risk associated with the Army's plans for addressing the reported shortfall in Army war reserve spare parts, but it indicated that it would determine whether an independent assessment is feasible by August 1, 2001. The intent of this recommendation was not to assess the feasibility of an independent assessment but rather to bring increased visibility to the Army's plans for addressing the reported shortfall in the Army's war reserves and ensuring secretarial review and concurrence with the Army's plan considering funding priorities and risk. We continue to believe such a review is needed. The Department concurred with the recommendation we made for improving the accuracy of its calculation of war reserve spare parts requirements. It outlined specific actions and time frames for accomplishing planned actions. It noted that validation of consumption factors important to more precisely identifying requirements would be addressed by a team the Army has established to review the planning data used throughout the Army. The Department also concurred with our recommendation for improving the Army's assessment of industry's ability to supply critical spare parts for two major theater wars. It indicated that it will review the need for further industrial base assessments upon completion of an Army Industrial Base Strategy that is expected to be completed December 1, 2001. However, available information indicates that this study is focused on government production and maintenance facilities, not on private industry's ability to provide spare parts. Accordingly, we believe that additional action will be needed to develop fact-based estimates of the industrial base capacity to provide the needed spare parts in the two major theater war scenario time frames. To ascertain what the Army was reporting about spare parts in its war reserve, we reviewed Quarterly Readiness Reports to the Congress and Joint Monthly Readiness Reports and discussed issues related to spare parts with Army headquarters and U.S. Central Command and U.S. Pacific Command officials. To compare the reported readiness status to the availability of parts to meet requirements for the two major theater war scenario, we obtained Army data on war reserve spare parts on hand compared to the requirements and discussed the results with officials in Army headquarters and the Army Materiel Command. To determine the reliability of the Army's war reserve spare parts requirements, we reviewed the process and factors used for determining requirements and analyzed data on requirements and on-hand parts from officials of Army headquarters in the Office of the Deputy Chief of Staff for Logistics; the U.S. Army Materiel Command and related agencies, to include the Army Materiel Systems Analysis Agency, the Logistics Support Agency, the Field Support Command of the Operations Support Command, and the Aviation and Missile Command; and the Combat Arms Support Command. We visited the U.S. Central Command and its Army component and met with representatives of the U.S. Pacific Command to discuss the requirements they receive from the Army. We also attended several logistics planning conferences to learn more about how the Army plans to support the fighting commands with parts and other supplies. We performed our review between February 2000 and March 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; and the Honorable Joseph Westphal, Acting Secretary of the Army. We will also make copies available to others upon request. Please contact me on (202) 512-5581 if you or your staff have any questions concerning this report. Key contributors to this report were Joseph Murray, Leslie Gregor, Paul Gvoth, and Robert Sommer.

According to the current National Military Strategy the United States should be prepared to fight and win two nearly simultaneous wars in different parts of the world. Military policy calls for each of the services to acquire and maintain enough war material inventories to sustain a two-war scenario until the industrial base can resupply our armed forces. Because of limitations in the Army's process for determining war reserve spare parts requirements, however, the accuracy of the war reserve spare parts requirements and funding needs are uncertain. These limitations include (1) not using the best available data on the rate at which spare parts would be consumed during wartime for its war reserve spare parts requirements calculations, (2) having a potential mismatch between the Army's process for determining spare parts requirements for war reserves and how the Army plans to repair equipment on the battlefield, and (3) lacking a fact-based assessment of industrial base capacity to provide needed parts for the two-war scenario. Uncertainties are likely to persist for some time as the Army contemplates a significant transformation of its forces and other changes are considered affecting military strategy and force structure. However, improvements in the above areas could lessen the degree of uncertainties that exist.

Each service academy operates its own preparatory school. The U.S. Air Force Academy Preparatory School is co-located with the U.S. Air Force Academy in Colorado Springs, Colorado. The U.S. Military Academy Preparatory School is located at Fort Monmouth, New Jersey, and the U.S. Naval Academy Preparatory School is located in Newport, Rhode Island. (See fig 1.) During World War I, the Secretaries of the Army and the Navy nominated enlisted personnel to their respective service academies. Many of the first enlisted personnel did poorly on service academy entrance examinations, and many of the slots that were created for them went unfilled. To coach enlisted nominees for service academy entrance examinations, Army and Navy officials formally established the Military Academy and Naval Academy preparatory schools in 1946 and 1920, respectively. (The U.S. Air Force Academy was created in 1954, and its preparatory school in 1961.) The preparatory schools have evolved over the years and become more diverse. Today, the student bodies of these schools consist of enlisted personnel, minorities, recruited athletes, and women (see table 1). To be admitted to a preparatory school, an applicant must meet basic eligibility requirements. Because applicants to the academies must (1) be unmarried, (2) be a U.S. citizen, (3) be at least 17 years of age and must not have passed their twenty-third birthday on July 1 of the year they enter an academy, (4) have no dependents, and (5) be of good moral character, the preparatory schools apply the same requirements. The preparatory schools do not charge for tuition. The enlisted personnel who are selected to attend the preparatory schools are reassigned to the preparatory schools as their duty stations, and these enlisted personnel continue to be paid at the grades they earned before enrolling. Civilians who are selected to attend the preparatory schools enlist in the reserves and are paid about $700 per month. Enlisted personnel must complete their military obligations if they do not complete the programs or go on to one of the academies. Civilian students do not incur any financial or further military obligation if they do not complete the programs or go on to one of the academies. However, they also do not accrue any transferable college credits while attending the preparatory schools. The preparatory schools offer a 10-month course of instruction that combines academic instruction, physical conditioning, and an orientation to military life. The daily schedule includes several hours of classroom instruction, mandatory study time, and extra instruction; time for athletics or physical training; and some instruction in military customs and practices. Emphasis is placed on giving each candidate as much tutorial assistance as is necessary to maximize the individual's potential for success. The student body at each school is organized into a military unit with a student chain of command that is advised by commissioned and noncommissioned officers. This structure is intended to provide the students with exposure to military discipline and order. In fiscal year 2002, DOD reported that the total cost to operate all three preparatory schools was about $22 million (see table 2). We did not independently verify or evaluate these costs. OUSD/P&R, the service headquarters, and the service academies have established clear roles and responsibilities for oversight of the preparatory schools. According to DOD Directive 1322.22 (Service Academies), the Under Secretary of Defense for Personnel and Readiness has responsibility to assess the operations and establish policy and guidance for uniform oversight and management of the service academies and their preparatory schools. The service headquarters perform their oversight over their respective academies and preparatory schools in accordance with the directive. The superintendent of each academy reports directly to the uniformed head of his respective service (the Chiefs of Staff for the Army and the Air Force and the Chief of Naval Operations for the Navy), in accordance with the chain of command for each service. The academies perform the primary DOD oversight function for their respective preparatory schools. The commanding officers at the Air Force and Army preparatory schools hold the rank of colonel, and the head of the Navy's preparatory school holds the equivalent rank of captain. They report directly to the superintendent of their respective service academies, in accordance with the chain of command for each service. Appendix II provides general information about the three service academy preparatory schools. The three preparatory schools' current mission statements do not clearly define the purpose for which the schools are being used by their respective service academies. Mission statements should define an organization's purpose in language that states desired outcomes. Mission statements also bring the organization's vision into focus, explain why it exists, and tell what it does. Without a clear mission statement, the organization cannot establish goals that fully reflect the organization's intended purpose. Although the preparatory schools exist to help the service academies meet their diversity needs, the schools' mission statements simply refer to preparing "selected personnel who meet special needs," "selected candidates," or "candidates" for admission to and success at the service academies. These mission statements are not clearly aligned with DOD guidance, which states that primary consideration for enrollment shall be accorded to nominees to fill officer objectives for three target groups: (1) enlisted personnel, (2) minorities, and (3) women. Senior academy officials told us that their expectations of the preparatory schools are consistent with DOD guidance on enrollment objectives and that they also rely on the preparatory schools to meet their needs for a fourth group-- recruited athletes--adding that the service academies would not be able to meet their diversity needs if the preparatory schools did not exist. However, neither DOD nor the service academies have required the preparatory schools to align their mission statements to reflect DOD's guidance and the service academies' expectations. As a result, none of the mission statements are explicit about the preparatory schools' intended purpose. Table 3 presents more detailed information on the preparatory schools' mission statements. Even though the mission statements are not explicit about the schools' intended purpose, data on the number of students belonging to target groups who enter the preparatory schools and then enter the service academies indicate that, in practice, the schools are giving primary consideration for enrollment to those target groups identified by the DOD directive and the service academies--namely, enlisted personnel, minorities, recruited athletes, and women--and are primarily preparing those student groups for admission to the service academies. Preparatory school and service academy admissions data over a 10-year period indicate that the preparatory schools are a source for the academies of target groups--enlisted personnel, minorities, recruited athletes, and women--identified by DOD guidance and service academy officials. Average admissions data on the representation of targeted groups in the preparatory schools for preparatory school academic years 1993 through 2002 are shown in figure 2. (Appendix III contains detailed enrollment figures, by target group, for each of the preparatory schools.) Figure 3 shows the average percentage of each targeted group enrolled at the service academies that came from the preparatory schools for the same time period. We first identified this lack of clarity in mission statements in our 1992 report on the preparatory schools. In the 1992 report, we concluded that the preparatory schools' missions were not clearly defined and that the preparatory schools appeared to be pursuing somewhat differing goals for the target groups of enlisted personnel, minorities, recruited athletes, and women--the primary groups the schools served at that time. We recommended that the Secretary of Defense determine what role the preparatory schools should play among the services' officer production programs and direct the services to clarify their school missions accordingly. To address this lack of clarity, DOD indicated that it planned to work with the services to develop a consistent mission statement for these schools that would be approved by May 1992. As discussed previously, however, the preparatory schools' current mission statements still do not clearly define the purpose for which the schools are being used by their respective service academies. It is difficult to evaluate how effective the preparatory schools have been in accomplishing their missions because the service academies have not established performance goals for their preparatory schools. The service academies rely on the preparatory schools to meet their targeted needs for enlisted personnel, minorities, recruited athletes, and women. The preparatory schools collect a substantial amount of performance data for these targeted groups. However, without mission-linked performance goals and measures, the service academies cannot objectively and formally assess these data to determine mission effectiveness. Without specific performance goals, there is no objective yardstick against which to gauge preparatory school effectiveness, as would be consistent with the principle of best practices for ensuring optimal return on investment. With performance goals against which to compare actual performance, an organization can gauge how effectively it is meeting its mission. To assess effectiveness in achieving its mission, an organization should establish performance goals to define the level of performance to be achieved by a program; express such goals in an objective, quantifiable, and measurable form; provide a basis to compare actual program results with performance goals; and report assessment results, including actions needed to achieve unmet goals or make programs minimally effective. The preparatory schools collect performance data, such as the number of students admitted to the schools, the types of students (enlisted personnel, minorities, recruited athletes, and women) admitted, and the number who entered and graduated from the academies. These descriptive data show, among other things, that during the past 10 years, an average of 76 percent of students enrolled at the preparatory schools graduated from them. Data for this same 10-year period show that a smaller percentage of all students admitted to the preparatory schools graduated from or are still attending the academies. For example, 51 percent of students who were admitted to the Air Force Academy preparatory school, 56 percent of students admitted to the Military Academy preparatory school, and 59 percent of students admitted to the Naval Academy preparatory school graduated from or are still attending their respective academies. Senior officials at the preparatory schools and academies stated that they are satisfied with these results. Figure 4 shows the average number of students who entered the preparatory schools, graduated from the preparatory schools, entered the academies, and graduated from or are still attending the academies for preparatory school academic years 1993 through 2002. Appendix IV provides more detailed information, for class totals and by target groups, on the percentage of students who entered the preparatory schools and graduated from or are still attending the academies between preparatory school academic years 1993 and 2002. Appendix V provides more detailed information, for class totals and target groups, on the percentage of students who graduated from the preparatory schools for that same time period. Appendix VI provides more detailed information, for class totals and by target groups, on the percentage of preparatory school graduates who accepted appointments to the academies. The service academies have not established quantified performance goals for their preparatory schools. However, they do have implicit expectations. Senior officials at both the preparatory schools and the academies told us that the preparatory schools are expected to enable preparatory school students to (1) meet the service academies' academic standards and (2) graduate from the service academies at rates comparable to the rates of students who received direct appointments to the service academies. A 2.0 grade point average is the minimum level of academic performance accepted at the academies. Our analysis of academy data for the graduating class of 2002 shows that preparatory school graduates, as a group, exceeded the 2.0 grade point average but had slightly lower cumulative grade point averages than did the student body as a whole. Figure 5 shows the cumulative grade point averages for preparatory school graduates and service academy student bodies as a whole for the class of 2002. For preparatory school academic years 1993 through 1998, an average of 73 percent of preparatory school graduates who accepted appointments to the academies graduated from the service academies, while the average rate was 78 percent of students directly admitted to the academies for the same years. Thus, graduation rates for preparatory school graduates were slightly lower than the rates for students directly admitted to the service academies. The academies, however, do not have a performance target for graduation rates for preparatory school graduates, and therefore these rates do not necessarily represent the achievement of a desired outcome. Figure 6 shows the average percentage of preparatory school students who graduated from the academies and the average percentage of directly appointed students who graduated from the academies for preparatory school academic years 1993 through 1998. Appendix VII provides more detailed information for comparative graduation rates for preparatory school academic years 1993 through 1998 for each preparatory school. We first found that DOD had not established specific performance goals for the preparatory schools in our 1992 review on the service academy preparatory schools. In that report, we concluded that without such goals, DOD lacked the tools it needed to determine whether the schools were effective. DOD still has not required the academies to establish quantified performance goals that are clearly linked with the mission of the schools. The effectiveness of DOD, military service, and service academy oversight is limited because the existing oversight framework for assessing preparatory school performance does not include, among other things, performance goals and mission statements--as discussed in previous sections of this report--and objective measures against which to assess performance. An effective oversight framework includes tracking achievements in comparison with plans, goals, and objectives and analyzing the differences between actual performance and planned results. The interrelationship of these elements is essential for accountability and proper stewardship of government resources, and for achieving effective and efficient program results. Without formal goals and measures that are, moreover, linked to mission statements, oversight bodies do not have sufficient focus for their activities and cannot systematically assess an organization's strengths and weaknesses or identify appropriate remedies to achieve the best value for the investment in the organization. OUSD/P&R, the services, and the service academies have established mechanisms to conduct oversight of the preparatory schools through DOD guidance established in 1994. OUSD/P&R is required to assess and monitor the preparatory schools' operations based on the information provided in the annual reports it requires from the service secretaries. The service headquarters are responsible for oversight for their respective academies and preparatory schools, and they oversee the schools' operations through the annual preparatory school reports that they submit to OUSD/P&R. These reports contain data on various aspects of preparatory school performance, such as student demographic trends, admissions trends, and attrition. The service academies exercise direct oversight of their respective preparatory schools and monitor the schools' performance through ongoing collection of data required by OUSD/P&R. For example, each of the service academies collects preparatory school data such as the number of students admitted to the schools, the types of students (enlisted personnel, minorities, recruited athletes, and women) admitted, and the number who entered and graduated from the academies. DOD, the service headquarters, and the service academies, through these annual assessment reports, are able to compare aspects of preparatory school performance against prior period results. For example, service academy data show that over the past 10 years, 51 percent of students who were admitted to the Air Force Preparatory School, 56 percent of students admitted to the Military Academy Preparatory School, and 59 percent of students admitted to the Naval Academy Preparatory School graduated from or are still attending their respective academies. Other data reported by the preparatory schools show that the percentage of students in the target groups admitted to the schools has varied over the past 10 years. However, as mentioned in previous sections of this report, the preparatory schools lack quantified performance goals that are linked to clear mission statements. Without goals linked to clear mission statements, DOD, the service headquarters, and the service academies do not have an objective basis by which to judge the effectiveness of the preparatory schools' performance of their missions. Although the service academy preparatory schools receive oversight from a number of organizations, they lack clear mission statements and quantified performance goals and measures. Thus, there is no objective yardstick against which to gauge preparatory school performance, consistent with the principle of best practices for ensuring optimal return on investment. This conclusion reiterates our 1992 report's finding that the preparatory schools lacked clear mission statements and that DOD lacked the tools necessary to determine whether the schools were effective. We recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness, in concert with the service headquarters and service academies, to clarify the preparatory schools' mission statements by aligning these statements with the department's guidance and the academies' expectations, which target student groups for primary enrollment consideration; establish quantified performance goals and measures, linked with the schools' mission statements; and enhance the existing oversight framework by using quantified performance goals and measures to objectively evaluate the performance of the preparatory schools. In commenting on a draft of this report, DOD concurred with our recommendations and indicated that the mission statements of the preparatory schools will be aligned with DOD guidance and service expectations and that quantitative goals will be established to create effective measures and appropriate standards for success. DOD added that the Office of the Under Secretary of Defense for Personnel and Readiness will review and analyze these statistics over time to ensure the successful performance of the preparatory schools. DOD's comments are reprinted in their entirety in appendix VIII. We are sending copies of this report to the appropriate 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 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) 512-5559 if you or your staff have any questions concerning this report. Key contributors are listed in appendix IX. To assess the adequacy of the mission statements of the preparatory schools, we interviewed officials at the following locations: the Office of the Under Secretary of Defense for Personnel and Readiness, Washington, D.C.; the U.S. Air Force Academy, Washington Liaison Office, Washington, D.C.; Headquarters, Department of the Army, Personnel, Washington, D.C.; Headquarters, Department of the Navy, Office of Plans and Policy, Washington, D.C.; the U.S. Air Force Academy, Colorado Springs, Colorado; the U.S. Military Academy, West Point, New York.; the U.S. Naval Academy, Annapolis, Maryland; the U.S. Air Force Academy Preparatory School, Colorado Springs, Colorado; the U.S. Military Academy Preparatory School, Fort Monmouth, New Jersey; and the U.S. Naval Academy Preparatory School, Newport, Rhode Island. We obtained and reviewed Department of Defense (DOD), service, service academy, and academy preparatory school guidance, service academy strategic plans and instructions, and preparatory school annual reports on operations and performance. Using data provided to us by the preparatory schools, we analyzed aggregate data for preparatory school academic years 1993 through 2002, by class totals and by four groups of students--enlisted personnel, minorities, recruited athletes, and women--to ascertain the extent to which these four groups of students were being admitted to the preparatory schools; at what rates these four groups of students graduated from the preparatory schools and accepted appointments to the academies; and how well these four groups fared at the academies in comparison with their nonpreparatory school peers. We also reviewed relevant studies on the preparatory schools conducted by internal and external sources. To evaluate the effectiveness of the preparatory schools in accomplishing their missions, we held discussions with senior service academy and preparatory school officials to determine what results they expected the preparatory schools to achieve, and we obtained their assessments of the schools' effectiveness. We reviewed and analyzed aggregate preparatory school performance data for preparatory school academic years 1993 through 2002. We reviewed and analyzed the preparatory schools' annual assessment reports, as well as other relevant data gathered from the academies and the preparatory schools. For class totals and for the four target groups of students at each of the preparatory schools, we analyzed the number and percentage of preparatory school students who entered and graduated from a preparatory school; the number and percentage of preparatory school graduates who accepted an appointment to an academy; the number and percentage of preparatory school graduates who accepted an appointment to an academy and then graduated from or are still attending an academy; and the number and percentage of the original preparatory school students who graduated from or are still attending an academy. We did not independently assess data reliability, but we obtained assurances about data completeness, accuracy, and reliability from academy officials responsible for maintaining data for each preparatory school. To assess the effectiveness of DOD oversight of the preparatory schools, we reviewed DOD guidance on oversight roles, responsibilities, and reporting requirements, as well as academy regulations and instructions, and discussed oversight activities with DOD, service, and service academy officials. Additionally, we reviewed criteria on the principles of effective management, such as those found in Internal Control Standards: Internal Control Management and Evaluation Tool. We conducted our review from February 2003 through July 2003 in accordance with generally accepted government auditing standards. Colorado Springs, Colorado (co- located with the U.S. Air Force Academy) Figure 7 shows the composition of each class of Air Force Academy Preparatory School enrollees over the past 10 years. Minorities are the largest target group at the school, averaging 48 percent of enrollment. The percentage of recruited athletes decreased from 1993 through 1996, and it has remained relatively constant since then at about 40 percent of enrollment. Enlisted personnel experienced the greatest change, constituting 12 percent of the student body in 1993, and peaking to 28 percent in 1996. Enlisted personnel averaged 18 percent of the enrolled class from 1993 through 2002. Since 1996 the percentage of enlisted personnel enrolled at the Military Academy Preparatory School has generally declined from a high of 54 percent in 1996 to a low of 25 percent in 2002. Concurrently, the enrollment of minorities has fluctuated between 29 and 49 percent. (See fig. 8.) The composition of each class of Naval Academy Preparatory School enrollees over the past 10 years is shown in figure 9. Minorities constituted the largest target group, averaging 44 percent from 1993 through 2002. Enlisted personnel made up, on average, 29 percent of the enrolled class, and recruited athletes made up, on average, 31 percent of the class. Figure 10 shows the percentage of all Air Force Academy Preparatory School students who graduated from or are still attending the Air Force Academy. From 1993 through 1998, academy graduation rates of Air Force Preparatory School students ranged from 43 percent to 53 percent. Figure 11 shows the same data for each of the four target groups. Figure 12 shows the percentage of all Army Preparatory School students who graduated from or are still attending the Military Academy. From 1993 through 1998, academy graduation rates of Army Preparatory School students ranged from 46 percent to 59 percent. Figure 13 shows the same data for each of the four target groups. Figure 14 shows the percentage of all Naval Academy Preparatory School students who graduated from or are still attending the Naval Academy. From 1993 through 1998, academy graduation rates of Naval Academy Preparatory School students ranged from 50 percent to 63 percent. Figure 15 shows the same data for each of the four target groups. Figure 16 shows the graduation rates for the Air Force Academy Preparatory School. In 2002, 79 percent of the students enrolled in the U.S. Air Force Preparatory School graduated from the preparatory school. The graduation rate remained relatively constant, averaging 78 percent from 1993 through 2002. Air Force preparatory school graduation rates by target group are shown in figure 17. Recruited athletes had the lowest graduation rates, averaging 67 percent over 10 years. Women and minorities had similar graduation rates over 10 years, both averaging 83 percent. Enlisted personnel had the highest graduation rate, averaging 85 percent over the past 10 years. Figure 18 shows the trend in Army preparatory school graduation rates over the past 10 years. In 2002, 77 percent of students in the U.S. Military Academy Preparatory School graduated from the school. The graduation rate increased during the past 10 years, from a low of 59 percent in 1993 to a high of 82 percent in 2000, before declining slightly in both 2001 and 2002. Figure 19 shows the Army preparatory school graduation rates, by target group, over the past 10 years. The rate for women increased--in fact doubled--from a low of 42 percent in 1993 to a high of 84 percent in 2001. On average, minorities graduated at a higher rate--73 percent--than did the other target groups from 1993 through 2002. Enlisted personnel had the lowest graduation rate among the four target groups, averaging 67 percent over 10 years. Figure 20 shows the trend in overall graduation rates at the Navy preparatory school for the past 10 years. Graduation rates at the school generally declined until 2000, reaching a low of 68 percent in that year. The graduation rate increased in the last 2 years, reaching 73 percent in 2002. Graduation rates averaged 75 percent over the 10 years. Figure 21 shows historical trends in Navy preparatory school graduation rates for target groups. Enlisted personnel had an average graduation rate of 83 percent, the highest among the target groups. Women and recruited athletes had lower graduation rates, both averaging 69 percent over 10 years. Graduation rates for minorities generally declined after peaking at 90 percent in 1994 and averaged 73 percent from 1993 to 2002. Figure 22 shows the percentage of Air Force preparatory school graduates who accepted appointments at the Air Force Academy. This percentage has remained relatively constant over the past 10 years. On average, 91 percent of the graduates accepted appointments to attend the Air Force Academy. Figure 23 shows the percentage of Air Force preparatory school students in the four target groups-enlisted personnel, minorities, recruited athletes, and women-who accepted an appointment to the Air Force Academy. All four groups had similar acceptance rates of appointments for admission. For the past 10 years, of those who graduated, an average of 91 percent of enlisted personnel, 92 percent of minorities, 93 percent of recruited athletes, and 90 percent of women accepted an appointment to attend the Air Force Academy. Figure 24 shows the rate at which U.S. Military Preparatory School students accepted appointments to attend the U.S. Military Academy. From 1993 through 2002, 97 percent of U.S. Military Academy Preparatory School graduates accepted appointments to attend the U.S. Military Academy. Figure 25 shows the rate at which Army preparatory school students in the target groups accepted appointments to attend the Military Academy. On average, almost all students in three target groups--minorities, recruited athletes, and women--accepted appointments into the U.S. Military Academy from 1993 through 2002. The acceptance rate for enlisted personnel decreased to 85 percent in 1999; however, it increased to 128 percent in 2002. Figure 26 shows the acceptance rate, by Navy preparatory school graduates, of appointments into the Naval Academy. Rates remained relatively constant over 10 years, falling to a low of 87 percent in 1998 and increasing to 100 percent in 1999. On average, 97 percent of the graduates accepted appointments to attend the U.S. Naval Academy. Figure 27 shows the rate at which Navy preparatory school students in the target groups accepted appointments to attend the Naval Academy. Women had the highest average acceptance rate among the four target groups, averaging 100 percent over 10 years. Although acceptance rates for enlisted personnel remained at or above 100 percent from 1999 through 2002, they had the lowest average acceptance rate, averaging 90 percent, over 10 years. On average, 99 percent of minorities and 95 percent of recruited athletes accepted nominations to attend the U.S. Naval Academy. Figure 28 shows a comparison between the Air Force Academy graduation rates of preparatory school graduates and those of students who accepted direct appointments to the academy. Academy graduation rates of Air Force Academy Preparatory School graduates from 1993 through 1998 were, on average, lower than those of direct appointees. Only in 1993 was the difference in graduation rates between preparatory school graduates and direct appointees greater than 10 percent. Figure 29 shows a comparison between the Military Academy graduation rates of preparatory school graduates and those of students who accepted direct appointments to the academy. Academy graduation rates of Military Academy Preparatory School graduates from 1993 through 1998 were, on average, lower than those of direct appointees. Figure 30 shows a comparison between the Naval Academy graduation rates of preparatory school graduates and those of students who accepted direct appointments to the academy. Academy graduation rates of Naval Academy Preparatory School graduates from 1993 through 1998 were, on average, lower than those of direct appointees. In addition to the name above, Daniel J. Byrne, Leslie M. Gregor, David F. Keefer, Tina M. Morgan, David E. Moser, Cheryl A. Weissman, and Susan K. Woodward made key contributions to this report.

Each year, the U.S. Air Force Academy, the U.S. Military Academy, and the U.S. Naval Academy combined spend tens of millions of dollars to operate preparatory schools that provide an alternative avenue for about 700 students annually to gain admission to the service academies. Service academy officials screen all applicants to identify those who they believe could succeed at the academies but who would benefit from more preparation. The Department of Defense (DOD) pays the full cost of providing this preparation. GAO was asked to review the three service academy preparatory schools, and this report specifically assesses (1) the adequacy of their current mission statements, (2) the effectiveness of these schools in accomplishing their missions, and (3) the effectiveness of DOD oversight of these schools. The three service academy preparatory schools' current mission statements do not clearly articulate the purpose for which the schools are being used by their respective service academies. In accordance with DOD guidance and the service academies' expectations, the preparatory schools give primary consideration for enrollment to enlisted personnel, minorities, women, and recruited athletes. However, the preparatory school mission statements are not clearly aligned with DOD guidance and the academies' expectations. This is a continuing problem, which GAO first reported in 1992. Without clear mission statements, the service academies and their respective preparatory schools cannot establish goals that fully reflect the preparatory schools' intended purpose. It is difficult to evaluate how effective the preparatory schools have been in accomplishing their missions because the service academies have not established performance goals for the preparatory schools. Without specific performance goals, there is no objective yardstick against which to gauge preparatory school effectiveness, as would be consistent with the principle of best practices for ensuring optimal return on investment. The effectiveness of DOD, military service, and service academy oversight is limited because the existing oversight framework for assessing preparatory school performance does not include performance goals and measures against which to objectively assess performance. DOD and the services receive annual reports from the academies on preparatory school performance. Without stated performance goals and measures, however, the reports do not offer DOD, the services, or the service academies as good an insight into the preparatory schools' performance and their return on investment as they could.

The DDG 1000 program has from the onset faced a steep challenge framed by demanding mission requirements, stealth characteristics, and a desire to reduce manning levels by more than half that of predecessor destroyers. These requirements translated into significant technical and design challenges. Rather than introducing three or four new technologies (as is the case on previous surface combatants), DDG 1000 plans to use a revolutionary hull form and employ 11 cutting-edge technologies, including an array of weapons, highly capable sensors integrated into the sides of a deckhouse made primarily of composite material--not steel, and a power system designed for advanced propulsion as well as high-powered combat systems and ship service loads. This level of sophistication has necessitated a large software development effort--14 million to 16 million lines of code. All of this is to be accomplished while splitting construction between two shipyards. The Navy believes this approach and schedule is important to managing shipyard workloads, as starting later would have caused shipyard workload to drop too low. In a sense, then, the construction approach and schedule became an additional challenge as they became constraints on the pace of technology and design development. To meet these multiple and somewhat conflicting demands, the Navy structured its acquisition strategy to develop key systems and mature the design before starting to build the ship. While the Navy has made good decisions along the way to address risk, it is already likely, shortly before the Navy embarks on ship construction, that additional funding will be necessary or trade-offs will need to be made to develop and deliver DDG 1000 ships. Despite multiple and somewhat competing demands, the Navy conceived a thoughtful approach and achieved developmental successes on DDG 1000. Developing 10 prototypes of the ship's critical systems helped to create confidence that a number of technologies would operate as intended, and the Navy's plan to mature the ship's design before starting construction aims to reduce the risk of costly design changes after steel has been cut and bulkheads built. For example, the Navy successfully demonstrated the advanced gun system through initial guided flight and testing on land. In other cases, such as for the integrated power system, tests brought to light technical problems, which the Navy was able to address by going to an alternate technology. However, notwithstanding these efforts, significant challenges remain in developing the ship's design and a number of key components--in particular, the deckhouse, volume search radar, and the integrated power system. Moreover, the ship's capability is contingent on an unprecedented software development effort. Recently, the Navy restructured the schedule to buy more time for development--a good decision. However, as construction of the first ship has not yet begun, the Navy may have exhausted its options for solving future problems without adding money and time. Although the initial phases of the design are complete, the shipbuilders will be pressed to complete a large amount of design work by October 2008 when lead ship construction begins. From August 2007 through May 2008, the shipbuilders finished work on 16 of the 100 design zones (individual units that make up the ship's design) leaving 5 months to finish the final design phases in 84 zones leading up to the start of construction. While the shipbuilders believe they can finish the design by the start of ship construction, delays in the development of the ship's key systems could impede completion of the design and eventually interfere with DDG 1000 construction. If the shipbuilders cannot finish planned design work prior to the start of lead-ship construction, the program is at greater risk for costly rework and out-of-sequence work during construction. To maintain the start of ship construction in 2008 while continuing to develop the ship's technologies, the Navy recently realigned the program's schedule. Rather than delivering a fully mission-capable ship, the Navy will take ownership of just the vessel and its mechanical and electrical systems--including the ship's power system--in April 2013. At that point, the Navy plans to have completed "light-off" of the power, mechanical, and electrical systems. Light-off refers to activating and testing these systems aboard ship. The Navy deferred light-off of the combat systems--which include the radars, guns, and the missile launch systems--by over 2 years until May 2013. According to the Navy, conducting light-off in phases allows the program to test and verify the ship's major systems, in particular the integrated power system, in isolation and creates additional time to mature the combat systems, as well as the software that supports these systems, before ship installation and shipboard testing. However, since the Navy will only test and inspect the hull prior to taking ownership of the vessel, it will not have a full understanding of how the ship operates as a complete and integrated system until after final shipboard testing of the combat systems in 2014. While the restructure maintains the construction schedule, it does delay verifying the performance of the integrated power system before producing and installing it on the ship. Tests of a complete integrated power system with the control system will not occur until 2011--nearly 3 years later than planned. To meet the shipyard's schedule, the Navy will buy a power system intended for the third ship and use it in land-based tests. As a result, the integrated power system will not be demonstrated until a year after the power systems have been produced and installed on the two lead ships--an approach that increases exposure to cost and schedule risk in production. Finalizing deckhouse manufacturing and assembly processes are essential to constructing and delivering the deckhouse as planned. Changes to the manufacturing processes for deckhouse production are ongoing. The shipbuilder is validating process changes through production and inspection of a series of test units, culminating with a large-scale prototype manufactured to the same thickness and other specifications of the deckhouse. Final validation of the manufacturing processes for deckhouse construction will not occur until after construction, inspection, and shock testing of the large-scale prototype. However, test and inspection activities are not scheduled for completion until after the deckhouse production readiness review in September 2008. Problems discovered during testing and inspection may require additional changes to manufacturing methods. Moreover, facility and machinery upgrades necessary to construct and assemble the deckhouse are not all scheduled to be complete until March 2010--over a year after the start of construction of the first deckhouse. While the shipbuilder expects to complete efforts to meet the construction schedule, if difficulties occur, the deckhouses may not be delivered to the shipyards on time, disrupting the construction sequence of the ships. Further, the volume search radar (one of two radars in the dual band radar system) will not be installed during deckhouse construction as initially planned. Instead, installation will occur at the shipyard when the first ship is already afloat, a more costly approach. The change was partly due to delays in developing the volume search radar. Land-based demonstrations of the volume search radar prototype originally planned to be done before starting ship construction will not be completed until 2009--almost 2 years later. Development difficulties center on the radar's radome and transmit- receive units. The contractor has been unable to successfully manufacture the radome (a composite shield of exceptional size and complexity), and the transmit-receive units (the radar's individual radiating elements) have experienced failures operating at the voltage needed to meet range requirements. While the Navy believes that the voltage problem has been resolved, upcoming land-based tests will be conducted at a lower voltage--and without the radome. The Navy will not demonstrate a fully capable radar at its required power output until after testing of the first production unit sometime before combat systems light-off in 2013. Crucial to realizing DDG 1000's required manning reductions is the ability to achieve a high degree of computer automation. If the ship's software does not work as intended, crew size would need to be increased to make up for any lack of automation. Given the risks associated with the ship's software system, referred to as the total ship computing environment, the Navy initially planned to develop and demonstrate all software functionality (phased over six releases and one spiral) over 1 year before ship light-off. As a result of changes in the software development schedule, the Navy eliminated this margin. Until recently, the Navy was able to keep pace with its development schedule, successfully completing the first three software releases. However, the Navy is now entering the complex phases of software development when ship functionality is introduced. The Navy certified release 4 without the release meeting about half of the software system requirements, mainly because of issues coding the ship's command and control component--the heart of the ship's decision-making suite. Problems discovered in this release, coupled with the deferred work, may signify larger software issues that could disrupt the development of releases 5 and 6 and prevent the timely delivery of software to meet the ship's schedule. Costs of the DDG 1000 ships are likely to exceed current budgets. If costs grow during lead ship construction due to technology, design, and construction risks, as experience shows is likely, remaining funds may not be sufficient to buy key components and pay for other work not yet under contract. Despite a significant investment in the lead ships, the remaining budget is likely insufficient to pay for all the effort necessary to make the ships operational. The Navy estimates a total shipbuilding budget of $6.3 billion for the lead ships. Of this amount, the Navy has approximately $363 million remaining in unobligated funds to cover its outstanding costs and to manage any cost growth for the two lead ships, but known obligations for the lead ships, assuming no cost growth during construction, range from $349 million to $852 million (see table 1). The main discrepancy is the current estimated cost of the combat systems. In order to create a cash reserve to pay for any cost increases that may occur during construction of the lead ships, the Navy has deferred contracting and funding work associated with conducting shipboard testing of the combat systems--and in some cases has also delayed purchasing and installing essential ship systems until later in the construction sequence. The Navy has estimated the cost of these combat systems to be around $200 million, while the contractor's estimate is over $760 million. If the agreed-on cost approaches the contractor's estimate, the Navy will not have enough in its remaining funds to cover the cost. There is little margin in the budget to pay for any unknown cost. To ensure that there was enough funding available in the budget to cover the costs of building the lead ships, the Navy negotiated contracts with the shipbuilders that shifted costs or removed planned work from the scope of lead ship construction and reduced the risk contingency in the shipbuilders' initial proposals. For example, the Navy stated that it shifted in excess of $100 million associated with fabrication of the peripheral vertical launch system from the scope of ship construction and funded this work separately using research and development funding. As a result, this work is no longer included in the $6.3 billion end cost to construct DDG 1000. To the extent that the lead ships experience cost growth beyond what is already known, more funding will be needed to produce operational ships. However, these problems will not surface until well after the shipyards have begun construction of the lead ships. Cost growth during construction for lead ships has historically been about 27 percent, and an independent estimate by the Department of Defense already projects the cost of the two lead ships to be $878 million higher than the Navy's budget. With ships as expensive as DDG 1000, even a small percentage of cost growth could lead to the need for hundreds of millions of dollars in additional funding. The challenges facing DDG 1000 are not unique among Navy shipbuilding programs nor to Department of Defense acquisition programs at large. Across the shipbuilding portfolio, the Navy has not been able to execute programs within cost and schedule estimates, which has, in turn, led to disruptions in its long-range construction plans. This outcome has largely resulted from Navy decisions to move ships forward into construction with considerable uncertainties--like immature technologies and unstable designs. However, by doing so the Navy has effectively eroded its buying power by forcing it to make near-term quantity reductions within its shipbuilding plan. Because fleet requirements remain steady at 313 ships, the Navy must compensate for near term construction deferrals by increasing ship construction in the out-years. Achieving this plan, however, will require significant funding increases in the future, which will likely be difficult to obtain. These near term trade-offs could have long- term consequences for balancing mission, presence, industrial base, and manning tensions. For example, if ship quantities are deferred to the future to accommodate near-term cost growth, the Navy could be trading off presence and industrial base if additional funds do not materialize in the future. Cost growth and schedule delays are persistent problems for shipbuilding programs as they are for other weapon systems. These challenges are amplified for lead ships in a class (see figs. 1 and 2). The Navy's six most recent lead ships have experienced cumulative cost growth over $2.4 billion above their initial budgets. These cost challenges have been accompanied by delays in delivering capability totaling 97 months across these new classes. The first San Antonio-class ship (LPD 17) was delivered to the warfighter incomplete and with numerous mechanical failures--52 months late and at a cost of over $800 million above its initial budget. For the LCS program, the Navy established a $220 million cost target and 2-year construction cycle for each of the two lead ships. To date, costs for these two ships have exceeded $1 billion, and initial capability has been delayed by 21 months. Cost increases are also significant if the second ship is assembled at a different shipyard than the first ship. This was the case with SSN 775, with cost growth of well over $500 million. These outcomes result from the Navy consistently framing its shipbuilding programs around unexecutable business cases, whereby ship designs seek to accommodate immature technologies and design stability is not achieved until late in production. New ship programs have moved forward through milestones, whether or not desired knowledge had been attained. In turn, initial ships in Navy programs require costly, time-consuming out- of-sequence work and rework during construction, and undesired capability trade-offs are often required. In essence, execution problems are built into the initial strategy for a new ship, as the scope of the ship-- that is, the innovative content and complexity owing to multiple mission requirements--overmatches the time and money set aside to develop and construct the ship. For example, while the scope of the DDG 1000 and CVN 78 ships were driven by mission requirements, the schedules for these ships was set by shipyard workload needs or by the retirement schedule of a predecessor ship. The result is the scope of work is compressed into a schedule that is based on something else. LCS is a recent example. In this program, the Navy sought to concurrently design and construct two lead ships in an effort to rapidly meet pressing needs in the mine countermeasures, antisubmarine warfare, and surface warfare mission areas. However, changes to Navy requirements required redesign of major elements in both lead ships to provide enhanced survivability, even after construction had begun on the first ship. While these requirements changes improved the robustness of LCS designs, they contributed to out-of-sequence work, rework, and weight increases on the lead ships. These difficulties caused LCS construction costs to grow and delivery schedules to be extended and prompted the Navy to reduce speed requirements for the class due to degraded hydrodynamic performance. In turn, the Navy canceled construction contracts for the third and fourth ships and used funds from other previously appropriated ships to pay for lead ship cost growth. Although these steps increased the resources available to the two lead ships, continuing technology immaturity and unproven watercraft launch and recovery systems included within each design could trigger additional cost growth and schedule delays above and beyond current estimates. The Ford-class aircraft carrier (CVN 78) also faces uncertainty related to its cost and schedule estimates and eventual capability. The business case for CVN 78 is framed around delivering the carrier to maintain the Navy's force of 11 operational carriers given the impending retirement of USS Enterprise (CVN 65), but includes a cost target that leaves little if any margin for error. As construction begins, remaining technology risk in the program--particularly with the electromagnetic aircraft launch system (EMALS)--has positioned the program to face future construction challenges similar to other lead ships. Previously, the Navy planned to demonstrate full functionality of a ship-ready system prior to production and installation on CVN 78--an approach aimed at reducing risk to ship construction. However, the contractor encountered technical difficulties developing the prototype generator and meeting detailed Navy requirements which left no margin in the schedule to accommodate unanticipated problems discovered in testing or production. In order to maintain the ship's construction schedule, the Navy adopted a test and production strategy that will test, produce, and ultimately install EMALS with a high degree of concurrency. At the same time test events are occurring, the Navy will authorize and begin production of EMALS intended for ship installation. While Navy officials recognize that concurrency is undesirable, they believe it is the only way to meet the ship's delivery date in September 2015. However, by moving ahead with production in order to accommodate schedule milestones, CVN 78 is at risk of cost growth and ultimately schedule changes if unexpected problems arise in EMALS testing. Since 2006, the Navy has annually issued a long-range plan for shipbuilding. These plans outline expected new ship procurements 30 years into the future and the funding the Navy estimates will be needed to support those procurements. The long-range plan is predicated upon the stated fleet need for 313 ships. However, mounting cost and schedule challenges in current programs have required the Navy to increasingly reshape its long-range ship procurement plans, placing the 313 ship goal in jeopardy. The Navy's long-range ship construction plan embodies multiple objectives including building sophisticated ships to support new and existing missions, improving presence by increasing the numbers of ships available to execute these missions, designing ships and operating concepts that reduce manning supplying construction workloads that stabilize the industrial base. There is an inherent tension among the multiple objectives in the plan that is depicted in simple form in figure 3. This tension can play out in several ways. If, for example, a class of ship is expected to perform multiple challenging missions, it will have sophisticated subsystems and costs will be high. The cost of the ship may prevent its being built in desired numbers, subsequently reducing presence and reducing work for the industrial base. Requirements to reduce manning can actually add sophistication if mission requirements are not reduced. To some extent, this has happened with DDG 1000 as decisions have tended to trade quantities (that affect presence and industrial base) in favor of sophistication. Several years ago, the program was expected to deliver 32 ships at an approximate unit cost of $1 billion. Over time, sophistication and cost of the ship grew as manning levels lower than current destroyers were maintained. Today, the lead ships are expected to cost $8.9 billion in research and development funding and another $6.3 billion to build. Similarly, cost growth in the LCS program has precluded producing ships at the rate originally anticipated, and it is possible the Navy will never regain the recent ships it traded off to save cost. Had the Navy anticipated that LCS lead ship costs would more than double, it may have altered its commitment to the program within its previous long-range shipbuilding plan. The Navy's fiscal year 2009 long-range ship construction plan reflects many of the recent challenges that have confronted Navy shipbuilding programs. The plan provides for fewer ships at a higher unit cost--in both the near term and the long term--from what the Navy outlined in its fiscal year 2008 plan. Across the next 5 years, the Navy now expects to fund construction of 47 new ships at a cost of almost $74 billion. However, only 1 year ago the Navy expected to purchase 60 ships at a cost of $75 billion during this same time span. Instead, as cost growth has mounted in current shipbuilding programs, the Navy has had to reallocate funds planned for future ships to pay for ones currently under construction. These problems have also required the Navy to adjust its long-term plans. To compensate for its recent near-term quantity reductions, the Navy now plans to increase construction rates starting in fiscal year 2014. This strategy is based upon the premise that increased funding--on the order of $22 billion between fiscal years 2014 and 2018--will become available to support its plans. The Navy assumes this trend of increased funding-- above and beyond annual adjustments for inflation--will continue through the end of its plan, which culminates in fiscal year 2038. Cost and schedule pressures in current programs have also led the Navy to make a number of operational trade-offs to help maintain the viability of its shipbuilding goals. For instance, the Navy's current long-range plan includes a new provision to extend the service lives of current DDG 51 ships by 5 years to maintain an adequate number of surface combatants in its fleet. In addition, the Navy plans to extend the service life of selected attack submarines as well as the length of attack submarine deployments. These actions, however, will require the Navy to increase funding for future upgrades, modernization programs, and maintenance for these vessels--from sources the long-range plan does not identify. The discussion over whether to conclude the DDG 1000 program at two ships should prompt some introspection given that over $13 billion has been spent. In a sense, some of the key factors influencing the discussion--such as the high cost of the ship, the potential for cost growth, and the questionable affordability of the 30-year shipbuilding plan--are not markedly different from what they were a few years ago. Future success in shipbuilding depends on understanding why the weaknesses in the DDG 1000 business case, which now seem to threaten the program, did not prompt a similar re-examination several years ago. I believe that Navy managers and shipbuilders have enough knowledge about cost estimating, technology development, engineering, and construction to develop more executable business cases for new ships-- that is, a better match between the scope of the ship and the time and money allotted for delivering it. The fact remains that we do not get these matches when they really count--before detail design and construction for a new ship are approved. So, the question is, why are well-understood elements of success not incorporated into new ship programs? Part of the answer is that while managers may know what it takes to put an executable business case together, compromises in judgment have to be made to bring the business case in conformance with competing demands. For example, in a program like the DDG 1000 that undertook multiple technical leaps to meet challenging requirements, yet also had to deliver in time to match shipyard availability, pressures existed to make optimistic assumptions about the pace of technology maturity. At the same time, budget constraints exert pressure on cost estimates to be lower. These demands do not all fall just within the province of the Navy-- industry, Congress, and the Office of the Secretary of Defense all play important roles. Over time, the business case for DDG 1000 eroded. The primary mission of DDG 1000--and the foundation for its business case-- was land attack. Yet, subsequent decisions ultimately forced trade-offs in that mission. For example, while including features like a more sophisticated radar and stealth characteristics may be good decisions individually, collectively they made the ship more expensive. Efforts to contain cost involved both reducing the quantity of ships and the actual land attack capability possessed by each individual ship. Ironically, the advanced gun system, which was the primary land attack weapon of the ship and a technical success to date, will now not have a platform to operate from beyond the first two DDG 1000s. The reconsideration of the DDG 1000 buy reflects poorly on the requirements, acquisition, and funding processes that produced the ship's business case. Unless some attempt is made to examine the root causes of decisions that hope for the best and result in poor outcomes, shipbuilding programs seem destined to the same fate: despite the best efforts to manage, the scope of the program will outstrip the cost and schedule budget. This examination must begin with an honest self-appraisal of what each player in the shipbuilding acquisition process demands of programs in terms of requirements, technologies, design, industrial base, quantities, and cost. Otherwise, while cost and other problems of current ships are lamented, these same problems could continue to curb the outcomes of future programs like the potentially sophisticated next-generation cruiser (CG(X)) or even renewed construction of DDG 51. Mr. Chairman, that concludes my statement. I would be pleased to answer any questions. To develop information on the status of the DDG 1000 program, we relied largely on our current work examining the DDG 1000 program, as well as a number of prior GAO products on shipbuilding programs. We supplemented this work with analysis of the Navy's most recent and previous long-range plan for ship construction and Selected Acquisition Reports for current Navy ships. Finally, we updated our estimates of lead ships costs through the use of the Navy's budget justification documentation. For future questions about this statement, please contact me at (202) 512- 4841 or [email protected]. Individuals making key contributions to this statement include Marie P. Ahearn, Christopher R. Durbin, Brian Egger, James Madar, Diana Moldafsky, Gwyneth B. Woolwine, and Karen Zuckerstein. Defense Acquisitions: Cost to Deliver Zumwalt-Class Destroyers Likely to Exceed Budget. GAO-08-804. Washington, D.C.: July 31, 2008. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO- 08-467SP. Washington, D.C.: March 31, 2008. Defense Acquisitions: Overcoming Challenges Key to Capitalizing on Mine Countermeasures Capabilities. GAO-08-13. Washington, D.C.: October 12, 2007. Defense Acquisitions: Realistic Business Cases Needed to Execute Navy Shipbuilding Programs. GAO-07-943T. Washington, D.C.: July 24, 2007 Defense Acquisitions: Navy Faces Challenges Constructing the Aircraft Carrier Gerald R. Ford within Budget. GAO-07-866. Washington D.C.: August 23, 2007. Defense Acquisitions: Challenges Remain in Developing Capabilities in Naval Surface Fire Support. GAO-07-115. Washington, D.C.: November 30, 2006. Defense Acquisitions: Challenges Associated with the Navy's Long-Range Shipbuilding Plan. GAO-06-587T. Washington, D.C.: March 30, 2006. Defense Acquisitions: Progress and Challenges Facing the DD(X) Surface Combatant Program. GAO-05-924T. Washington, D.C.: July 19, 2005. Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255. Washington, D.C.: March 1, 2005. Defense Acquisitions: Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183. Washington, D.C.: February 28, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The U.S. Navy is about to begin construction of the first Zumwalt-class destroyer (DDG 1000) amid considerable uncertainties and a high likelihood of cost and schedule growth. Significant cost growth and schedule delays are persistent problems that continue to compromise the Navy's shipbuilding goals. This testimony focuses on (1) the challenges faced by the DDG 1000 program and (2) the strain such challenges portend for long term shipbuilding plans. From the outset, DDG 1000 has faced a steep challenge framed by technical sophistication, demanding mission requirements, and a cost and schedule budget with little margin for error. The Navy has worked hard to manage the program within these competing goals. Yet recently, the Navy has discussed canceling construction of the remaining five DDG 1000 ships. Although a cancellation may stem from fiscal necessity, it reflects poorly on the acquisition, requirements, and funding processes that produced the DDG 1000 business case. Future success in shipbuilding depends on understanding why the weaknesses in the DDG 1000 business case, which now seem to threaten the program, did not prompt a similar re-examination several years ago. The current program of record faces significant execution risks. The Navy will be pressed to complete a large amount of design work in time for the start of construction in October 2008. Demonstration of key components--particularly, the deckhouse, the volume search radar, and the integrated power system--have fallen behind. Despite restructuring the construction schedule, margins between several major events are gone. For example, land-based tests of the integrated power system are now scheduled after installation on the lead ships. Software development has also proven challenging; the Navy certified the most recent software release before it met about half of its requirements. Further, the full costs of constructing the two lead ships have not been entirely recognized or funded. The complexity and unique features of DDG 1000, along with the design work, testing, and actual construction experience to come, make cost growth beyond budgeted amounts likely. The challenges confronted by DDG 1000 are not unique. Across the shipbuilding portfolio, executing programs within cost and schedule estimates remains problematic, largely because of unexecutable business cases that allow programs to start with a mismatch between scope and resources. Collectively, problems in individual programs erode the buying power of the Navy's long-range construction budget. The Navy compensates for near-term construction deferrals by increasing construction in the out-years, but this will require significant funding increases in the future, which are unlikely. Near-term tradeoffs could have long-term consequences for maintaining a rational balance between mission capability, presence, industrial base, and manning. The Navy's consideration of cutting the DDG 1000 program back comes after over 10 years of development and $13 billion have been invested. Clearly, changes are needed in how programs are conceptualized and approved. Although the elements needed for success are well known, unrealistic compromises are made to make business cases conform to competing demands. An examination of the root causes of unexecutable business cases must be done or shipbuilding programs will continue to produce unsatisfactory outcomes. This examination must begin with an honest appraisal of the competing demands made on new programs early in the acquisition process and how to strike a better balance between them.

In 1965, Medicaid was established as a jointly funded federal and state program providing medical assistance to qualified low-income people. At the federal level, the program is administered by HCFA, an agency within the Department of Health and Human Services (HHS). Within a broad legal framework, each state designs and administers its own Medicaid program. States decide how much to reimburse providers for each service and whether to cover optional services, such as eyeglasses and dental care. The federal and state governments share in the cost of Medicaid, with the federal government paying at least 50 percent and not more than 83 percent of a state's costs, as determined by a formula. This formula considers a state's average per capita income relative to the national per capita income and is intended to reduce differences among the states in medical care coverage to the poor and to distribute the burden of financing program benefits fairly among the states. The formula-derived match rate is called the federal medical assistance percentage. In fiscal year 1997, the federal government share averaged about 57 percent of Medicaid expenditures. Besides making payments to medical providers for services rendered, states are required to make additional Medicaid payments (DSH payments) to hospitals that serve large numbers of Medicaid and other low-income patients. Within federal guidelines, states may designate disproportionate share hospitals but must include hospitals with high utilization rates for Medicaid or low-income patients. Hospitals must receive DSH payments if their Medicaid utilization rate is at least one standard deviation greater than the average for hospitals participating in Medicaid or if their low-income utilization rate exceeds 25 percent. States may designate other hospitals to receive DSH funding if the hospital's Medicaid utilization rate is at least 1 percent of its total bed days. Total DSH allocations to states are limited by federal formula, and within states, payments to individual hospitals are limited to the costs of uncompensated care that hospitals provide plus the shortfall between costs and payments for care of Medicaid patients. In addition to designating certain hospitals to receive DSH payments, federal rules give states three options for setting minimum DSH payments. Within these limits, states have broad discretion when determining the size of Medicaid DSH payments to individual hospitals. The creative financing mechanisms that states began using in the mid-1980s to maximize federal Medicaid contributions without effectively committing their own share of matching funds took various forms. One involved using provider-specific tax revenue or provider donations to fund a state's share of a later Medicaid payment to the providers. For example, hospitals might have paid $50 million in taxes or provider donations to the state. The state, in turn, made $60 million in payments to hospitals. The state received federal matching funds based on the Medicaid expenditure of $60 million. If the state had a 50-percent matching rate, it received $30 million of federal funds. Because the state received $80 million in revenue ($50 million from hospitals and $30 million from the federal government) and made $60 million in payments, it had a net gain of $20 million. Also the hospitals received a net increase in revenues of $10 million, entirely from federal dollars. States also benefited when they used their own funds to initiate payments to public providers. Under this financing mechanism, states generated federal matching funds by increasing payment rates for a particular group of public providers, such as nursing homes, public hospitals, or state psychiatric hospitals. However, these providers, through the use of intergovernmental transfers, returned all or the majority of federal and state funds to state treasuries. Federal legislation in 1991 and 1993 essentially banned provider donations, required that provider taxes be broad based, limited provider taxes to 25 percent of a state's share of Medicaid expenditures, and prevented states from repaying provider taxes. Also, the legislation placed a cap on a state's total DSH payments and limited such payments to 100 percent of a hospital's unrecovered costs of serving Medicaid and uninsured patients. As these and other restrictions have been phased in, Medicaid DSH payments have dropped from a peak of $17.9 billion in 1995 to $14.7 billion in 1996. However, the legislation did not restrict states' use of intergovernmental transfers. Creative financing mechanisms involving DSH payments to public hospitals and intergovernmental transfers are still possible, although the limit for DSH payments of 100 percent of unrecovered costs constrains the hospitals from recovering more than their actual costs. The federal government has never shared in the costs of services provided to adults in IMDs because mental health services have traditionally been considered a state and local responsibility. These hospitals may be reimbursed by Medicaid for services for patients younger than 21 or older than 64. They are also eligible for DSH payments, like other hospitals, if their Medicaid utilization rate is at least 1 percent. The majority of IMDs that receive DSH payments are state psychiatric hospitals. Medicaid DSH payments in 1996 to state psychiatric hospitals in the six states were generally far larger than those to other types of hospitals. The states in our review devoted a significant share, from 20 to 89 percent in 1996, of their total DSH expenditures to state mental hospitals. DSH payments to state psychiatric hospitals, and other state-owned hospitals, enabled states to obtain federal Medicaid matching funds benefiting the state treasury. The Balanced Budget Act of 1997 should reduce the DSH payments to state psychiatric hospitals from 1996 levels in some of our study states, because it limits the proportion of a state's DSH spending that may be paid to state psychiatric hospitals. However, the amount of the reductions will depend in part on how states use the flexibility inherent in the Medicaid program. Four of the six states in our study made DSH payments to state psychiatric hospitals that were larger on average than payments to any other type of hospital. In Michigan and Texas, payments to state psychiatric hospitals were on average less than to other state-owned hospitals. However, in both Michigan and Texas, payments to state psychiatric hospitals still averaged far more than payments to local public and private hospitals. Table 1 shows the average 1996 DSH payment for each type of hospital in the states we reviewed. To determine whether the large DSH payments were a function of hospital size, we compared the average DSH payment per bed day for each type of hospital in the six study states. For five states, this ratio was greater for state psychiatric hospitals--and for other state-owned hospitals in one state--than for other types of hospitals, indicating that the difference in average DSH payments between groups does not result from differing hospital size. For example, Kansas state psychiatric hospitals received more than $150 in DSH for each bed day, while private hospitals received about $5, and average DSH payments per bed day to other state-owned hospitals and local public hospitals were about $19 and $11, respectively. Table 2 shows the average DSH payment per inpatient bed day in 1996 for the different types of hospitals in the six states. DSH payments made to state psychiatric hospitals account for a significant portion of the total DSH payments made in these six states. In fact, three of the six allocated more than half of their total DSH spending to state psychiatric hospitals. Table 3 shows the percentage of total DSH payments made to state psychiatric hospitals in 1996. DSH payments to state psychiatric hospitals benefited the state by the amount of the federal portion of the DSH payment, because the federal funds were returned to the state treasury or replaced money the state would otherwise have needed to spend for hospital operations. For example, DSH payments made to New Hampshire Hospital, a state psychiatric hospital, are treated as board-and-care revenue to the hospital and returned to the state's general fund. The DSH payment returned to the treasury consists of both state funds spent and the federal contribution, resulting in a gain to the state treasury of the federal portion of the DSH payment, or 50 percent. In other states, officials told us that Medicaid DSH payments to state-operated hospitals reduced, by the federal share of the DSH payments, the amount of state funds spent to operate the hospital. For example, officials from Texas told us that the availability of DSH payments to state psychiatric hospitals has allowed the state to change its financing for these hospitals. They told us that while appropriation statutes for state psychiatric hospitals provided for general state revenues to cover full hospital operations, the amount of state-appropriated funds actually spent to operate these hospitals is reduced by the federal share of the DSH payment. If the DSH payment were not available, more of the appropriated funds would actually be spent on hospital operations. State psychiatric hospitals in the six states generally served relatively fewer Medicaid patients than other hospitals while receiving larger DSH payments. Only 6 of 34 state psychiatric hospitals in the six states have a Medicaid utilization rate higher than 25 percent. However, this calculation does not include patients between ages 21 and 65 who would have been eligible for Medicaid coverage if they were not in an IMD. Some of these hospitals serve many children covered by Medicaid. States are allowed to designate other hospitals to receive DSH payments as long as they have at least 1-percent Medicaid utilization. Average Medicaid utilization rates for state psychiatric hospitals in 1996 ranged from 3.1 percent in Texas to 22.1 percent in Kansas. In three states, at least one IMD had a Medicaid utilization rate close to the 1-percent minimum necessary to qualify for DSH. For example, one of the eight state psychiatric hospitals in Texas had a 1.4-percent rate, and five other Texas state psychiatric hospitals had rates lower than 3 percent. Other types of hospitals, with lower DSH payments, generally had higher, and in some cases much higher, Medicaid utilization rates. Other state-owned hospitals in Maryland, for example, had average Medicaid utilization rates five times as great as the average for the state's psychiatric hospitals. North Carolina private hospitals averaged 19-percent Medicaid utilization, but the state's four state psychiatric hospitals averaged less than half that rate, and the state psychiatric hospital with the highest rate (18 percent) still fell below the private hospitals' average. Table 4 shows the average Medicaid utilization for each type of hospital for our study states in 1996. An exception to the pattern of higher Medicaid utilization rates in private hospitals is New Hampshire. There, the only state psychiatric hospital has a center for children, about 80 percent of whom qualify for Medicaid. State psychiatric hospitals generally received DSH payments at or near the maximum allowed by Medicaid rules, while other hospitals often received payments that were well below their maximums. Within federal limits, states targeted DSH payments to state psychiatric hospitals and in some cases to other state-owned hospitals. Local public hospitals and private hospitals generally received DSH payments at rates that were a smaller proportion of the maximum allowable. In some cases, the proportions were much smaller, as for local public hospitals in Kansas, which received only 8 percent of the maximum the state could have paid them. Table 5 shows the percentage of the maximum allowable DSH payments made to each group of hospitals for our study states in 1996. Individual hospital maximum DSH payments were established by the Omnibus Budget Reconciliation Act of 1993, which limits each hospital's DSH payment to its cost of care for uninsured and Medicaid patients, less payments received from them or on their behalf. The cost of care for patients who have insurance is not included in the determination. Similarly, state and local funds appropriated to a hospital are not included in the calculation of individual hospital limits. DSH payments to other state-owned hospitals can provide to the state benefits similar to those of large DSH payments to state psychiatric hospitals. In some states, these hospitals used intergovernmental transfers to return their DSH funds to the state treasury. In addition, officials from North Carolina told us that local public hospitals returned the majority of their DSH payments to the state. In state fiscal year 1996, state psychiatric hospitals in the six states we reviewed received between 20 and 89 percent of total Medicaid DSH payments, even though state psychiatric hospitals represented a much smaller portion of the number of hospitals in the states and even though state psychiatric hospitals often had lower Medicaid utilization rates than other hospitals. In each of the six states, payments to state psychiatric hospitals covered more than 90 percent of the maximum allowable payment to state psychiatric hospitals. These large DSH payments have enabled states to obtain federal matching funds that indirectly cover costs of services that state Medicaid programs cannot pay for directly. Implementation of restrictions on payments to IMDs in the Balanced Budget Act of 1997 should reduce some of these large payments. We provided a draft of this report to the HCFA Administrator for review and comment. HCFA officials who reviewed the report told us that the report was accurate. They pointed out that although DSH payments to IMDs enable the states to obtain federal matching funds to indirectly cover the costs of services provided to patients in IMDs that Medicaid cannot pay for directly, this is within the rules of the Medicaid program. They also suggested some technical changes to the report, and we modified the text to reflect their comments. We also discussed the information in the report on the states with officials in each state. They provided technical comments that we incorporated as appropriate. We are sending copies of this report to the Secretary of HHS, the Administrator of HCFA, state officials in the states we contacted, and others who are interested. We will also make copies available to others upon request. Please call me at (202) 512-7114 or Leslie G. Aronovitz at (312) 220-7600 if you or your staff have any questions about this report. Other major contributors to this report include Paul D. Alcocer, Robert T. Ferschl, Barbara A. Mulliken, and Paul T. Wagner, Jr. William J. Scanlon Director, Health Financing and Systems Issues The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed Medicaid disproportionate share hospital (DSH) program payments to state psychiatric institutions, focusing on: (1) how the amount of DSH payments to state psychiatric hospitals compares with DSH payments made to other types of hospitals; (2) how the proportion of Medicaid beneficiaries in state psychiatric hospitals compares with the proportion in other state hospitals; and (3) what proportion of the maximum allowable DSH payment states paid state psychiatric hospitals compared with the proportion of the maximum allowable paid to other types of hospitals. GAO noted that: (1) Medicaid DSH payments to state psychiatric hospitals were far larger on average than payments made to other types of local public and private hospitals in states GAO contacted, enabling the states to obtain federal matching funds to indirectly cover costs of services provided to patients in institutions for mental diseases (IMD) that Medicaid cannot pay for directly; (2) overall, DSH payments to state psychiatric hospitals averaged about $29 million per hospital compared with $1.75 million for private hospitals; (3) in four of the six states, the average DSH payments to state psychiatric hospitals were also much larger than those to other state-owned hospitals; (4) in the two other states, DSH payments to the other state-owned hospitals were larger than payments to state psychiatric hospitals; (5) in all but one state, the average DSH payment per bed day was also much higher for state psychiatric hospitals than for other types of hospitals, indicating that the large DSH payments were not simply a function of hospital size; (6) the Balanced Budget Act of 1997 limits the proportion of a state's DSH payment that can be paid to IMDs, which should reduce such payments to state psychiatric hospitals in at least some cases; (7) state psychiatric hospitals receiving DSH payments in five of the six states GAO reviewed often served smaller proportions of Medicaid patients than other state-owned, local public, and private hospitals; (8) for example, the 1996 average Medicaid utilization rate at Texas state psychiatric hospitals was about 3 percent, while the average rate at other types of hospitals was much higher, up to 37 percent at local public hospitals; (9) however, in one state, the state psychiatric hospital served a higher proportion of Medicaid patients than other hospitals receiving DSH payments; (10) the states in GAO's review allocated DSH funds to state psychiatric hospitals at or near the maximum allowed by Medicaid rules and made DSH payments to other hospitals that were far below their limits; (11) each of the six states made 1996 DSH payments to its state psychiatric hospitals at more than 90 percent of the maximum allowable amount, and four of the six states paid these hospitals the maximum allowed; (12) other types of hospitals often received much less; and (13) for example, local public hospitals in Kansas as well as private hospitals in Michigan and North Carolina all received, on average, less than 10 percent of their allowed maximum.

To carry out its responsibilities under the nation's environmental laws, EPA conducts an array of activities, such as promulgating regulations; issuing and denying permits; approving state programs; and issuing enforcement orders, plans, and other documents. Many of these activities may be subject to legal challenge.and Clean Water Act require EPA to take certain actions, such as issuing rules, to implement provisions of the law within certain statutorily designated time frames, and EPA is subject to legal challenge for not taking the mandatory actions by the required deadline. If the legal challenge is a deadline suit, EPA works with Justice to consider several factors in determining whether or not to settle the deadline suit and the terms of any settlement. Statutes establishing programs administered by EPA, and under which the agency may be sued, include 10 of the nation's most prominent environmental laws, such as the Clean Air Act; Clean Water Act; Comprehensive Environmental Response, Compensation, and Liability Act (better known as the Superfund law); Emergency Planning and Community Right-to-Know Act; Federal Insecticide, Fungicide, and Rodenticide Act and related provisions of the Federal Food, Drug, and Cosmetic Act; Resource Conservation and Recovery Act; Safe Drinking Water Act; and Toxic Substances Control Act. Generally, the federal government has immunity from lawsuits, but federal laws authorize three types of suits related to EPA's implementation of environmental laws. First, most of the major environmental statutes include "citizen suit" provisions authorizing citizens--including individuals, associations, businesses, and state and local governments--to sue EPA when the agency fails to perform an action mandated by law. These suits include deadline suits. Second, the major environmental statutes typically include judicial review provisions authorizing citizens to challenge certain EPA actions, such as promulgating regulations or issuing permits. Third, the Administrative Procedure Act authorizes challenges to certain agency actions that are considered final actions, such as rulemakings and decisions on permit applications. As a result, even if a particular environmental statute does not authorize a challenge against EPA for a final decision or regulation, the Administrative Procedure Act may do so. A lawsuit challenging EPA's failure to act may begin when the aggrieved party sends EPA a notice of intent to sue, if required, and a lawsuit challenging a final EPA action begins when a complaint is filed in court. Before EPA takes final action, the public or affected parties generally have opportunities to provide comments and information to the agency. In addition, administrative appeals procedures are available--and in many cases required--to challenge EPA's final action without filing a lawsuit in a court. For example, citizens can appeal an EPA air emission permit to the agency's Environmental Appeals Board. These administrative processes provide aggrieved parties with a forum that may be faster and less costly than a court. Generally, the environmental statutes' citizen suit provisions require a prospective plaintiff to first send EPA a formal notice of intent to sue. Conversely, neither these statutes' judicial review provisions nor the Administrative Procedure Act impose a notice requirement. between the aggrieved party and EPA may occur anytime after the agency action, at any point during active litigation, and even after judgment. FWS's mission is to work with others to conserve, protect, and enhance fish, wildlife, and plants and their habitats for the continuing benefit of the American people. FWS is responsible for administering the Endangered Species Act for freshwater and land species. Under the act, FWS works to implement its requirements, such as consulting with federal agencies to determine if actions may affect listed species or habitats identified as critical to the species' survival, and acting on applications for permits required when non-federal activities will result in take of threatened or endangered species. The act authorizes parties to file challenges to government actions affecting threatened and endangered species. These lawsuits can include deadline suits as well as other types of lawsuits. EPA has primary regulatory authority that allows citizens to file a deadline suit for laws including the following: the Superfund law; Clean Air Act, Clean Water Act, Emergency Planning and Community Right-to-Know Act, Safe Drinking Water Act, Resource Conservation and Recovery Act, and Toxic Substances Control Act. According to EPA and Justice officials, when a deadline suit is filed, the agencies work together to determine how to respond to the lawsuit, including whether or not to negotiate a settlement with the plaintiff to issue a rule by an agreed upon deadline or allow the lawsuit to proceed. In making this decision, EPA and Justice consider several factors to determine which course of action is in the best interest of the government. According to EPA and Justice officials, these factors include (1) the cost of litigation, (2) the likelihood that EPA will win the case if it goes to trial, and (3) whether EPA and Justice believe they can negotiate a settlement that will provide EPA with sufficient time to complete a final rule if required to do so. EPA and Justice officials have often chosen to settle deadline suits when EPA has failed to fulfill a mandatory duty because it is very unlikely that the government will win the lawsuit. In many such cases, the only dispute is over the appropriate remedy (i.e., fixing a new date by which EPA should act). Additionally, in such cases, officials may believe that negotiating a settlement is the course of action most likely to create sufficient time for EPA to complete the rulemaking if it is required to issue a rule. EPA and Justice have an agreement under which both must concur in the settlement of any case in which Justice represents EPA. See 28 C.F.R. SSSS 0.160-0.163. related to water quality criteria for pathogens and pathogen indicators. The Meese memorandum also provides that Justice should not enter into a settlement agreement that interferes with the agency's authority to revise, amend, or promulgate regulations through the procedures set forth in the Administrative Procedure Act. As such, EPA officials stated that they have not, and would not agree to settlements in a deadline suit that finalizes the substantive outcome of the rulemaking or declare the substance of the final rule. As discussed in our August 2011 report, the number of environmental litigation cases brought against EPA each year from fiscal year 1995 through fiscal year 2010 varied with no discernible trend. Similarly, data available from Justice, the Department of the Treasury, and EPA show that the costs associated with environmental litigation cases against EPA have varied from year to year for fiscal years 1998 through 2010, averaging at least $3.6 million per year with no discernible trend. Information regarding lawsuits against FWS is limited, with FWS data showing that the agency paid about $1.6 million in 26 cases from fiscal years 2004 through 2010. In August 2011, we reported that there were no aggregated data on environmental litigation or associated costs reported by federal agencies. The key agencies involved--Justice, EPA and Treasury-- maintained certain data on individual cases in decentralized databases. In particular, each of Justice's litigation components maintained a separate case management system to gather information related to individual cases. We were able to merge cases from two systems for purposes of our work. The average number of new cases filed against EPA each year was 155, ranging from a low of 102 new cases filed in fiscal year 2008 to a high of 216 cases filed in fiscal year 1997 (see fig. 1). In all, Justice defended EPA in nearly 2,500 cases from fiscal year 1995 through fiscal year 2010. The greatest number of cases was filed in fiscal year 1997, which, according to a Justice official, may be explained by the fact that EPA revised its national ambient air quality standards for ozone and particulate matter in 1997, which may have caused some groups to sue. In addition, according to the same official, in 1997 EPA implemented a "credible evidence" rule, which also was the subject of additional lawsuits. The fewest cases against EPA (102) were filed in fiscal year 2008, and Justice officials were unable to pinpoint any specific reasons for the decline. In fiscal years 2009 and 2010, the caseload increased. A Justice official said that it is difficult to know why the number of cases might increase because litigants sue for different reasons, and some time might elapse between an EPA action and a group's decision to sue. As shown in figure 2, most cases against EPA were brought under the Clean Air Act, which represented about 59 percent of the approximately 2,500 cases that were filed during the 16-year period of our August 2011 report (i.e., fiscal year 1995 through fiscal year 2010). Cases filed under the Clean Water Act represented the next largest group of cases (20 percent), and the Resource Conservation and Recovery Act represented the third largest group of cases (6 percent). The lead plaintiffs filing cases against EPA during the 16-year period of our August 2011 report fit into several categories. The largest category comprised trade associations (25 percent), followed by private companies (23 percent), local environmental groups and citizens' groups (16 percent), and national environmental groups (14 percent). Individuals, states and territories, municipal and regional government entities, unions and workers' groups, tribes, universities, and a small number of others we could not identify made up the remaining plaintiffs (see table 1). According to the stakeholders we interviewed for our August 2011 report, a number of factors--particularly a change in presidential administration, the passage of regulations or amendments to laws, and EPA's failure to meet statutory deadlines--affect plaintiffs' decisions to bring litigation against EPA. Stakeholders did not identify any single factor driving litigation, but instead, attributed litigation to a combination of different factors. According to most of the stakeholders we interviewed, a new presidential administration is an important factor in groups' decisions to bring suits against EPA. Some stakeholders suggested that a new administration viewed as favoring less enforcement could spur lawsuits from environmental groups in response, or industry groups could sue to delay or prevent the outgoing administration's actions. Other stakeholders suggested that if an administration is viewed as favoring greater enforcement of rules, industry may respond to increased activity by bringing suit against EPA to delay or prevent the administration's actions, and certain environmental groups may bring suit with the aim of ensuring that required agency actions are completed during an administration they perceive as having views similar to the groups' own. Most of the stakeholders interviewed also said that the development of new EPA regulations or the passage of amendments to environmental statutes may lead parties to file suit against the new regulations or against EPA's implementation of those amendments. One stakeholder noted that an industry interested in a particular issue may become involved in litigation related to the development of regulations because it wishes to be part of the regulatory process and negotiations that result in a mutually acceptable rule. Data available for our August 2011 report from Justice, Treasury, and EPA show that the costs associated with environmental litigation cases against EPA have varied from year to year with no discernible trend. Justice's Environment and Natural Resources Division spent a total of about $46.9 million to defend EPA in these cases from fiscal year 1998 through fiscal year 2010, averaging at least $3.6 million per year. Some cost data from Justice were not available, however, in part because Justice's Environment and Natural Resources Division and the U.S. Attorneys' Offices did not have a standard approach for maintaining key data for environmental litigation cases. For example, while the Environment and Natural Resources Division tracked attorney hours by case, the U.S. Attorneys' Offices did not. In addition, owing to statutory requirements to pay certain successful plaintiffs for attorney fees and costs, Treasury paid a total of about $15.5 million to prevailing plaintiffs for attorney fees and costs related to these cases for fiscal years 2003 through 2010, averaging about $2 million per year. EPA paid a total of $1.5 million from fiscal year 2006 through fiscal year 2010 in attorney fees and costs, averaging about $305,000 per year. In April 2012, we reported that the FWS did not use a data system for cases brought against FWS to track attorney fees and costs paid by the Endangered Species Program but that the agency tracked this information in its Washington office using a spreadsheet. FWS officials gathered information on those cases paid by the Washington office and supplemented the information with four endangered species cases identified by the agency's regional offices. However, not all regional offices tracked attorney fee payments, so the data may not be complete for fiscal years 2004 through 2010. That is, FWS officials were not sure that they had provided the complete universe of cases. FWS data show that FWS paid about $1.6 million in the 26 cases from fiscal years 2004 through 2010. In December 2014, we reported that the terms of settlements in deadline suits that resulted in EPA issuing major rules from May 31, 2008, through June 1, 2013, established a schedule for issuing rules. Specifically, the settlements were to either promulgate a statutorily required rule or make a determination that doing so is not appropriate or necessary pursuant to the relevant statutory provision. EPA received public comments on all but one of the draft settlements in these suits. According to EPA officials we interviewed for our December 2014 report, settlements in deadline suits primarily affected a single office within EPA because most deadline suits are based on provisions of the Clean Air Act for which that office is responsible. In our December 2014 report, we found that EPA issued 32 major rules from May 31, 2008, through June 1, 2013. According to EPA officials, the agency issued 9 of these rules following settlements in seven deadline suits. They were all Clean Air Act rules. Two of the settlements established a schedule to complete 1 or more rules, and five settlements established a schedule to complete 1 or more rules or make a determination that such a rule was not appropriate or necessary in accordance with the relevant statute. Some of the schedules included interim deadlines for conducting rulemaking tasks, such as publishing a notice of proposed rulemaking in the Federal Register. In addition to schedules, the seven settlements also included, among other things, provisions that allowed deadlines to be modified (including the deadline to issue the final rule) and specified that nothing in the settlement can be construed to limit or modify any discretion accorded EPA by the Clean Air Act or by general principles of administrative law. Consistent with Justice's 1986 Meese memorandum, none of the settlements we reviewed included terms that required EPA to take an otherwise discretionary action or prescribed a specific substantive outcome of the final rule. The Clean Air Act requires EPA, at least 30 days before a settlement under the act is final or filed with the court, to publish a notice in the Federal Register intended to afford persons not named as parties or interveners to the matter or action a reasonable opportunity to comment in writing. EPA or Justice, as appropriate, must then review the comments and may withdraw or withhold consent to the proposed settlement if the comments disclose facts or considerations that indicate consent to the settlement is inappropriate, improper, inadequate, or inconsistent with Clean Air Act requirements. The other major environmental laws with provisions that allow citizens to file deadline suits do not have a notice and comment requirement for proposed settlements. According to an EPA official, with the exception of the agency's pesticide program, EPA generally does not ask for public comments on defensive settlements (i.e., settlements on cases in which EPA is being sued) if the agency is not required to do so by statute. Of the 32 major rules that EPA issued from May 31, 2008 to June 1, 2013, 9 rules following seven settlements in deadline suits were Clean Air Act rules. For each settlement, EPA published a notice in the Federal Register providing the public the opportunity to comment on a draft of the settlement. EPA received from 1 to 19 public comments on six of the draft settlements. No comments were received on one of the draft settlements. Based on EPA summaries of the comments, the comments concerned the reasonableness of the deadlines contained in the settlements or supported or objected to the settlements. For example, some comments supported the deadline or asserted that the deadlines should be accelerated, and other comments stated that EPA would have difficulty meeting the deadlines. EPA determined that none of the comments on any of the draft settlements disclosed facts or considerations that indicated that consent to the settlement in question would be inappropriate, improper, inadequate, or inconsistent with the act. According to EPA officials interviewed for our December 2014 report, settlements in deadline suits primarily affected a single office within EPA--the Office of Air Quality Planning and Standards (OAQPS)-- because most deadline suits were based on provisions of the Clean Air Act for which that office is responsible. According to EPA's Office of General Counsel, provisions in the Clean Air Act that authorize the National Ambient Air Quality Standards program and Air Toxics program account for most deadline suits. These provisions have recurring deadlines requiring EPA to set standards and to periodically review--and revise as appropriate or necessary--those standards. OAQPS sets these standards through the rulemaking process. For example, the Clean Air Act requires EPA to review and revise as appropriate National Ambient Air Quality Standards every 5 years and to review and revise as necessary technology standards for numerous air toxics generally every 8 years. The effect of settlements in deadline suits on EPA's rulemaking priorities is limited to timing and order. OAQPS officials said that deadline suits affect the timing and order in which rules are issued by the National Ambient Air Quality Standards program and the Air Toxics program, but not which rules are issued. The officials also noted that the effect of deadline suits on the two programs differs because of the different characteristics of the programs. In conclusion, environmental statutes allow litigation to check the authority of federal agencies as they carry out--or fail to carry out--their duties. Available data did not show discernible trends in the number of cases or costs associated with the litigation against EPA and there was limited information on FWS. Information on deadline suits showed that the effect of settlements in deadline suits was primarily on one office and limited to the timing and order in which rules were issued. Chairman Rounds, Ranking Member Markey, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Susan Iott (Assistant Director), Charlie Egan, Cindy Gilbert, Rich Johnson, Tracey King, Marya Link, Maria Strudwick, and Kiki Theodoropoulos made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Environmental statutes, such as the Clean Air Act and Clean Water Act, allow citizens to file suit against EPA to challenge certain agency actions, such as issuing regulations or rules. Such laws also require EPA to take certain actions, such as issuing rules, to implement provisions of the law within certain statutorily designated time frames. Citizens can sue EPA to compel the agency to take required actions, such as issuing a rule on time, in lawsuits often called deadline suits. EPA can negotiate a settlement to issue a rule by an agreed upon deadline. Where EPA is named as a defendant, Justice provides EPA's legal defense. If successful, plaintiffs may be paid for certain attorney fees and costs. Payments are made from Treasury's Judgment Fund or EPA's appropriations. Under the Endangered Species Act, FWS also faces lawsuits over its regulations and actions to carry out the act. As with EPA, Justice defends suits against FWS in court. This testimony is based on GAO reports issued from August 2011 through December 2014 about litigation directed at EPA and FWS. It focuses on (1) information on cases and associated costs, as available, for EPA and FWS and (2) information on the impact of deadline cases on EPA rulemaking. GAO did not make recommendations in the reports on which this testimony is based and is not making any in this testimony. As GAO reported in August 2011, the Environmental Protection Agency (EPA) faces legal challenges implementing the nation's key environmental laws. The number of environmental litigation cases brought against EPA each year for fiscal years 1995 through 2010 varied with no discernible trend. Data available from the Department of Justice, the Department of the Treasury, and EPA show that the costs associated with such cases against EPA have also varied from year to year with no discernible trend. Specifically, Justice staff defended EPA on an average of about 155 such cases each year from fiscal years 1995 through 2010, for a total of about 2,500 cases during that time. Most cases were filed under the Clean Air Act (59 percent of cases) and the Clean Water Act (20 percent of cases). According to stakeholders GAO interviewed, a number of factors--particularly a change in presidential administrations, new regulations or amendments to laws or EPA's not meeting statutorily required deadlines--affected environmental litigation. Justice spent at least $46.9 million, averaging $3.6 million annually, to defend EPA in court from fiscal years 1998 through 2010. In addition, owing to statutory requirements to pay certain successful plaintiffs for attorney fees and costs, the Treasury paid about $15.5 million from fiscal years 2003 through 2010--averaging about $2 million per fiscal year--to plaintiffs in environmental cases. EPA paid approximately $1.5 million from fiscal years 2006 through 2010--averaging about $305,000 per fiscal year--to plaintiffs for environmental litigation claims. (All amounts are in constant 2015 dollars.) As one of the primary agencies responsible for implementing the Endangered Species Act, the U.S. Fish and Wildlife Service (FWS) faces litigation over its regulations and actions to carry out provisions of the act. In April 2012, GAO reported that FWS did not use a data system to track cases and associated fees and costs it paid. As a result, information regarding cases against FWS and associated costs was limited, with FWS data showing that the agency paid about $1.6 million in 26 cases from fiscal years 2004 through 2010. As GAO reported in December 2014, of the 32 major rules that EPA stated it promulgated from May 31, 2008 to June 1, 2013, nine were issued following seven settlements in deadline lawsuits, all under the Clean Air Act. The terms of the settlements in these deadline suits established a schedule to issue a statutorily required rule(s) or to issue a rule(s) unless EPA determined that doing so was not appropriate or necessary pursuant to the relevant statutory provision. None of the seven settlements included terms that finalized the substantive outcome of a rule. The impact of settlements in deadline suits on EPA's rulemaking priorities was limited primarily to one office within EPA--the Office of Air Quality Planning and Standards (OAQPS)--because most deadline suits are based on provisions of the Clean Air Act for which that office is responsible. These provisions have recurring deadlines requiring EPA to set standards and to periodically review--and revise as necessary--those standards. OAQPS sets these standards through the rulemaking process. OAQPS officials said that deadline suits affect the timing and order in which rules are issued.

Three recent bills have been introduced to change the overall leadership and management of programs to combat terrorism and homeland security. On February 8, 2001, Representative Gilchrest introduced H.R. 525, the Preparedness Against Domestic Terrorism Act of 2001, which proposes establishing a President's Council on Domestic Terrorism Preparedness within the Executive Office of the President to address preparedness and consequence management issues. On March 21, 2001, Representative Thornberry introduced H.R. 1158, the National Homeland Security Act, which advocates the creation of a cabinet-level head within the proposed National Homeland Security Agency to lead homeland security activities. On March 29, 2001, Representative Skelton introduced H.R. 1292, the Homeland Security Strategy Act of 2001, which calls for the development of a homeland security strategy developed by a single official designated by the President. Related proposals from congressional committee reports and congressionally chartered commissions provide additional, often complementary, options for structuring and managing federal efforts to combat terrorism. These include Senate Report 106-404 to Accompany H.R. 4690 on the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriation Bill 2001, submitted by Senator Gregg on September 8, 2000; the report by the Gilmore Panel (the Advisory Panel to Assess Domestic Response Capabilities for Terrorism Involving Weapons of Mass Destruction, chaired by Governor James S. Gilmore, III) dated December 15, 2000; and the report of the Hart-Rudman Commission (the U.S. Commission on National Security/21st Century, chaired by Senators Gary Hart and Warren B. Rudman) dated January 31, 2001. H.R. 1158 is based upon the report of the Hart-Rudman Commission. The bills and related proposals vary in the scope of their coverage. H.R. 525 focuses on federal programs to prepare state and local governments for dealing with domestic terrorist attacks. Both H.R. 1158 and H.R. 1292 focus on the larger issue of homeland security that includes threats other than terrorism, such as military attacks. However, only H.R. 1292 includes a specific definition of homeland security. The Senate Report 106-404 proposal is limited to domestic terrorism preparedness, including programs for both crisis and consequence management. The Gilmore Panel report includes both international and domestic terrorism programs. The Hart-Rudman Commission report (like H.R. 1158) focuses on the larger issue of homeland security. The bills and related proposals also vary in where they locate the focal point for overall leadership. Federal efforts to combat terrorism are inherently difficult to lead and manage because the policy, strategies, programs, and activities to combat terrorism cut across more than 40 agencies. The bills and related proposals would create a single focal point for programs to combat terrorism, and some would have the focal point perform many of the same functions. For example, some of the proposals would have the focal point lead efforts to develop a national strategy. The proposals (with one exception) would have the focal point appointed with the advice and consent of the Senate. The various bills and proposals differ in where they would locate the focal point for overall leadership and management. The two proposed locations for the focal point are in the Executive Office of the President or in a Lead Executive Agency. Table 1 summarizes the various bills and proposals regarding the focal point for overall leadership, the scope of its activities, and its location. Based upon our analysis of legislative proposals, various commission reports, and our ongoing discussions with agency officials, each of the two locations for the focal point--the Executive Office of the President or a Lead Executive Agency--has its potential advantages and disadvantages. An important advantage of placing the position with the Executive Office of the President is that the focal point would be positioned to rise above the particular interests of any one federal agency. Another advantage is that the focal point would be located close to the President to resolve cross agency disagreements. A disadvantage of such a focal point would be the potential to interfere with operations conducted by the respective executive agencies. Another potential disadvantage is that the focal point might hinder direct communications between the President and the cabinet officers in charge of the respective executive agencies. Alternately, a focal point with a Lead Executive Agency could have the advantage of providing a clear and streamlined chain of command within an agency in matters of policy and operations. Under this arrangement, we believe that the Lead Executive Agency would have to be one with a dominant role in both policy and operations related to combating terrorism. Specific proposals have suggested that this agency could be either the Department of Justice (per Senate Report 106-404) or an enhanced Federal Emergency Management Agency (per H.R. 1158 and its proposed National Homeland Security Agency). Another potential advantage is that the cabinet officer of the Lead Executive Agency might have better access to the President than a mid-level focal point with the Executive Office of the President. A disadvantage of the Lead Executive Agency approach is that the focal point--which would report to the cabinet head of the Lead Executive Agency--would lack autonomy. Further, a Lead Executive Agency would have other major missions and duties that might distract the focal point from combating terrorism. Also, other agencies may view the focal point's decisions and actions as parochial rather than in the collective best interest. Based upon the problems we have identified during 5 years of GAO evaluations, we believe the following actions need to be taken: (1) create a single high-level federal focal point for policy and coordination, (2) develop a comprehensive threat and risk assessment, (3) develop a national strategy with a defined end state to measure progress against, (4) analyze and prioritize governmentwide programs and budgets to identify gaps and reduce duplication of effort, and (5) coordinate implementation among the different federal agencies. The three bills would collectively address many of these actions. We will now discuss each of these needed actions, executive branch attempts to complete them, and how the three bills would address them. In our testimony last May, we reported that overall federal efforts to combat terrorism were fragmented. To provide a focal point, the President appointed a National Coordinator for Security, Infrastructure Protection, and Counterterrorism at the National Security Council. This position, however, has significant duties indirectly related to terrorism, including infrastructure protection and continuity of government operations. Notwithstanding the creation of this National Coordinator, it was the Attorney General who led interagency efforts to develop a national strategy. Thus, at least two top officials are responsible for combating terrorism, and both of them have other significant duties. H.R. 525 would set up a single, high-level focal point in the President's Council on Domestic Terrorism Preparedness. In addition, H.R. 525 would require that the new Council's executive chairman--who would represent the President as chairman--be appointed with the advice and consent of the Senate. This last requirement would provide Congress with greater influence and raise the visibility of the office. H.R. 1158 would designate the Director of the proposed National Homeland Security Agency as the focal point for policy and coordination. As with H.R. 525, the appointment of the Director by the President and with the advice and consent of the Senate, provides Congress with greater influence and raises the visibility of the office. H.R. 1292 would require the President to designate a single official within the U.S. government to be responsible and accountable to the President concerning homeland security. We testified in July 2000 that one step in developing sound programs to combat terrorism is to conduct a threat and risk assessment that can be used to develop a strategy and guide resource investments. Based upon our recommendation, the executive branch has made progress in implementing our recommendations that threat and risk assessments be done to improve federal efforts to combat terrorism. However, we remain concerned that such assessments are not being coordinated across the federal government. H.R. 525 would require a threat, risk, and capability assessment that examines critical infrastructure vulnerabilities, evaluates federal and applicable state laws used to combat terrorist attacks, and evaluates available technology and practices for protecting critical infrastructure against terrorist attacks. This assessment would form the basis for the domestic terrorism preparedness plan and annual implementation strategy. Although H.R. 1158 would not require the National Homeland Security Agency Director to conduct a threat and risk assessment, it directs this individual to establish and maintain strong mechanisms for sharing information and intelligence with U.S. and international intelligence entities. Information and intelligence sharing may help identify potential threats and risks against which the United States could direct resources and efforts. H.R. 1292 would require the President to conduct a comprehensive homeland security threat and risk assessment. This assessment would be the basis for a comprehensive national strategy. In our testimony last July, we noted that the United States has no comprehensive national strategy that could be used to measure progress.The Attorney General's Five-Year Plan represents a substantial interagency effort to develop a federal strategy, but it lacks defined outcomes. The Department of Justice believes that their current plan has measurable outcomes about specific agency actions. However, in our view, the plan needs to go beyond this to define an end state. As we have previously testified, the national strategy should incorporate the chief tenets of the Government Performance and Results Act of 1993 (P.L. 130-62). The Results Act holds federal agencies accountable for achieving program results and requires federal agencies to clarify their missions, set program goals, and measure performance toward achieving these goals. H.R. 525 would require the new council to publish a domestic terrorism preparedness plan with objectives and priorities; an implementation plan; a description of roles of federal, state, and local activities; and a defined end state with measurable standards for preparedness. H.R. 1158 would require the annual development of a federal response plan for homeland security and emergency preparedness and would require the Director to provide overall planning and guidance to federal agencies concerning homeland security. The bill would require the Director to work with state and local governments, but it would not explicitly require that the plan include the roles of state and local governments. H.R. 1292 would require the President to develop a strategy and multiyear phased implementation plan and budget for antiterrorism and consequence management. The bill requires the inclusion of specific, measurable objectives based on findings identified in a threat and risk assessment. Furthermore, it requires the strategy to (1) define federal agencies' responsibilities; (2) permit the selective use of military personnel and assets without infringing on civil liberties; (3) provide for the use of intelligence assets and capabilities; and (4) augment existing medical response capabilities and equipment stockpiles at the federal, state, and local levels. In our December 1997 report, we reported that there was no mechanism to centrally manage funding requirements and requests to ensure an efficient, focused governmentwide approach to combat terrorism. Our work led to legislation that required the Office of Management and Budget to provide annual reports on governmentwide spending to combat terrorism. These reports represent a significant step toward improved management by providing strategic oversight of the magnitude and direction of spending for these programs. Yet, we have not seen evidence that these reports have established priorities or identified duplication of effort. H.R. 525 would require the new council to develop and make budget recommendations for federal agencies and the Office of Management and Budget. The Office of Management and Budget would have to provide an explanation in cases where the new council's recommendations were not followed. The new council would also identify and eliminate duplication, fragmentation, and overlap in federal preparedness programs. H.R. 1158 would not explicitly require an analysis and prioritization of governmentwide budgets to identify gaps and reduce duplication of effort. Rather, it would require the Director to establish procedures to ensure that the planning, programming, budgeting, and financial activities of the National Homeland Security Agency use funds that are available for obligation for a limited number of years. H.R. 1292 would provide for the development of a comprehensive budget based on the homeland security strategy and would allow for the restructuring of appropriation accounts by the Director of the Office of Management and Budget as necessary to fulfill the organizational and operational changes needed to implement the national strategy. In our April 2000 testimony, we observed that federal programs addressing terrorism appear in many cases to be overlapping and uncoordinated. To improve coordination, the executive branch created organizations like the National Domestic Preparedness Office and various interagency working groups. In addition, the annual updates to the Attorney General's Five-Year Plan now tracks individual agencies' accomplishments. Nevertheless, we have noted that the multitude of similar federal programs have led to confusion among the state and local first responders they are meant to serve. H.R. 525 would require the new council to coordinate and oversee the implementation of related programs by federal agencies in accordance with the proposed domestic terrorism preparedness plan. The new council would also make recommendations to the heads of federal agencies regarding their programs. Furthermore, the new council would provide notification to any department that it believes has not complied with its responsibilities under the plan. H.R. 1158 would require extensive coordination among federal agencies-- especially those under the National Homeland Defense Agency-- concerning their activities relating to homeland security. For instance, the bill would require the agency's Directorate of Critical Infrastructure Protection to coordinate efforts to address vulnerabilities in the U.S. critical infrastructure by working with other federal agencies to establish security policies, standards, and mechanisms and to share intelligence. Additionally, H.R. 1158 would instruct the Directorate for Emergency Preparedness and Response to coordinate activities among private sector entities and federal agencies and the bill would delegate the coordination of all U.S. border security activities to the Directorate of Prevention. H.R. 1292 would require a national strategy to provide for the coordination of federal programs. For example the strategy would identify federal agencies and their respective roles and responsibilities for homeland security. In our ongoing work, we have found that there is no consensus--in Congress, the Executive Branch, the various panels and commissions, and among organizations representing first responders--on the matters discussed in our testimony. Specifically, there is no consensus on the required scope of duties or the location for a single focal point. In addition, the three bills provide the focal point with different, but often similar, duties to improve the management of federal programs. To the extent that these three bills--or some hybrid of them all--address the problem areas we have identified above, we believe that federal programs to combat terrorism will be improved. Developing a consensus on these matters and providing the focal point with legitimacy and authority through legislation, is an important task that lies ahead. We believe that this hearing and the debate that it engenders, will help to reach that consensus. This concludes our testimony. We would be happy to answer any questions you may have. For future questions about this testimony, please contact Raymond J. Decker, Director, Defense Capabilities and Management at (202) 512-6020. Individuals making key contributions to this statement include Stephen L. Caldwell and Krislin Nalwalk. Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, Mar. 27, 2001) Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, Mar. 20, 2001). Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01-14, Nov. 30, 2000). Combating Terrorism: Linking Threats to Strategies and Resources (GAO/T-NSIAD-00-218, July 26, 2000). Combating Terrorism: Comments on Bill H.R. 4210 to Manage Selected Counterterrorist Programs (GAO/T-NSIAD-00-172, May 4, 2000). Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism (GAO/NSIAD-00-85, Apr. 7, 2000). Combating Terrorism: Issues in Managing Counterterrorist Programs (GAO/T-NSIAD-00-145, Apr. 6, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000). Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO/AIMD-00-1, Oct. 1, 1999). Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, Sept. 7, 1999). Combating Terrorism: Observations on Growth in Federal Programs (GAO/T-NSIAD-99-181, June 9, 1999). Combating Terrorism: Issues to Be Resolved to Improve Counterterrorist Operations (GAO/NSIAD-99-135, May 13, 1999). Combating Terrorism: Observations on Federal Spending to Combat Terrorism (GAO/T-NSIAD/GGD-99-107, Mar. 11, 1999). Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO/NSIAD-99-3, Nov. 12, 1998).

This testimony discusses three bills that would change the overall leadership and management of programs to combat terrorism. The three bills--H.R. 525, H.R. 1158, and H.R. 1292--vary in scope. H.R. 525 focuses on federal programs to prepare state and local governments for domestic terrorist attacks. Both H.R. 1158 and H.R. 1292 focus on the larger issue of homeland security, which includes terrorism and additional threats such as military attacks. The bills are similar in that they all advocate a single focal point for programs to combat terrorism. However, some bills place the focal point in the Executive Office of the President and others place it with a lead executive agency. In addition, the three bills provide the focal point with different, but often similar, duties to improve the management of federal programs. To the extent that these three bills--or some hybrid of them--address these problem areas, GAO believes that federal programs to combat terrorism will be improved. It will be important to develop a consensus on these matters and provide the focal point with legitimacy and authority through legislation are important tasks that lie ahead.

Prior to the Bayh-Dole Act, the government generally retained ownership of federally funded inventions regardless of whether the research was performed in federal laboratories, at universities, or by individual companies, and only 5 percent of the patents on these inventions were ever used in the private sector, according to a Congressional Research Service report. The Bayh-Dole Act allows nonprofits, small businesses, and universities to retain ownership of federally funded inventions to promote the utilization of inventions created through federal research and development programs, and to provide an incentive for contractors to commercialize federally funded inventions for sale in the marketplace. The Bayh-Dole Act applies to universities, nonprofit organizations, and small businesses that receive federal research funding. Federal agencies that enter into financial assistance awards with these types of entities must adhere to the requirements of the Bayh-Dole Act and its implementing regulation developed by the Department of Commerce.particular, the Bayh-Dole Act requires agencies, including DOE, to incorporate specific provisions into research and development financial assistance awards that contractors must comply with to help protect the government's interests in any resulting inventions. Federal Nonnuclear Energy Research and Development Act of 1974 SS 9, 42 U.S.C. SS 5908. 3. apply for a patent on an invention, typically within 1 year of electing to retain ownership. DOE generally requires similar actions from large businesses in order to retain ownership of agency funded inventions, but the time frames can vary depending on the specific provisions of an individual financial assistance agreement. Compliance with these provisions informs agencies, such as DOE, of an invention's existence, and helps ensure that a contractor takes timely steps to patent the intellectual property embodied in the invention, should the contractor wish to retain ownership of it. If a contractor does not comply with these requirements, agencies have the authority to demand ownership of a federally funded invention to provide the government the opportunity to take steps to protect its interests in it. Once contractors own a patented invention, they are generally free to use or transfer their patent rights at their discretion, in compliance with applicable laws, such as those regarding export control. The Bayh-Dole Act also identifies certain interests the government has in federally funded inventions, including their utilization and domestic manufacture. DOE's Patent Waiver Regulation does not explicitly identify these interests with regard to inventions developed by large business contractors, but the waivers themselves generally will outline specific requirements related to invention utilization and domestic manufacture as shown below. Utilization. DOE can use the authority, known as march-in authority, to require a contractor or licensee to grant a license to any responsible entity or entities when an agency determines that certain conditions identified in the act have been met. Additionally, the government has a nonexclusive royalty-free license to practice, and have practiced on its behalf, any invention created with federal funding. Domestic manufacture. Under the Bayh-Dole Act and DOE regulations and policy, DOE has established certain requirements in financial assistance awards for contractors to manufacture federally funded inventions in the United States. These requirements vary depending on the type of contractor involved in a financial assistance award. Domestic manufacture requirements for federally funded inventions include: U.S. Preference. U.S. Preference provisions generally require small business and nonprofit contractors' exclusive licensees to substantially manufacture federally funded inventions domestically in order to use or sell the inventions in the United States. These requirements apply only to a contractor's exclusive licensee; the contractor that developed the invention faces no limitations on manufacturing location. Federal agencies may use their march-in authority in instances where contractors' licensees do not comply with U.S. Preference requirements. U.S. Competitiveness. U.S. Competitiveness provisions generally require that the manufacture of inventions developed by large businesses must occur substantially in the United States unless otherwise approved by DOE. DOE may require forfeiture of invention ownership or refund of its investment when contractors do not comply with these requirements if such penalties are included in the patent rights clause of the financial assistance award. U.S. Manufacturing Plan. U.S. Manufacturing Plan provisions generally require that contractors submit plans as part of a funding application specifying how they intend to domestically manufacture any potential inventions developed in the course of the financial assistance award. Where this provision is part of a financial assistance award, DOE may take ownership of the invention, require refund of its investment,reporting requirements in instances of noncompliance. In addition, DOE may include provisions within a financial assistance award that require reports from contractors to provide information on how Specifically, DOE programs can federally funded inventions are utilized. request that contractors provide periodic reports with information regarding patent status (e.g., filing date, application number and title, and patent number and issue date), and invention utilization (e.g., the status of development, date of first commercial sale or use, and gross royalties received). DOE may request these reports at its discretion but not more than annually. During fiscal years 2009 through 2013, DOE initiated nearly 6,000 financial assistance awards. DOE relies primarily on contractor self- reporting and financial assistance award closeout procedures to ensure that contractors disclose agency funded inventions. During fiscal years 2009 through 2013, DOE initiated a total of nearly 6,000 financial assistance awards worth at least $11 billion with contractors, according to data provided by DOE. During this period, according to DOE patent counsel, contractors reported approximately 5,800 inventions, elected to take ownership of about 2,800 inventions, and were issued more than 700 patents. 37 C.F.R. SS 401.8. DOE's large business patent waivers may contain similar reporting requirements. amount and number of financial assistance awards DOE established with different types of contractors for fiscal years 2009 through 2013. In fiscal year 2013, the most recent year data were available, DOE provided a majority of funds to universities and nonprofits (nearly $1 billion across 580 agreements), followed by large businesses (approximately $304 million across 79 agreements) and small businesses (approximately $290 million across 370 agreements). Contractors disclose agency funded inventions to DOE through a variety of reporting mechanisms including e-mail, regular mail, and Interagency Edison (iEdison)--which is an electronic reporting system that allows federal grantees and contractors to report federally funded inventions, patents, and utilization data.contractor discloses an invention developed with DOE funds, patent staff create a file for that invention. According to DOE procedures, patent counsel then monitor compliance with time frames related to the contractor's determination of whether to retain ownership and pursue According to DOE procedures, when a patent protection. From this point forward, according to DOE procedures, whenever a contractor submits additional information about an invention, DOE patent counsel review the invention's file to ensure compliance with all invention disclosure provisions. If DOE patent counsel determine that a contractor has not met the specified time frames for disclosing and electing ownership of an invention, they send the contractor a letter-- known as a demand letter--demanding that the contractor give DOE ownership of the invention. DOE patent counsel told us that they recently upgraded one of the agency's data management systems--IP Master--to a new system called IP Manager, which became operational in November 2014. noncompliance with invention disclosure requirements during closeout.They added that nondisclosure, particularly from contractors with more limited resources, is generally inadvertent. They told us that nondisclosure is more often due to limited contractor familiarity with the legal requirements or experience in working with the federal government than an intentional attempt to avoid disclosing an agency funded invention. DOE patent counsel said if a contractor failed to disclose an agency funded invention but did so inadvertently, they would generally work with the contractor to meet disclosure requirements rather than demand ownership for noncompliance with disclosure requirements. They said that approach better meets their view of the intent of the Bayh-Dole Act to commercialize federally funded inventions, while ensuring the government protects its interests in them. The closeout of a financial assistance award is also the point when DOE monitors whether contractors have patented agency funded inventions. For example, according to DOE procedures, a contractor must send DOE patent counsel a patent certification form--a document that discloses all inventions that resulted from the financial assistance award. In turn, according to DOE procedures, patent counsel use this information to ensure contractor compliance with the terms of the financial assistance award before issuing a patent clearance letter--a document in which DOE acknowledges the contractor's ownership of the patented invention. In addition to the required certification form, upon request from DOE, contractors must provide information about patents for any invention they elected to own. When a contractor submits such information, DOE patent counsel verify that the reported patents include a statement of government interest--standard language in a patent that acknowledges the government's role in funding its development--and that the invention's file is complete and up-to-date in the relevant data system. DOE faces challenges in ensuring that contractors disclose inventions they develop with agency funding and is taking actions to address them. Specifically, one challenge DOE faces is not having a documented process for ensuring that contractors disclose agency funded inventions after financial assistance awards end, and the agency has initiated two pilot projects to identify the extent of potentially undisclosed inventions. Additionally, DOE faces a challenge in managing invention disclosure information because its data systems for doing so have limited capabilities. While the agency has begun to upgrade those systems, DOE has not developed an implementation plan with specific milestones for certain key steps to guide these efforts. One challenge that DOE faces is not having a documented process for ensuring that contractors disclose agency funded inventions after financial assistance awards end. DOE's closeout procedures are designed to, among other things, ensure that contractors disclose all inventions developed during a DOE financial assistance award and that DOE's interests in them are documented. However, DOE has no documented process to monitor inventions after award closeout. Due to the time that may elapse between when a contractor files a patent application and when a patent is granted by the U.S. Patent and Trademark Office, DOE funded inventions may exist that are not identifiable through public searches at the time a financial assistance award ends. Under such a scenario, if the contractor did not voluntarily disclose an invention, the invention would not be identifiable during DOE's closeout procedures. Instead, DOE patent counsel told us they rely on contractors to voluntarily disclose such information following financial assistance award closeout. As a result, the potential exists for DOE to be unaware of inventions that it funded and in which it would retain interests. To address this challenge, DOE recently launched two pilot projects aimed at better understanding the extent of undisclosed inventions. One pilot project is an audit of a sample of previously completed financial assistance awards to determine the extent to which contractors did not disclose DOE funded inventions. The second pilot project involves cross- referencing U.S. Patent and Trademark Office data against DOE information on inventions it funded. In the first pilot project, which began in December 2013, DOE developed draft audit procedures to sample previously completed financial assistance awards and determine the extent to which contractors did not disclose agency funded inventions. Under the draft audit procedures, DOE patent counsel (1) audit contractor activities for any indication of patents, patent applications, or inventions that might have been developed with DOE funding but were not disclosed to DOE; (2) submit demand letters to contractors to obtain ownership of any potentially undisclosed inventions; and (3) work with contractors, depending on the circumstances of nondisclosure, to allow them to retain ownership of the inventions. The draft audit procedures set a target of annually sampling 100 randomly selected financial assistance awards completed during the previous 5 years, which represents approximately 5 percent of the agreements closed out during that period, according to DOE documentation. As of December 2014, DOE patent counsel told us that they had reviewed 99 financial assistance awards completed during the previous 5 years and identified three undisclosed inventions for which they sent demand letters to the relevant contractors. DOE patent counsel told us that they granted one of the contractors an extension of time to retain ownership of the undisclosed invention because DOE determined that the nondisclosure was an oversight. DOE patent counsel said that they resolved another as a data entry error. As of December 2014, DOE had not received a response to the third demand letter. DOE modified its draft audit procedures based on initial testing, and patent counsel told us that they might conduct another phase of pilot testing before assessing the overall results of the audit procedures and making a determination about whether to implement the pilot project on a permanent basis. They told us that this decision will depend on the extent to which the pilot project identifies undisclosed inventions compared with the resources-- principally staff hours--necessary to conduct it. For example, if the audit procedures identify few undisclosed inventions, DOE could be less likely to implement it permanently. DOE's second pilot project involves cross-referencing U.S. Patent and Trademark Office data against DOE information on inventions it funded. For this pilot project, DOE patent counsel analyzed data from a U.S. Patent and Trademark Office database to identify inventions or patents with a government interest clause indicating the patent stemmed from DOE funding. Then, DOE patent counsel reviewed the data to determine if information on issued patents or published patent applications also existed in DOE's PATMIS data system, with patent files not identified in DOE's data system representing possible unreported inventions or patents. For the pilot, DOE patent counsel told us that they reviewed 549 patented inventions that they identified as absent from DOE's data system. Through this effort, DOE patent counsel told us they identified 100 patented inventions that may have been undisclosed and issued 40 demand letters covering 64 undisclosed inventions to contractors. As of December 2014, they said DOE resolved 16 demand letters--covering 22 inventions--and is awaiting response from the other 24--covering the remaining 42 inventions. According to DOE patent counsel, 11 of the contractors had not properly disclosed the patented inventions, generally due to misunderstandings regarding what their responsibilities were to the government. They told us that, in each instance, DOE determined that the contractor had acted in good faith and allowed an extension of time for the contractors to file the required disclosure paperwork to retain ownership. According to DOE patent counsel, the 5 other contractors to which DOE issued demand letters demonstrated that they had not failed to comply with invention disclosure requirements. DOE patent counsel explained that the related inventions were either disclosed to DOE but not logged into its data systems, or were logged incorrectly into its data systems, among other reasons. DOE patent counsel said that this effort helped DOE identify several inventions that were not properly disclosed. DOE patent counsel also indicated that the pilot revealed that the contractors' failure to report inventions to DOE appeared to have been in good faith, but that the contractors were unaware of all invention reporting obligations. DOE patent counsel told us that, in turn, the agency is reviewing the compliance assistance resources available to contractors and periodically reminds them of their obligations to DOE. They also said that, after these compliance assistance actions have been implemented, DOE anticipates reevaluating the usefulness of the pilot audit project. DOE faces a challenge in managing information on disclosed inventions, which underpins its ability to protect its interests in agency funded inventions. This is because, according to DOE patent counsel, the department's two older invention data management systems--IP Master and PATMIS--are outdated, unable to communicate with each other, and do not have functionality for electronically updating invention disclosure or patent status, hampering their ability to manage information and data related to inventions developed with DOE funding. For example, DOE patent counsel told us that IP Master will soon be obsolete because, among other reasons, the vendor is discontinuing support for it. Additionally, DOE patent counsel told us that the existence of two separate systems can lead to duplicative entries and make it difficult to track invention disclosures on a department-wide basis. Further, DOE patent counsel explained that the systems do not have the functionality for electronic reporting. That means contractors submit information--such as invention disclosure reports--in mail, faxes, and e-mails, and DOE patent counsel must then manually enter that information in DOE's systems. The DOE patent counsel described this as a time-consuming, labor-intensive process that can increase the likelihood of data errors. DOE patent counsel stated that they recognized the need to transition to a unified data tracking and monitoring system with functionality for electronic reporting and have begun efforts to do so. Specifically, DOE patent counsel told us that they recently upgraded one of the agency's data management systems--IP Master--to a new system called IP Manager, which became operational in November 2014. DOE patent counsel said they intend to migrate the agency's other system-- PATMIS--to the new IP Manager system in the near future so there will be only one data tracking and monitoring system. However, prior to any such migration of PATMIS, DOE officials told us that they want to ensure that there are no technical problems with the new IP Manager system and evaluate its performance in case modifications are necessary. DOE patent counsel told us that integrating DOE's existing systems into the IP Manager system will provide a consolidated, DOE-wide invention management database that will significantly reduce administrative costs associated with invention management and improve data quality by reducing duplicative entry of inventions. Also, according to documentation DOE provided about the IP Manager system, some of its features may help address DOE's current data management challenges including automated generation of legal forms to reduce the need to draft unique documentation for every invention. Additionally, DOE plans to develop a "one click invention reporting" capability that would be designed to, among other things, give contractors the ability to electronically report and update invention records directly from their own databases and provide DOE with enhanced reporting functions to monitor contractor actions, including invention disclosure. DOE patent counsel explained that this would enhance DOE's ability to share invention information across the agency to better enable it to manage information to track contractor compliance with financial assistance award provisions. DOE patent counsel told us the agency has created a workgroup composed of representatives from federal agencies and DOE laboratories to determine the requirements for this new "one click invention reporting" capability and tentatively plans to begin software development in the spring of 2015, with an initial pilot capability scheduled for fall of 2015 and full deployment in early 2016, subject to available funding. While DOE transitioned its IP Master system to IP Manager, and has developed an implementation plan with milestones for the additional capability it wants to add to the IP Manager system, DOE patent counsel said the agency does not have an implementation plan with milestones for when PATMIS would be migrated to IP Manager. They said that PATMIS contains the majority of the agency's invention records and estimated that, given the amount of data contained in the system, it could cost as much as $100,000 to move the data from PATMIS into IP Manager. According to DOE patent counsel, as of November 2014, DOE had not prioritized funding to migrate the data and consolidate the databases. DOE also has not established milestones for its efforts to (1) identify requirements for the "one click invention reporting" capability it plans to add to IP Manager or (2) evaluate any system modifications necessary as a result of migrating IP Master to IP Manager and associated system requirements. Under federal standards for internal control, information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. In addition, best practices for information technology system acquisition emphasize developing requirements, among other practices, to guide software engineering investments. By planning to transition to a unified data tracking and monitoring system with functionality for electronic reporting, DOE is taking a step in the right direction. Also, the implementation plan with milestones DOE developed for the additional capability it wants to add to the IP Manager system will help it track and communicate progress toward completing this effort. By developing a comprehensive implementation plan with milestones that cover all aspects of the steps DOE is taking to transition to a unified data tracking and monitoring system with functionality for electronic reporting, DOE would have greater assurance that it will be able to track progress toward completing all of these steps in a timely manner. DOE faces challenges in monitoring and influencing contractor utilization and domestic manufacture of agency funded inventions to protect its interests in them, and the agency has proposed regulatory changes to address these challenges. Specifically, DOE does not have a standard for invention utilization and manufacture reporting, has a limited ability to compel domestic manufacture of agency funded inventions, and has a limited ability to influence changes in control of contractors receiving DOE funds. In turn, DOE's proposed regulatory changes address, with respect to for-profit contractors, the frequency and duration of invention utilization and manufacturing reporting, use of U.S. Manufacturing Plans, and DOE influence over changes in contractor control.indicated that the agency anticipates issuing a final rule to implement these changes in fiscal year 2015. DOE faces a challenge in understanding how inventions it funds are utilized and manufactured because it does not have a standard for collecting such information from contractors. Currently, DOE can, at its discretion, request such information, but DOE regulations do not specify the duration of this reporting. DOE patent counsel told us that there are no established procedures regarding the frequency and duration of requests for information on invention utilization and manufacturing of agency funded inventions, which could hamper DOE's efforts to protect its interests. To address this challenge, DOE's proposed regulatory change would require annual contractor reporting on the utilization and manufacture of any products that use a DOE funded invention. This reporting would include information on the status of technology development, date of first commercial sale or use, gross royalties received, and manufacturing locations of those products, and it would be required for at least 10 years following invention disclosure. DOE patent counsel said that requiring this reporting for all DOE financial assistance awards to for-profit contractors would enhance the agency's ability to protect its interests by providing it additional information with which to monitor compliance with financial assistance award provisions. DOE faces a challenge in protecting the agency's interest in the domestic manufacture of agency funded inventions. DOE patent counsel stated that the agency's ability to compel domestic manufacture of agency funded inventions is limited because the agency can only require substantial domestic manufacture from certain contractors under certain circumstances. In particular, they said that the process for determining an "exceptional circumstance"--which DOE can use to broaden the domestic manufacture requirements beyond those included in award provisions-- can be difficult. Specifically, they noted that it is not a routine process and often requires substantial internal agency analysis, as well as coordination with other agencies, including the Department of Commerce. Additionally, any broadened requirements apply only to the specific programs or activities covered by the determination. For example, in 2011, DOE determined that an exceptional circumstance existed regarding DOE's SunShot Initiative. Specifically, DOE proposed requiring a certain level of domestic manufacture for all inventions developed under the SunShot Initiative by all contractors, as well as their licensees.following a review to identify international trade and other issues, However, this proposed requirement was not implemented according to DOE patent counsel. DOE patent counsel also said that the limitations of U.S. Preference provisions--which apply to small businesses, academia, and nonprofits--constitute a challenge to protecting the agency's interest in domestic manufacture. Specifically, such provisions require the exclusive licensees of contractors, but not the contractors themselves, to substantially manufacture agency funded inventions domestically. To address this limitation, DOE's proposed regulatory change would allow programs to require that potential for-profit contractors submit a U.S. Manufacturing Plan as part of any funding proposal. In turn, DOE would be able to use these plans as criteria in assessing funding proposals and making financial assistance award decisions. Under the proposed regulatory change, and consistent with applicable law, DOE could make such plans binding for any licensee or entity that subsequently acquired ownership of an invention or technology developed under a DOE financial assistance award. DOE patent counsel explained that requiring and enforcing U.S. Manufacturing Plans increases the agency's ability to influence the domestic manufacture of inventions it funded. DOE faces a challenge in influencing the change in control--such as ownership--of contractors engaged in DOE financial assistance awards. A change in control may affect a contractor's ability to carry out the project that DOE is funding and, according to DOE patent counsel, the agency currently does not require contractors to notify it of such changes. DOE's proposed regulation would require contractors to notify the agency of changes in their control in certain circumstances.regulation would establish procedures for the change of control, including ownership, of a contractor that received a DOE funding award of more The proposed than $10 million. The affected contractor would be required to notify the agency within 30 days of a change of control, or within 30 days if the contractor had a reason to know that such a change is likely. Failure to notify DOE would be grounds for suspension or termination of the financial assistance award. Further, without DOE authorization of the change of control, the award funding could cease to continue.such penalties would only apply to the current award. DOE is taking actions to update its data systems and move to a consolidated, DOE-wide invention management database to improve its ability to monitor and manage information regarding contractor disclosure of agency funded inventions. Currently, its two data systems are outdated, unable to communicate with each other, and do not have functionality for electronically updating invention disclosure or patent status, hampering DOE's ability to manage information and data on agency funded inventions. DOE recently upgraded one of its data systems--IP Master--to a new system called IP Manager, which became operational in November 2014 and has developed an implementation plan with milestones for the additional capability it wants to add to the IP Manager system. However, DOE has not developed an implementation plan with appropriate milestones to help assess its progress toward completing key steps, such as moving the data in its primary PATMIS database--which contains the majority of the agency's invention records--into the new IP Manager system, or for defining the requirements for planned or potential upgrades to that system. Without such a plan, DOE may not have assurance that it is making timely progress toward obtaining the information management capabilities it needs to protect its interests in agency funded inventions by monitoring information regarding contractor disclosure of these inventions. To help provide greater assurance that DOE is making timely progress toward obtaining the information management capabilities it needs to protect its interests by monitoring contractor disclosure of agency funded inventions, we recommend that the Secretary of Energy develop an implementation plan, including appropriate milestones, to guide DOE's efforts to improve its data management capabilities. We provided a draft of this report to the Department of Energy and Department of Commerce for review and comment. In its written comments, the Department of Energy agreed with our findings and recommendation. The Department indicated that it would develop an implementation plan to guide data management improvements. The Department of Commerce neither agreed nor disagreed with our findings but noted that it provided background information on intellectual property issues related to the review. The Department of Energy's and Department of Commerce's written comments are reproduced in appendixes I and II, respectively. Both agencies also provided technical comments that 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 appropriate congressional committees, the Secretary of Energy, the Secretary of Commerce, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. In addition to the individual named above, Christopher Murray, Assistant Director; Richard P. Johnson; Gerald B. Leverich; Matthew D. Tabbert; and Michelle R. Wong made significant contributions to this report. Cheryl Arvidson and Kiki Theodoropoulos provided technical assistance.

DOE provides funding to contractors for research and development of new technologies. To incentivize participation in federal research projects and promote the use of federally funded inventions, the 1980 Bayh-Dole Act and other laws and regulations allow contractors receiving federal research and development funds to retain ownership of inventions they create so long as they adhere to certain requirements, including disclosing inventions developed with agency funding. DOE's ability to protect its interests in these inventions--including their utilization and domestic manufacture--depends on its knowledge of their existence. GAO was asked to review DOE efforts to protect its interests in agency funded inventions. This report examines: (1) DOE funding for contractor research for fiscal years 2009 through 2013 and how DOE ensures that contractors disclose agency funded inventions, (2) the challenges DOE faces in ensuring invention disclosure and actions it is taking to address them, and (3) the challenges DOE faces in protecting its interests in these inventions and the actions it is taking to address them. GAO reviewed laws, regulations, and other documents and interviewed DOE patent counsel responsible for intellectual property issues, representatives of organizations that facilitate the development of federally funded technology, and others. The U.S. Department of Energy (DOE) provided at least a total of $11 billion ($12 billion in fiscal year 2014 dollars) in research and development funding to contractors for fiscal years 2009 through 2013. Contractors reported about 5,800 inventions and 700 patents developed with DOE funding during this time period. To ensure disclosure of these agency funded inventions, DOE relies primarily on contractor self-reporting and financial assistance award closeout procedures. Contractors are generally required to adhere to specific time frames for invention disclosure. Following contractor invention disclosure, DOE patent counsel monitor the invention through the end of a financial assistance award to ensure contractor compliance with time frame requirements for electing to retain ownership and applying for patent protection of the invention. DOE faces challenges in (1) ensuring that contractors disclose agency funded inventions and (2) managing information related to these disclosures and is taking steps to address them. Limited ability to ensure invention disclosure after funding ends: DOE does not have a documented process to ensure contractors disclose inventions after financial assistance awards end. To address this, DOE recently began two pilot efforts to determine the extent of undisclosed inventions. One is an audit of a sample of previously completed financial assistance awards and the other involves cross-referencing U.S. Patent and Trademark Office data against DOE information on inventions it funded. DOE is still implementing these efforts but reported identifying more than 100 potential undisclosed inventions. DOE will assess the results of the pilots to determine whether to continue them, according to DOE patent counsel. Data management limitations: DOE faces a challenge in managing information related to agency funded inventions because it relies on two different data systems that are outdated, unable to communicate with each other, and do not allow for electronic reporting. Under federal internal control standards, information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their responsibilities. DOE is in the process of updating its data systems and is planning the development of an electronic reporting function but has not established an implementation plan with milestones against which it can track its progress toward completing these efforts. By developing such a plan, DOE would have greater assurance that it is making timely progress toward these efforts. In addition, DOE faces challenges in its ability to monitor and influence the utilization and domestic manufacture of inventions it funded to protect its interests in them. DOE has proposed regulatory changes to address these challenges that would (1) require contractors to report on the utilization and domestic manufacture of agency funded inventions, (2) allow DOE to assess manufacturing plans as criteria for funding decisions, and (3) require contractors to obtain DOE authorization for changes in their control--including ownership--under certain circumstances. According to patent counsel, DOE expects to finalize these regulatory changes in fiscal year 2015. GAO recommends that DOE develop an implementation plan with milestones for improving its data management systems. DOE agreed with this recommendation.

PBGC plays a critical role in protecting the pension benefits of private sector workers--it is responsible for administering current or future pension benefit payments to just over 1.3 million plan participants. Its budget operations flow through two accounts, one that appears in the federal budget and one that does not. PBGC's budget can be confusing, especially in the short-term, as apparent federal budget gains may be offset by long-term liabilities that are not reported to on-budget accounts. PBGC plays a critical role in protecting the pension benefits of private sector workers. PBGC administers current or future pension benefit payments to a growing number of plan participants, from just under one- half million in fiscal year 2000 to 1.3 million in fiscal year 2007. Figure 1 shows the breakdown of recipients of benefit payments from PBGC's single-insurance program. PBGC benefits are insured up to certain limits--up to $51,750 per year (about $4300 per month) for participants aged 65, with lower benefits for younger participants. While the actual annual benefits paid to participants are not adjusted for inflation, the initial maximum levels are set by law and are indexed for inflation. Covered benefits include pension benefits accrued at normal retirement age, most early retirement benefits, and survivor and disability benefits. PBGC pays these benefits when a plan is terminated and the plan has insufficient assets to pay all benefits accrued under the plan up to the date of plan termination. In 2006, PBGC paid over 622,000 people a median benefit of about $296 per month. The vast majority of the participants in PBGC-trusteed plans receive all the benefits they were promised by their plan. Benefits for some participants may be reduced if 1) their benefits exceed PBGC's maximum guarantee limit, 2) a benefit increase occurred (or became payable due to a plant shutdown) within five years of the plan's termination, or 3) a part of their benefit is a supplemental benefit. In addition to paying guaranteed benefits, PBGC may pay certain non-guaranteed benefits in limited circumstances involving asset recoveries from employers. PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income of assets from pension plans trusteed by PBGC ($4.8 billion in investment income from $68.4 billion in assets for its combined programs in 2007) and recoveries from the companies formerly responsible for the plans. Under current law, other than statutory authority to borrow up to $100 million from the Treasury Department (sometimes referred to as a $100 million line of credit), no substantial source of funds is available to PBGC if it runs out of money. In the event that PBGC were to exhaust all of its holdings, benefit payments would have to be drastically cut unless Congress were to take positive action to provide support. In 2007, PBGC received over $1.5 billion in premium income. An insured plan in the single employer program was required to pay PBGC a yearly premium of $31 per participant for pension benefit insurance coverage in 2007. This per-participant premium rate is adjusted annually to wage inflation. Plans that are underfunded as specified by ERISA must pay PBGC an additional premium of $9 per $1,000 of underfunding. Some terminating plans have to pay an "exit" premium of $1,250 per participant per year for three years if they undergo a distress or PBGC-initiated plan termination on or after January 1, 2006. PBGC also insures multiemployer defined benefit pensions through its multiemployer program. Multiemployer plans are established through collective bargaining agreements involving two or more unrelated employers and are common in industries such as construction, trucking, mining, the hotel trades, and segments of the grocery business. The multiemployer program is far smaller than the PBGC single employer program, insuring about 10 million participants in about 1,530 plans. Like the single employer program, PBGC collects premiums from sponsoring employers and insures multiemployer participant benefits up to a limit, although both the level of premiums and the maximum insured limit are far lower than those for the single employer program. Further, unlike the single-employer program, a multiemployer plan termination does not trigger the PBGC benefit guarantee. A terminated multiemployer plan continues to pay full plan benefits so long as it has sufficient assets to do so. The treatment of PBGC in the federal budget is complicated by the use of two accounts--an on-budget revolving fund and a non-budgetary trust fund. Some activities flow through the federal budget and other activities are outside the federal budget. Not only is PBGC's budget structure complex, it can also result in confusing signals about the financial health of PBGC and create unintended policy incentives. PBGC's receipts and disbursements are required by law to be included in the federal budget. These cash flows are reported in the budget in a single revolving fund account. The cash flows include premiums paid, interest income on federal securities, benefit payments, administrative expenses, and reimbursements from PBGC's non-budgetary trust fund. The non- budgetary trust fund includes assets obtained from terminated plans and is managed by private money-managers. Because the trust fund is a non- budgetary account, the transfer of assets from terminated plans to PBGC is not considered a receipt to the government. Likewise, the liabilities PBGC incurs when it takes over an underfunded plan or other changes in PBGC's assets and liabilities are not reflected in the budget. Figure 2 provides an overview of PBGC's budgetary and non-budgetary cash flows. When an insured pension plan is terminated, assets are transferred to PBGC's non-budgetary trust fund. Neither these assets nor the benefit liabilities appear on the federal balance sheet and PBGC's net loss is not recorded in the federal government's income statement. Assets in the non- budgetary trust fund are commingled and no longer identified with particular plans. PBGC has broad authority to oversee and administer pension assets held in its trust fund and is free to invest and expend the funds as if it were a private fiduciary of the trust fund's holdings. PBGC can invest the assets in whatever way it chooses, as long as it acts in the best financial interest of beneficiaries. In addition to the non-budgetary trust fund, PBGC has an on-budget revolving fund. Premium income and transfers from the trust fund for both benefit payments and administrative expenses are deposited to the revolving funds as offsetting collections (that is, offsets to outlays). Unlike the trust fund, the revolving fund appears on the federal government's balance sheet and provides PBGC with permanent spending authority to carry out its activities. In years that premium income and trust fund reimbursements exceed benefit payment and administrative costs, the revolving fund would show negative outlays, thus improving the overall fiscal balance of the federal government. Any funds that are not used to pay benefits or expenses are considered unobligated balances and are available for expenditure in the next year. By law, unobligated funds in the revolving fund must be held in Treasury securities and earn interest income. PBGC transfers funds from the non-budgetary trust fund to its on-budget revolving fund to pay a portion of retirement annuities and certain administrative costs. Such transfers are referred to as reimbursements and are recorded as offsetting collections in the budget. Generally, the proportion of benefit payments that is reimbursed from the trust fund depends on the aggregate funding level of the plans that PBGC has taken over and is adjusted periodically. In other words, if the average funding ratio of all plans taken over by PBGC is 50 percent, then half of all benefit payments originate from the non-budgetary trust fund. In addition to financing benefits, trust fund assets are also transferred to the revolving fund to pay for PBGC's administrative expenses related to terminations. PBGC's other administrative expenses are paid directly from the revolving fund. Insurance programs with long-term commitments, such as PBGC, may distort the budget's fiscal balance by looking like revenue generators in years that premium collections exceed benefit payments and administrative expenses because the programs' long-term expected costs are not reported. For example, in 2004 when PBGC's losses measured on an accrual basis ballooned and its deficit grew from $11 billion to $23 billion, PBGC's cash flow reported in the budget was positive and reduced the federal government's budget deficit. GAO has reported previously that the cash-based federal budget, which focuses on annual cash flows, does not adequately reflect the cost of pension and other insurance programs. Generally, cost is only recognized in the budget when claims are paid rather than when the commitment is made. Benefit payments of terminated plans assumed by PBGC may not be made for years, even decades, because plan participants generally are not eligible to receive pension benefits until they reach age 65. Once eligible, beneficiaries then receive benefit payments for the rest of their lives. As a result, there can be years in which PBGC's current cash collections exceed current cash payments, regardless of the expected long-term cost to the government. PBGC's single-employer program faces financial challenges both from past claims resulting from bankruptcies and plan termination, which have been concentrated in a few industrial sectors, and structural problems such as weak plan funding rules and a premium structure that does not fully reflect the various risks posed by plans. Because of these financial challenges, GAO designated the single-employer program as "high risk" in 2003, and it remains so today. PBGC has seen recent improvements to its net financial position and recent legislative changes have raised premiums, changed certain plan funding rules and limited PBGC guarantees. However, the legislation has only been recently implemented and it did not completely address a number of the risks that PBGC faces going forward. Further, PBGC has recently implemented a new investment policy which adds significant variability and risk to the assets it manages. PBGC's net deficit for the single-employer program, which is currently $13.1 billion, reached a peak of $23.3 billion (or $23.5 billion for both insurance programs combined) in 2004 largely as a result of a number of realized and probable claims that occurred during that year. See figure 3 for the difference between PBGC assets and liabilities for both insurance programs from 1991 to 2007. GAO has generally focused its work on the single-employer pension insurance program with respect to PBGC's overall financial challenges. This is because the single-employer program represents nearly all of the assets and liabilities held by PBGC. The assets and liabilities that PBGC accumulates from taking over, or "trusteeing," plans has increased rapidly over the last 5 years or so. This is largely due to the termination, typically through bankruptcies, of a number of very large, underfunded plan sponsors. In fact, eight of the top 10 largest firms that have presented claims to PBGC did so from 2002 to 2005. (See table 1). These top 10 claims alone currently account for nearly two-thirds of all of PBGC's claims and are concentrated among firms representing the steel and airline industries. Overall, these industries account for about three- quarters of PBGC's total claims and total single-employer benefit payments in 2006. While the claims presented by the steel and airline industries were due in some part to restructuring and competitive pressures in those industries, it is important to recognize other economic and regulatory factors affected PBGC and DB plan sponsors as a whole. For example, when we reported on airline pension plan underfunding in late 2004 we noted that several problems contributed to the broad underfunding of DB plans. These problems included cyclical factors like the so called "perfect storm" of key economic conditions, in which declines in stock prices lowered the value of pension assets used to pay benefits, while at the same time a decline in interest rates inflated the value of pension liabilities. The combined "bottom line" result was that many plans were underfunded at the time and had insufficient resources to pay all of their future promised benefits. Figure 4 shows the underfunding of PBGC's single-employer plans from 1991 to 2007. Underfunding among large plans (as reuired by ERISA section 4010) In 2003, GAO designated PBGC's single-employer program as high-risk, or as a program that needs urgent Congressional attention and agency action. We specifically noted PBGC's prior-year net deficit as well as the risk of the termination among large, underfunded pension plans, as reasons for the programs high-risk designation. As part of our monitoring of PBGC as a high-risk agency we have highlighted additional challenges faced by the single-employer program. Among these concerns were the serious weaknesses that existed with respect to plan funding rules and that PBGC's premium structure and guarantees needed to be re-examined to better reflect the risk posed by various plans. Additionally the number of single-employer insured DB plans has been rapidly declining, and, among the plans still in operation, many have frozen benefits to some or all participants. Additionally the prevalence of plans that are closed to new participants seems to imply that PBGC is likely to see a decline in insured participants, especially as insured participants seem increasingly likely to be retired (as opposed to active or current) workers. There have been a number of developments with respect to PBGC's situation since we issued our most recent high risk updates in 2005 and 2007. At least until fairly recently, key economic conditions have been generally favorable for DB plan sponsors and plan funding has generally improved. In addition, major pension legislation was enacted which addressed many of the concerns articulated in our previous reports and testimonies on PBGC's financial condition. The Deficit Reduction Act of 2005 (DRA) was signed in to law on February 8, 2006 and included provisions to raise flat-rate premiums and created a new, temporary premium for certain terminated single-employer plans. Later that year the Pension Protection Act of 2006 (PPA) was signed into law and included a number of provisions aimed at improving plan funding and PBGC finances. However, PPA did not fully close plan funding gaps, did not adjust premiums in a way that fully reflected risk from financially distressed sponsors and provided special relief to plan sponsors in troubled industries, particularly those in the airline industries. PBGC's net financial position improved from 2005 to 2006 because some very large plans that were previously classified as probable terminations were reclassified to a reasonably possible designation as a result of the relief granted to troubled industries. Since this provision has only been implemented for a few years, it is still too early to determine how much risk of new claims these reclassified plans still represent to PBGC. As many of the provisions in PPA are still phasing-in, we will continue to monitor the status of the single-employer program with respect to PPA and will be updating our high risk series in early 2009. GAO recently reported on a newly developing financial challenge facing PBGC due to the recent change to its investment policy. While the investment policy adopted in 2008 aims to reduce PBGC's $14 billion deficit by investing in assets with a greater expected return, GAO found that the new allocation will likely carry more risk than acknowledged by PBGC's analysis. According to PBGC the new allocation will be sufficiently diversified to mitigate the expected risks associated with the higher expected return. They also asserted that it should involve less risk than the previous policy. However, GAO's assessment found that, although returns are indeed likely to grow with the new allocation, the risks are likely higher as well. Although it is important that the PBGC consider ways to optimize its portfolio, including higher return and diversification strategies, the agency faces unique challenges, such as PBGC's need for access to cash in the short-term to pay benefits, which could further increase the risks it faces with any investment strategy that allocates significant portions of the portfolio to volatile or illiquid assets. Improvements are needed to PBGC's governance structure, to oversight of the corporation, and to its strategic approach to program management. PBGC's three member board of directors is limited in its ability to provide policy direction and oversight. According to corporate governance guidelines, the board of directors should be large enough to provide the necessary skill sets, but also small enough to promote cohesion, flexibility, and effective participation. PBGC may also be exposed to challenges as the board, its representatives, and the director will likely change with the upcoming presidential transition in January, limiting the board's institutional knowledge of the corporation. In addition, Congressional oversight of PBGC in recent years has ranged from formal congressional hearings to the use of its support agencies, such as GAO, the Congressional Budget Office, and the Congressional Research Service. However, unlike some other government corporations, PBGC does not have certain reporting requirements for providing additional information to Congress. Finally, we found that PBGC lacks a strategic approach to its acquisition and human capital management needs. PBGC's board has limited time and resources to provide policy direction and oversight and had not established comprehensive written procedures and mechanisms to monitor PBGC's operations. PBGC's three-member board, established by ERISA, includes the Secretary of Labor as the Chair of the Board and the Secretaries of Commerce and Treasury. We noted that the board members have designated officials and staff within their respective agencies to conduct much of the work on their behalf and relied mostly on PBGC's management to inform these board members' representatives of pending issues. PBGC's board members have numerous other responsibilities in their roles as cabinet secretaries and have been unable to dedicate consistent and comprehensive attention to PBGC. Since PBGC's inception, the board has met infrequently. In 2003, after several high-profile pension plan terminations, PBGC's board began meeting twice a year (see figure 5). PBGC officials told us that it is a challenge to find a time when all three cabinet secretaries are able to meet, and in several instances the board members' representatives officially met in their place. While the PBGC board is now meeting twice a year, very little time is spent on addressing strategic and operational issues. According to corporate governance guidelines, boards should meet regularly and focus principally on broader issues, such as corporate philosophy and mission, broad policy, strategic management, oversight and monitoring of management, and company performance against business plans. However, our review of the board's recorded minutes found that although some meetings devoted a portion of time to certain strategic and operational issues, such as investment policy, the financial status of PBGC's insurance programs, and outside audit reviews, the board meetings generally only lasted about an hour. The size and composition of PBGC's board does not meet corporate governance guidelines. According to corporate governance guidelines published by The Conference Board, corporate boards should be structured so that the composition and skill set of a board is linked to the corporation's particular challenges and strategic vision, and should include a mix of knowledge and expertise targeted to the needs of the corporation. We did not identify any other government corporations with boards as small as at PBGC. Government corporations' boards averaged about 7 members, with one having as many as 15. In addition, PBGC may also be exposed to challenges as the board, board members' representatives, and the director will likely change with the upcoming presidential transition in January 2009, limiting the board's institutional knowledge of the corporation. The recent revision of PBGC's investment policy provides an example of the need for a more active board. We found that PBGC board's 2004 and 2006 investment policy was not fully implemented. While the board assigned responsibility to PBGC for reducing equity holdings to a range of 15 to 25 percent of total investment, by 2008 the policy goal had not been met. Although the PBGC director and staff kept the board apprised of investment performance and asset allocation, we found no indication that the board had approved the deviation from its established policy or expected PBGC to continue to meet policy objectives. We previously recommended that Congress consider expanding PBGC's board of directors, to appoint additional members who possess knowledge and expertise useful to PBGC's responsibilities and can provide needed attention. Further, dedicating staff that are independent of PBGC's executive management and have relevant pension and financial expertise to solely support the board's policy and oversight activities may be warranted. In response to our finding, PBGC contracted with a consulting firm to identify and review governance models and provide a background report to assist the board in its review of alternative corporate governance structures. The consulting firm's final report describes the advantages and disadvantages of the corporate board structures and governance practices of other government corporations and select private sector companies, and concludes that there are several viable alternatives for PBGC's governance structure and practices. Along with the board's limited time and resources, we found that the board had not established comprehensive written procedures and mechanisms to monitor PBGC's operations. There were no formal protocols concerning the Inspector General's interactions with the board, and PBGC internal management were not required to routinely report all matters to the board. Even though PBGC used informal communication to inform the board, it could not be certain that it received high quality and timely information about all significant matters facing the corporation. As a result we recommended that PBGC's board of directors establish formal guidelines that articulate the authorities of the board, Department of Labor, other board members and their respective representatives. In May 2008 PBGC revised its bylaws. As part of its bylaw revision, the board of directors more explicitly defined the role and responsibilities of the director and the corporation's senior officer positions, and outlined the board's responsibilities, which include approval of policy matters significantly affecting the pension insurance program or its stakeholders; approval of the corporation's investment policy; and review of certain management and Inspector General reports. Since 2002, PBGC officials have testified 20 times before various congressional committees--mostly on broad issues related to the status of the private sector defined benefit pension policy and its effect on PBGC-- and, in 2007, the Senate conducted confirmation hearings of PBGC's director. PBGC must annually submit reports to Congress on its prior fiscal year's financial and operational matters, which include information on PBGC's financial statements, internal controls, and compliance with certain laws and regulations. In addition, through its support agencies-- GAO, the Congressional Budget Office, and the Congressional Research Service--Congress has also provided oversight and reviewed PBGC. Specifically, Congress has asked GAO to conduct assessments of policy, management, and the financial condition of PBGC. For example, we conducted more than 10 reviews of PBGC over the past 5 years, including assessments related to PBGC's 2005 corporate reorganization and weaknesses in its governance structure, human capital management, and contracting practices. Our work also raised concerns about PBGC's financial condition and the state of the defined benefit industry. Some government corporations have additional reporting requirements for notifying Congress of significant actions. For example, the Millennium Challenge Corporation is required to formally notify the appropriate congressional committees 15 days prior to the allocation or transfer of funds related to the corporation's activities. The Commodity Credit Corporation is subject to a similar requirement. These examples demonstrate how Congress has required additional reporting requirements for certain activities conducted by government corporations. PBGC generally has no requirements to formally notify Congress prior to taking any significant financial or operational actions. As reported in our recent work on PBGC contracting and human capital management, contracting plays a central role in helping PBGC achieve its mission and address unpredictable workloads. Three-quarters of PBGC's budget was spent on contracts and nearly two-thirds of its personnel are contractors, as shown in figure 6. Since the mid-1980s, PBGC has had contracts covering a wide range of services, including the administration of terminated plans, payment of benefits, customer communication, legal assistance, document management, and information technology. From fiscal year 2000 through 2007, PBGC's contract spending increased steadily along with its overall budget and workload, and its use of contract employees outpaced its hiring of federal employees. As PBGC workload grew due to the significant number of large pension plan terminations, PBGC relied on contractors to supplement its workforce, acknowledging that it has difficulty anticipating workloads due to unpredictable economic conditions. In 2000, we recommended that PBGC develop a strategic approach to contracting by conducting a comprehensive review of PBGC's future human capital needs and using this review to better link contracting decisions to PBGC's long-term strategic planning process. PBGC took some initial steps to implement our recommendation, and in August 2008, we reported that PBGC had recently renewed its efforts and drafted a strategic human capital plan. In addition to drafting a strategic human capital plan, PBGC recently issued its strategic plan; however this plan does not document how the acquisition function supports the agency's missions and goals. Although contracting is essential to PBGC's mission, we found that the Procurement Department is not included in corporate-level strategic planning. Further, PBGC's draft strategic human capital plan acknowledges the need for contractor support, but does not provide detailed plans for how the contract support will be obtained. While PBGC's workload can expand and contract depending on the state of plan terminations, planning documents do not include strategies for managing the fluctuations. Based on these findings, we recommended that PBGC revise its strategic plan to reflect the importance of contracting and to project its vision of future contract use, and ensure that PBGC's procurement department is included in agency-wide strategic planning. PBGC also needs a more strategic approach for improving human capital management. While PBGC has made progress in its human capital management approach by taking steps to improve its human capital planning and practices--such as drafting a succession management plan-- the corporation still lacks a formal, comprehensive human capital strategy, articulated in a formal human capital plan that includes human capital policies, programs, and practices. PBGC has initiatives for the management of human capital, such as ensuring employees have the skills and competencies needed to support its mission and establishing a performance-based culture within the corporation, and has made some progress toward these goals. However, PBGC has not routinely and systematically targeted and analyzed all necessary workforce data--such as attrition rates, occupational skill mix, and trends--to understand its current and future workforce needs. PBGC is generally able to hire staff in its key occupations--such as accountants, actuaries, and attorneys--and retain them at rates similar to those of the rest of the federal government. However, PBGC has had some difficulty hiring and retaining staff for specific occupations and positions, including executives and senior financial analysts. PBGC has made use of various human capital flexibilities in which the corporation has discretionary authority to provide direct compensation in certain circumstances to support its recruitment and retention efforts, such as recruitment and retention incentives, superior qualification pay-setting authority, and special pay rates for specific occupations. However, PBGC officials said that they had not recently explored additional flexibilities that required the approval of OPM and OMB to determine whether they would be applicable or appropriate for the corporation. PBGC clearly faces many challenges. The impact of PPA is still unclear, but in any case difficult decisions for the future still remain. While PBGC's net financial position has improved along with economic conditions that until recently had been favorable to plan sponsors, we are concerned that such conditions are changing and could leave PBGC exposed to another spate of claims from sponsors of very large severely underfunded plans. The challenges PBGC faces are acutely illustrated by its recent changes to its asset investment policy. The aim of the change to the policy is to reduce the current deficit through greater returns, but, holding all else equal, the potential for greater returns comes with greater risk. This greater risk may or may not be warranted, but the uncertain results of the policy could have important implications for all PBGC stakeholders: plan sponsors, insured participants, insured beneficiaries, as well as the government and ultimately taxpayers. One thing that is certain: PBGC will continue to require prudent management and diligent oversight going forward. However, PBGC faces challenges with its board structure, which will only become more apparent in the coming months as the board, its representatives, and the corporation's director will likely be entirely replaced by a new president. Without adequate information and preparation, this transition could limit not only the progress made by the current board, its representatives, and director, but may also hinder the corporation's ability to insure and deliver retirement benefits to millions of Americans that rely on the corporation. As this transition highlights, an improved board structure is critical in helping PBGC manage the daunting, and in many ways fundamental, long- term financial challenges it faces, which is why we have recommended the Congress restructure the Board. Chairman Lewis, Congressman Ramstad, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions you may have. For further questions about this statement, please contact Barbara D. Bovbjerg at (202) 512-7215. Individuals making key contributions to this statement include Blake Ainsworth, Charles Jeszeck, Jay McTigue, Charles Ford, Monika Gomez, Craig Winslow, and Susannah Compton. Pension Benefit Guaranty Corporation: Need for Improved Oversight Persists, GAO-08-1062. Washington, D.C.: September 10, 2008. Pension Benefit Guaranty Corporation: Some Steps Have Been Taken to Improve Contracting, but a More Strategic Approach Is Needed. GAO-08- 871. Washington, D.C.: August 18, 2008. PBGC Assets: Implementation of New Investment Policy Will Need Stronger Board Oversight. GAO-08-667. Washington, D.C.: July 17, 2008. Pension Benefit Guaranty Corporation: A More Strategic Approach Could Improve Human Capital Management. GAO-08-624. Washington, D.C.: June 12, 2008. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Pension Benefit Guaranty Corporation: Governance Structure Needs Improvements to Ensure Policy Direction and Oversight. GAO-07-808 Washington, D.C.: July 6, 2007. PBGC's Legal Support: Improvement Needed to Eliminate Confusion and Ensure Provision of Consistent Advice. GAO-07-757R. Washington, D.C.: May 18, 2007. Private Pensions: Questions Concerning the Pension Benefit Guaranty Corporation's Practices Regarding Single-Employer Probable Claims. GAO-05-991R. Washington, D.C.: September 9, 2005. Private Pensions: The Pension Benefit Guaranty Corporation and Long- Term Budgetary Challenges. GAO-05-772T. Washington, D.C.: June 9, 2005. Private Pensions: Recent Experiences of Large Defined Benefit Plans Illustrate Weaknesses in Funding Rules. GAO-05-294. Washington, D.C.: May 31, 2005. Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance Program Faces Significant Long-Term Risks. GAO-04-90. Washington, D.C.: October 29, 2003. Pension Benefit Guaranty Corporation Single-Employer Insurance Program: Long-Term Vulnerabilities Warrant 'High Risk' Designation. GAO-03-1050SP. Washington, D.C.: July 23, 2003. Pension Benefit Guaranty Corporation: Statutory Limitation on Administrative Expenses Does Not Provide Meaningful Control. GAO-03- 301. Washington, D.C.: February 28, 2003. GAO Forum on Governance and Accountability: Challenges to Restore Public Confidence in U.S. Corporate Governance and Accountability Systems. GAO-03-419SP. Washington, D.C.: January 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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 Pension Benefit Guaranty Corporation (PBGC) insures the retirement future of nearly 44 million people in more than 30,000 private-sector defined benefit pension plans. In July 2003, GAO designated PBGC's single-employer pension insurance program--its largest insurance program--as "high risk," including it on GAO's list of major programs that need urgent attention and transformation. The program remains on the list today with a projected financial deficit of just over $13 billion, as of September 2007. Because Congress exercises oversight of PBGC, GAO was asked to testify today on 1) the critical role PBGC plays in protecting the pension benefits of workers and how PBGC is funded, 2) the financial challenges facing PBGC, and 3) the PBGC's governance, oversight and management challenges. To address these objectives, we are relying on our reports from the last several years that, as part of our designation of PBGC's single-employer program as high-risk, explored the financial and management challenges facing the agency. GAO has made a number of recommendations and matters for Congressional consideration in these past reports. PBGC generally agreed with these past recommendations and is implementing many of them. No new recommendations are being made as part of this testimony. PBGC administers the current or future pension benefits for a growing number of participants of plans that have been taken over by the agency--from 500,000 in fiscal year 2000 to 1.3 million participants in fiscal year 2007. PBGC is financed by insurance premiums set by Congress and paid by sponsors of defined benefit (DB) plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for those trusteed plans; PBGC receives no funds from general revenues. The treatment of PBGC in the federal budget is complicated by the use of two accounts--an on-budget revolving fund and a non-budgetary trust fund. Ultimately this budget treatment can be confusing--especially in the short-term--as on-budget gains may be offset by long-term liabilities that are not reported to on-budget accounts. PBGC's single-employer program faces financial challenges from a history of weak plan funding rules that left it susceptible to claims from sponsors of large, severely underfunded pension plans. PBGC had seen recent improvements to its net financial position due to generally better economic conditions and from statutory changes that raised premiums and took measures designed to strengthen plan funding and PBGC guarantees. However, certain improvements have only just begun phasing-in and the changes did not completely address a number of the risks that PBGC faces going forward. Further, PBGC just began implementing a new investment policy that, while offering the potential for higher returns, also adds significant variability and risk to the assets it manages. Also, changing economic conditions could further expose PBGC to future claims. Improvements are needed to PBGC's governance structure and to its strategic approach to program management. PBGC's three member board of directors is limited in its ability to provide policy direction and oversight. PBGC may also be exposed to challenges as the board, its representatives, and the director will likely change with the upcoming presidential transition in January. In addition, PBGC lacks a strategic approach to its acquisition and human capital management needs. Three-quarters of PBGC's administrative budget is spent on contractors, yet PBGC's strategic planning generally does not recognize contracting as a major aspect of PBGC activities.

The Food, Agriculture, Conservation, and Trade Act of 1990 (the 1990 Farm Bill) required, among other things, that the Secretary give priority to beginning farmers in purchasing inventory farmland--properties that have come into government ownership through voluntary conveyance or foreclosure. It also expressed the sense of Congress that USDA maintain statistics on, among other things, the number of loans made, insured, or guaranteed, and inventory farmland sold or leased to beginning farmers, and that USDA establish innovative programs of finance and assistance for land transfer between generations and the establishment of new farms. Currently, FSA's limits on direct loans for farm ownership and operations are each set at $200,000, while the guaranteed farm ownership and operating loan amounts are each set at $899,000. FSA allocates money to the states for its loan programs on the basis of the number of farmers in each state, the value of farm assets, and net farm income. For this allocation, the loan volumes of previous years may be considered as well. The Agricultural Credit Improvement Act of 1992 required the Secretary of Agriculture to reserve a portion of its direct and guaranteed farm ownership and operating loan funds for beginning farmers and ranchers. It also authorized the establishment of the Down Payment Farm Ownership Loan Program, administered by FSA. This program allows a beginning farmer to purchase a farm or ranch of up to $250,000 in value. To participate in this loan program, an applicant must make a cash down payment of at least 10 percent of the purchase price. FSA may provide up to 40 percent of the purchase or appraisal price over 15 or fewer years at a fixed interest rate of 4 percent. The balance may be obtained from another lender, with FSA providing up to a 95 percent guarantee. In addition, in accordance with the act, FSA has entered into memorandums of understanding with 21 states to provide joint financing to beginning farmers. The 1992 act also directed that the Secretary establish an Advisory Committee on Beginning Farmers and Ranchers to advise the Secretary on methods of creating new farming and ranching opportunities, among other things. The advisory committee includes representatives from the farming, ranching, and banking industries; extension education; nonprofit agencies; and federal and state staff who work directly with beginning farmers. Since it was established in 1998, the committee has met eight times, submitting recommendations to the Secretary to improve and increase opportunities for beginning farmers in starting and maintaining viable farming operations. Recently, these proposals have ranged from recommendations to develop a pilot program for providing matched savings accounts for beginning farmers to encouraging those with expiring Conservation Reserve Program easements to transfer their land to beginning farmers. Previously implemented recommendations have led to the 2006 addition of beginning farmers to USDA's small farms policy, which led to the establishment of the Small Farms and Beginning Farmers and Ranchers Council. The Farm Security and Rural Investment Act of 2002 (the 2002 Farm Bill) authorized higher payments in two key conservation programs geared toward working lands--EQIP and CSP. EQIP provides farmers with financial and technical assistance to address soil, air, water, and related natural resource concerns on eligible land, while CSP supports ongoing stewardship of farmland by providing payments to producers for maintaining and enhancing conservation efforts that benefit natural resources. For both programs, the 2002 Farm Bill authorized the Secretary to provide a higher cost-share for beginning farmers--up to 90 percent of the cost of implementing a conservation practice--compared to 75 percent for other producers. For EQIP, the act also authorized higher cost-share payments for limited resource producers. In 2006, on average, NRCS provided a cost-share rate of almost 80 percent for beginning farmers through EQIP, compared with an average of 59 percent for non-limited- resource, established farmers. For CSP, the 2006 sign-up reduced the cost- share rate for new practice payments to not more than 65 percent for limited resource and beginning farmers and to not more than 50 percent for other producers. Furthermore, the 2002 Farm Bill authorized the Secretary to create a pilot program to provide guarantees of loans made by private sellers of a farm or ranch to beginning farmers on a contract sale basis. It also authorized the Secretary to reserve at least 15 percent of funds in its interest rate reduction program--a program to subsidize the interest rate on a guaranteed operating loan--for beginning farmers. Finally, the 2002 Farm Bill also authorized a Beginning Farmer and Rancher Development Program to provide training, education, outreach, and technical assistance initiatives, but no funding has been allocated to this program. USDA's lending and conservation assistance to beginning farmers has been substantial and is growing. From fiscal year 2000 through 2006, FSA increased its lending to beginning farmers from $716 million to $1.1 billion annually, for a total of more than $6 billion during the period. Also, from fiscal years 2004 through 2006 (the most recent years for which data are available), NRCS's assistance to beginning farmers through two key conservation programs nearly doubled, from over $47 million to about $92 million. From fiscal years 2000 through 2006, FSA increased the value of its loans to beginning farmers from $716 million to $1.1 billion annually, for a total of more than $6 billion over the period. In addition, beginning farmers received an increasing share of FSA's loan dollars, from a 20 percent share in fiscal year 2000 to 35 percent by fiscal year 2006--or 27 percent of the amount FSA loaned all farmers over this period. At the end of fiscal year 2006, FSA had 25,064 beginning farmer borrowers in its loan portfolio. Of these borrowers, 16,828 had obtained 28,022 direct loans as of October 4, 2006, and 8,236 had obtained 11,735 guaranteed loans as of September 30, 2006. FSA also provided interest assistance on 2,409 of the guaranteed operating loans it made to beginning farmers between fiscal year 2000 and 2006. Through these loans, it obligated approximately $358 million--12 percent of guaranteed operating loan dollars with interest assistance obligated to all farmers. Table 1 provides more detailed information about FSA's direct and guaranteed loans to beginning farmers. Appendix II provides information on fiscal year 2006 loans to beginning farmers by state. Beginning farmers can also take advantage of FSA's joint financing plans and Down Payment Farm Ownership Loan Program. FSA's joint financing plans have been more popular than the down payment loan program, in part because they have longer loan terms and do not require a down payment. They allow a borrower to receive up to 50 percent of the amount financed through FSA at a reduced interest rate, with another lender providing 50 percent or more of the loan. Through joint financing arrangements, FSA has made 2,395 loans to beginning farmers that provided over $287 million in direct loan assistance between fiscal years 2000 and 2006. Through the Down Payment Farm Ownership Loan Program, FSA made 777 loans to beginning farmers, providing over $42 million in direct loan assistance over the same period. In addition to providing loans, FSA sells properties to beginning farmers from its inventory of farmland properties. From fiscal years 2000 through 2006, it sold 48 properties to beginning farmers, or 4 percent of the 1,136 sold to all farmers over this time period. This form of assistance has been used infrequently in recent years because FSA's farm inventory has been declining. NRCS conservation financial assistance for beginning farmers through EQIP and CSP increased from over $47 million in fiscal year 2004 to about $92 million in fiscal year 2006. In total, NRCS approved about $233 million in financial assistance for beginning farmers through these two programs from fiscal years 2004 through 2006--about 9 percent of the amount for all farmers. Table 2 shows EQIP and CSP assistance for beginning farmers over this period. Appendix III provides information on EQIP financial assistance approved for beginning farmers in fiscal year 2006 by state. Programs administered by USDA's Risk Management Agency (RMA) and Cooperative State Research, Education, and Extension Service (CSREES) have funded organizations assisting farmers with risk management and other challenges. For example, RMA administers several partnership programs--in conjunction with state departments of agriculture, universities, nonprofit agricultural organizations, and other public or private organizations--to deliver training and information on production, marketing, and financial risk management to farmers. Some proposals funded through these programs have addressed beginning farmer needs. Additionally, the Community Outreach and Assistance Partnership Program provides higher scores to applicants that partner with organizations that can meet the needs of beginning farmers and other underserved producers. In addition, the Cooperative State Research, Education, and Extension Service provides grants to universities, colleges, and nonprofit organizations to deliver outreach and assistance to socially disadvantaged farmers and ranchers, including farm, management, and marketing assistance. Table 3 describes some of the projects these two agencies have funded that have a focus on beginning farmers. In addition, the Agricultural Marketing Service has programs such as the Farmers Market Promotion Program to help farmers directly market their products, which may indirectly assist beginning farmers. This grant program targets funds to agricultural cooperatives; local governments; nonprofit, public health, and economic development corporations; regional farmers' market authorities; and tribal governments to work toward expanding direct producer-to-consumer marketing opportunities. These include farmers' markets, roadside stands, community-supported agriculture programs, and others. USDA has several efforts under way through multiple agencies that assist beginning farmers. However, it is unable to demonstrate the effectiveness of its assistance to this group because (1) it does not have a crosscutting, departmental strategic goal to guide its beginning farmer efforts and because (2) it has only recently begun to develop information on the characteristics of beginning farmers, which will supplement its existing research on the age of farmers and changes in the number of farms. Although many reasons exist for helping beginning farmers, USDA has not transformed these reasons into a crosscutting, departmental strategic goal that demonstrates the outcomes it expects its beginning farmer efforts to achieve. Without such a goal, USDA runs the risk that its several efforts are not mutually reinforcing or coordinated. Such a goal could address the reasons for beginning farmer assistance cited in Congress and by stakeholders and others. For example, relevant congressional committee reports cite the importance of encouraging young people to enter farming in order to address concerns about the nation's aging farmer population. Stakeholders cite additional reasons for beginning farmer assistance, such as promoting social change by increasing the number of immigrant and minority farmers and changes to the structure of agriculture by increasing the number of small and middle-sized farms. In 2006, USDA incorporated beginning farmers into its small farms policy to better recognize the importance of assisting beginning farmers. The Small Farms and Beginning Farmers and Ranchers Policy is designed to provide a framework for maintaining the viability of small and beginning farmer operations. It highlights numerous priorities as shown in table 4-- from supporting the special needs of beginning farmers to emphasizing socially desirable strategies for this group. It also calls for agencies and mission areas to reflect the small and beginning farmer policy in their strategic plans, performance plans, and other documents. However, the policy does not provide a management and accountability focus for USDA's efforts. (See app. IV for a complete copy of USDA's policy). Furthermore, USDA strategic planning documents contain a beginning farmer performance goal specific to the FSA loan programs, but they do not integrate USDA's and its multiple agencies' several efforts to assist beginning farmers. A crosscutting, departmental strategic beginning farmer goal could provide needed direction for USDA agencies and help ensure their efforts to assist beginning farmers work toward a common purpose and serve similar clients. For example, such a crosscutting goal could help address concerns about whether FSA's loans and NRCS's conservation assistance are directed toward similar groups of beginning farmers. FSA's loan programs are geared toward beginning farmers with limited economic resources--those who cannot access credit from another source. However, NRCS's definition of a beginning farmer does not contain any income limitations. Not only are these programs serving different groups of farmers, there are unintended consequences as well. According to an NRCS document, the agency's higher cost-share rates for beginning farmers have the potential to attract wealthy, retired, and absentee landowners. For example, an NRCS official told us of a case where a beginning farmer receiving NRCS assistance reported having an income of about $1 million, and another said his state did not offer a higher EQIP cost-share rate for beginning farmers because of concerns that wealthy beginning farmers would benefit. Appendix V contains information about NRCS's and FSA's beginning farmer definitions. While USDA has not established a crosscutting, departmental strategic goal for beginning farmers, two USDA agencies--FSA and RMA--have each developed their own beginning farmer performance goals. These goals set targets for the volume of their beginning farmer activities--the number of farmers assisted and the dollars they receive--rather than outcomes. Specifically, FSA annually tracks the volume of its lending to a combined grouping of its borrowers--including beginning farmers and socially disadvantaged farmers (racial and ethnic minority farmers and women farmers). FSA measures its performance by the increase in lending to these combined groups. For example, as shown in table 5, FSA reported that in 2006, 39 percent of its loan funds were obligated to these groups. Starting in fiscal year 2006, FSA adopted a related performance goal that tracks increases in the number of beginning farmers, racial and ethnic minority farmers, and women farmers in its portfolio as a percentage of individuals in this category with at least $10,000 in sales. FSA reported having 42,495 beginning and socially disadvantaged borrowers in its portfolio in fiscal year 2006--15.5 percent of its estimate of the 273,349 beginning and socially disadvantaged farmers who have at least $10,000 in sales. In effect, FSA measures its volume in providing loans to these groups, rather than measuring progress toward achieving a particular beginning farmer outcome, such as improving the financial well-being of beginning farmers or ensuring they continue to farm after leaving the loan program. Goals related to outcomes could provide additional insight into program effectiveness and allow FSA to evaluate the extent to which its loan programs contribute to a crosscutting, departmental goal. In addition to its specific beginning farmer goals, FSA also has broad performance goals related to its loan program. For example, one goal addresses the frequency with which farmers graduate from FSA's direct loan program to its guaranteed loan program. Other goals address the efficiency of FSA's lending as shown in table 5. In addition to the information FSA tracks on the number and types of borrowers served, a 2005 University of Arkansas study provides insight into the effectiveness of USDA's direct loan program for beginning farmers that could provide one basis for developing FSA performance goals that feed into a departmental, crosscutting goal. The study focused on borrowers, including beginning farmers, originating FSA direct loans between fiscal year 1994 and 1996. Among other things, the study found that beginning farmer borrowers had positive average annual change in their net worth, potentially indicating financial progress. It also found that about 82 percent of those who received beginning farmer direct farm ownership loans who had left the loan program by 2004 had graduated to another form of credit, such as FSA guaranteed loans or commercial loans, or no longer needed credit. The remainder left farming voluntarily (approximately 13 percent); involuntarily, such as due to financial stress (approximately 3 percent); or died (approximately 3 percent). Like FSA, RMA has performance goals related to beginning farmers and tracks actions, as table 6 shows. However, tracking actions provides limited performance information and does not indicate the level of improvement. Other agencies we spoke with--NRCS, the Agricultural Marketing Service, and the Cooperative State Research, Education, and Extension Service-- do not have beginning farmer performance goals. NRCS officials told us their performance goals are driven by their natural resource and environmental goals and do not directly target beginning farmers. Cooperative State Research, Education, and Extension Service and Agricultural Marketing Service officials said they have not developed beginning farmer performance goals because their programs benefit farmers broadly, rather than providing targeted assistance to this group. Nevertheless, achieving a common goal of importance often requires collaborative efforts among agencies. In 2005, GAO reported that collaborative efforts require agencies to define and articulate the common purpose or outcome they are seeking to achieve. In addition, GAO reported that agencies' collaborative efforts can be enhanced and sustained by, among other things, establishing mutually reinforcing or joint strategies; identifying and addressing needs by leveraging resources; establishing compatible policies and procedures; and developing mechanisms to monitor, evaluate, and report on results. USDA has recently begun to develop baseline information about beginning farmer characteristics, which should help the department evaluate and better target its beginning farmer efforts. Among other things, recently developed analysis of existing data shows that beginning farmers are younger than established farmers (about 7 in 10 beginning farmers are under 55 years of age), operate smaller farms, and are slightly more ethnically diverse and female than other farmers. Table 7 provides some recent data on beginning farmers that was developed by economists from USDA's Economic Research Service (ERS). These data estimate there were 484,981 beginning farmers with less than 10 years of experience operating farms from which $1,000 or more of agricultural products were produced and sold or normally would have been sold during the year. ERS economists told us they are supplementing this work with additional analysis to provide insight into the characteristics of beginning farmers. This information will include the location of beginning farmers across the United States, the types of production they engage in, the size of their operations, their level of participation in government programs, as well as whether they rent or own land. They are also analyzing differences between beginning farmers actively engaged in farming and those who are "hobby" farmers. For example, ERS economists found that roughly one- third of beginning farms in 2005 had no agricultural output and were likely operated by individuals interested in a rural residential lifestyle. In addition to ERS's efforts, FSA has recently begun to analyze the financial characteristics and types of production of beginning farmers with FSA loans, as table 8 illustrates. This information shows, for example, that most beginning farmers with FSA direct loans are involved in livestock, corn, or soybean production. This type of information should help FSA determine the extent to which the characteristics of its beginning farmer borrowers reflect those of beginning farmers as a whole. Furthermore, FSA officials we spoke with said that as additional data are entered into the agency's new centralized system for monitoring borrowers, it will be possible to conduct long-term analyses about these borrowers, including beginning farmers. This information will be valuable for understanding how farming operations change as a result of FSA assistance, including whether they expand and survive. Finally, USDA's analysis of beginning farmer characteristics supplements its work relating to changes in the age of farmers and the number of farms. In 2007, USDA economists reported that the number of older farmers is increasing and the number of young farmers is declining. Younger farmers enter the business at a very slow rate, a fact that tends to increase the average age of farmers as a whole. Agricultural census data show that the average of age of principal farm operators in 2002 was 55, an increase from 50 years of age in 1978. Nevertheless, the number of farms has been relatively stable in recent years according to USDA because of a near balance in the overall rate of farm entry and exit. Moreover, USDA maintains that changes in the age composition of the farm population and its overall size will not likely impair the nation's food security, since increases in labor productivity have been rapid enough to maintain farm output. Over the past two decades, heightened focus on beginning farmers by Congress and the agricultural community has led to USDA programs and incentives that provide much financial assistance to this group. However, despite the billions of dollars provided to beginning farmers through loans and conservation assistance, USDA has not yet demonstrated the effectiveness of its assistance to beginning farmers by showing what its expenditures are accomplishing. Although there are many reasons for helping beginning farmers, USDA has not developed a crosscutting, departmental strategic goal for its beginning farmer efforts to describe its expected accomplishments. FSA provides information about the dollars it directs to beginning farmers, but this information does not provide adequate direction for the department's efforts or speak to the outcomes of its beginning farmer assistance. Without a crosscutting, departmental strategic performance goal, USDA will be unable to determine the effectiveness of its current beginning farmer efforts and the need for changes in this assistance. Furthermore, the department's recent work to develop information about the characteristics of beginning farmers should help it define the outcomes it wants to achieve and develop a related crosscutting, departmental strategic goal. Additional baseline data about beginning farmer characteristics that provide insight into who beginning farmers are, which ones USDA assists, and how beginning farmer operations in agriculture change over time should (1) help USDA track the changes within this group, (2) provide a basis for more in-depth analyses about the effects of existing programs on beginning farmers, and (3) help identify the need for new forms of assistance. Furthermore, continued analysis of how beginning farmer policies affect farm entry and the age of farmers could provide insight into program effectiveness. To better ensure USDA can provide Congress and the public with information on the effectiveness of assistance to beginning farmers, we are recommending that the Secretary of Agriculture develop a crosscutting, departmental strategic beginning farmer performance goal that identifies the desired outcomes of USDA's beginning farmer assistance and that links to related agency goals. We also recommend that USDA track progress toward achieving these goals. We provided USDA with a draft of this report for review and comment. In a letter dated September 12, 2007, we received formal comments from the Secretary of Agriculture. These comments are reprinted in appendix VI. We also received oral technical comments, which we incorporated into the report, as appropriate. USDA stated that it generally agreed with our report and recommendations. In particular, USDA explained that it would be able to develop more focused performance measures once the 2007 Farm Bill is complete. However, USDA did not specifically state whether it would develop a crosscutting, departmental strategic goal as we recommended. In addition, USDA stated that its departmental and agency strategic plans, taken together, provide a comprehensive strategy to ensure that its programs to assist beginning farmers are achieving stated objectives and goals. We disagree, since the goals in USDA's plans do not provide adequate direction and focus for the department's multiple beginning farmer efforts. For example, the departmental goal in USDA's Strategic Plan to "Enhance the Competitiveness and Sustainability of Rural and Farm Economies" is related to agricultural producers and rural communities broadly; it is not specific to beginning farmers. A performance goal within that plan to increase the percentage of loans made to beginning farmers, racial and ethnic minority farmers, and women farmers is not crosscutting in nature and relates only to FSA's loan programs. Moreover, USDA's comments do not indicate a full appreciation of the efforts needed to implement our recommendation. For example, USDA did not discuss the need for further analysis of (1) beginning farmer characteristics, (2) gaps in beginning farmer assistance, and (3) the effects of beginning farmer policies on farm entry and the age of farmers. Such analysis could help USDA define the outcomes it expects its beginning farmer assistance to achieve and develop a crosscutting, departmental strategic goal to measure success. Furthermore, USDA did not directly respond to our conclusion that it has not demonstrated what has been accomplished by the billions of dollars of assistance to beginning farmers. In light of the federal government's large and growing structural deficits, GAO has stated that agencies must link resources and activities to results. While USDA has taken the first steps in tracking the numbers of farmers it assists, a crosscutting strategic goal can help ensure its programs are mutually reinforcing in their support of beginning farmers. USDA also stated that FSA has virtually no discretion in setting the definition of a qualified beginning farmer and rancher. However, we believe that if USDA determines that consistency between FSA's and NRCS's programmatic definitions would better ensure that beginning farmer dollars work toward a common purpose, it should consider what changes are needed and how best to effect those changes. If USDA finds the changes in definitions require legislative action to achieve consistency across programs or focus efforts on particular outcomes, it should provide its analysis to Congress for consideration. Finally, USDA provided examples of RMA partnership programs that provided higher scores to applicants partnering with organizations that help beginning farmers and other underserved producers. Although the partnership programs direct risk management assistance to a broad class of producers rather than specifically to beginning farmers, we clarified the language in our report to acknowledge how the application scoring process can benefit beginning farmers. Our report also identifies examples of projects designed to help beginning farmers and other underserved producers. As agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees and the Secretary of Agriculture. 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 or need additional information, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and of Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. At the request of the Chairman of the Senate Committee on Agriculture, Nutrition, and Forestry, we examined U.S. Department of Agriculture (USDA) support to beginning farmers and ranchers. Our objectives were to (1) identify the key steps USDA has taken to help beginning farmers and (2) assess USDA's actions to measure the effectiveness of these steps. To identify USDA's key steps to assist beginning farmers, we reviewed documentation describing the purpose and extent of USDA assistance to this group. We focused on departmental efforts to assist beginning farmers, as well as efforts by individual agencies such as the Farm Service Agency (FSA) and Natural Resources Conservation Service (NRCS). We also reviewed legislation authorizing assistance to beginning farmers, such as the Food, Agriculture, Conservation, and Trade Act of 1990; the Agricultural Credit Improvement Act of 1992; and the Farm Security and Rural Investment Act of 2002. To refine our understanding of the amount of assistance provided through beginning farmer programs, we also spoke with FSA and NRCS officials who manage programs that assist beginning farmers. Specifically, we spoke with officials from FSA's loan making and servicing divisions, as well as the agency's Economic and Policy Analysis staff. We spoke with NRCS officials who administer the Environmental Quality Incentives Program (EQIP) and Conservation Security Program (CSP), as well as a representative from the Resource Conservation and Development and Rural Lands Division. In addition, to identify other programs that may assist beginning farmers either directly or indirectly, we spoke with officials representing the Cooperative State Research, Education, and Extension Service (CSREES); Risk Management Agency (RMA); and the Agricultural Marketing Service (AMS). We reviewed data these agencies provided about the level of assistance to beginning farmers, including the number of loans and conservation dollars approved. We also contacted small and beginning farmer coordinators and the Co-Executive Directors of the Small Farms and Beginning Farmers and Ranchers Council to discuss the strengths and limitations of departmental assistance to beginning farmers. To assess USDA's actions to measure the effectiveness of steps taken to assist beginning farmers, we reviewed USDA's and agency strategic plans and USDA's Performance and Accountability Report. We also reviewed reports on farm entry and exit, the characteristics of beginning farmers, and the effectiveness of credit programs. In addition, we spoke with agency officials from FSA's Farm Loan Program and an official from NRCS's Strategic and Performance Planning Division. These officials described agency efforts taken to measure the effectiveness of USDA's efforts to serve beginning farmers and data used to monitor program performance. Last, we spoke with Economic Research Service (ERS) and National Agricultural Statistics Service (NASS) officials about data available regarding the characteristics of beginning farmers and future directions for their research. To understand the challenges beginning farmers face, we spoke with representatives from the Advisory Committee on Beginning Farmers and Ranchers. The Advisory Committee was established by USDA in 1998 to provide advice to the Secretary of Agriculture about methods of creating new farming and ranching opportunities, among other things. Members interviewed included those representing academia, cooperative extension programs, state government, and advocacy groups. On the basis of discussions with members of the Advisory Committee, we identified and interviewed other stakeholders, also representing academia, cooperative extension programs, state government, and advocacy groups. These interviews provided insight into USDA assistance to beginning farmers and potential areas for change and included such groups as the American Farm Bureau Federation, California FarmLink, Cornell Cooperative Extension, Iowa State University's Beginning Farmer Center, and the Montana Department of Agriculture, among others. We also reviewed relevant policy papers and spoke with representatives from such organizations as the Center for Rural Affairs and the Sustainable Agriculture Coalition to familiarize ourselves with their recommendations for beginning farmer policy changes. Our work was performed between September 2006 and August 2007 in accordance with generally accepted government auditing standards. FSA and NRCS have different beginning farmer definitions in place. While both definitions generally define a beginning farmer and rancher as one who has operated a farm or ranch for 10 years or less who will materially and substantially participate in its operation, only FSA's definition considers an applicant's available resources as part of its program eligibility requirements. FSA's definition also establishes other requirements that relate to its loan programs. For example, beginning farmers must agree to participate in borrower training. Table 9 presents a comparison of both FSA and NRCS beginning farmer definitions. has not operated a farm or ranch or has operated a farm or ranch for not more than 10 years has not operated a farm or ranch, or who has operated a farm or ranch for not more than 10 consecutive years will materially and substantially will materially and substantially participate in the operation of the farm or ranch participate in the operation of the farm or ranch meets the loan eligibility requirements of the program to which he/she is applying agrees to participate in such loan assessment, borrower training, and financial management programs as the Secretary requires demonstrates insufficient resources to continue farming or ranching on a viable scale does not own a farm greater than 30 percent of the average size farm in the county (farm ownership loans only) In addition to the individual named above, Charles Adams, Assistant Director; Kevin Bray; Barbara El Osta; Paige Gilbreath; Lynn Musser; Carol Herrnstadt Shulman; and Tracy Williams made key contributions to this report.

U.S. Department of Agriculture (USDA) programs have long supported beginning farmers. USDA generally defines a beginning farmer or rancher as one who has operated a farm or ranch for 10 years or less--without regard for age--and who materially and substantially participates in its operation. USDA's Farm Service Agency (FSA) makes and guarantees loans for farmers who cannot obtain commercial credit, including beginning farmers. FSA also reserves funds for beginning farmers within its loan programs. USDA's Natural Resources Conservation Service (NRCS) provides higher conservation payments for beginning farmers through two of its conservation programs. GAO reviewed the key steps USDA has taken to help beginning farmers and assessed the department's actions to measure the effectiveness of these steps.. USDA's lending and conservation assistance to beginning farmers has been substantial and is growing. USDA supports beginning farmers primarily through its lending assistance. From fiscal years 2000 through 2006, FSA's lending to beginning farmers rose from $716 million to $1.1 billion annually--totaling more than $6 billion. In addition, from fiscal years 2004 through 2006, the most recent years for which data are available, NRCS's annual financial assistance for beginning farmers through two key conservation programs nearly doubled from over $47 million to nearly $92 million, for a total of $233 million. However, USDA cannot demonstrate the effectiveness of its support for beginning farmers, because it has not developed a crosscutting, departmental strategic goal for its beginning farmer efforts and has only recently begun to analyze the characteristics of this group. Specifically, USDA has not developed a crosscutting, departmental strategic beginning farmer goal that demonstrates the outcomes it expects its beginning farmer efforts to achieve. Such a goal might address, for example, promoting demographic change, such as by decreasing the average age of farmers or changes to the structure of agriculture, such as by increasing the number of small and middle-sized farms. USDA has incorporated beginning farmers into its existing policy for maintaining the viability of small farms. Although this provides added recognition of the need to assist beginning farmers, USDA's policy does not establish a crosscutting, departmental strategic goal that provides a management and accountability focus for the department's several efforts. Furthermore, USDA tracks the numbers of farmers it assists and the dollars they receive, rather than its progress toward achieving a particular beginning farmer outcome. Having a crosscutting, departmental strategic goal could provide better insight into the desired outcomes and impact of USDA's beginning farmer efforts. USDA is just beginning to develop data about the characteristics of beginning farmers to supplement its existing analyses about the age of farmers and changes in the number of farms. For example, one recent analysis shows that beginning farmers are younger than established farmers, operate smaller farms, and are slightly more ethnically diverse and female than other farmers. Another indicates that roughly one-third of beginning farms in 2005 had no agricultural output and were likely operated by individuals interested in a rural residential lifestyle. Continued analysis of such characteristics and trends could provide better insight into who beginning farmers are, which ones USDA assists, and how beginning farmer operations change over time.

The primary mission of MEP is to give "hands-on" technical assistance to small- and medium-sized manufacturers trying to improve their operations through the use of appropriate technologies. MEP engage in a variety of activities to assist small- and medium-sized manufacturers, often in partnership with other business assistance providers such as Small Business Development Centers, community colleges, and federal laboratories. MEP offer a wide range of business services, including helping companies (1) solve individual manufacturing problems, (2) obtain training for their workers, (3) create marketing plans, and (4) upgrade their equipment and computers. MEP assistance focuses on small- and medium-sized manufacturers because research by the National Research Council and others has indicated that these companies lack the resources necessary to improve their manufacturing performance. MEP funding typically comes from a variety of sources, which may include federal and state government agencies, universities, private industry, and fees. Between fiscal years 1988 and 1994 Congress appropriated a total of $141.7 million (in 1994 dollars) to MEP through NIST. Fiscal year 1995 appropriations were $104 million. State or local agencies are to provide matching funds for NIST grants to individual MEP. A 1995 Battelle Memorial Institute report estimated that states collectively spent about $57.7 million specifically on MEP in fiscal year 1994. That same fiscal year, federal MEP spending was $66 million. We were not able to determine the amount of MEP funding from other sources of support, including universities, private industry, and users' fees. This report analyzes data from questionnaires we sent to 766 manufacturers that had completed at least 40 hours of MEP assistance in 1993 in one or more of four service categories. We obtained the names of these manufacturers from the directors of 57 MEP in 34 states. A total of 551 manufacturers (72 percent) completed and returned the questionnaire. We also interviewed eight manufacturers who had received MEP services and were given tours of their manufacturing facilities in Maryland, Georgia, North Carolina, and South Carolina. Appendix II provides more details on our scope and methodology. In assessing the impact of MEP services on their companies' overall business performance, 13 percent of survey respondents reported an extremely positive impact, 59 percent reported a generally positive impact, and 15 percent reported no impact. (Less than 1 percent of respondents (0.2 percent) said the assistance had had a negative impact.) We analyzed the likelihood of the companies reporting that the impact of MEP assistance on their overall business performance was extremely positive, somewhat positive, or not positive, depending on various company and program characteristics identified through the survey. We analyzed how the reported impact of MEP assistance related to the companies' reported age, 1994 gross sales, and number of permanent employees. Also, we analyzed the reported impact of MEP assistance in relation to the companies' activities associated with the assistance--whether they made financial investments, spent staff time, implemented recommendations, and paid for the assistance. In addition, we analyzed how the reported impact of MEP assistance varied according to whether programs received NIST funds. We used logistic regression techniques to determine which factors were statistically significant in predicting the reported impact of MEP assistance on companies' overall business performance. The strength of these particular statistical techniques is that they allowed us to estimate the individual influence of each factor on the reported impact, both before and after the influences of all other relevant factors identified in the survey were controlled. Appendix III provides more detailed information on our methodology, the models tested, and the results obtained. We used simple frequency distributions to determine whether the companies' expectations were met regarding the impact of MEP assistance on specific business performance indicators and to analyze whether MEP demonstrated the attributes most valued by the companies. Results from our work cannot be generalized to all companies that used MEP because our questionnaire covered only companies that had completed at least 40 hours of MEP assistance. In addition, our results do not apply to all MEP services because we limited our analysis to four MEP service categories. Since we did not evaluate the operations or management of specific federal programs, we did not obtain agency comments on this report. However, on February 12, 1996, we discussed a draft of this report with NIST officials, including the Director of the NIST Manufacturing Extension Partnership Program. He agreed with the technical accuracy of the report and offered minor clarifications, which we incorporated into the report where appropriate. We did our work primarily in Los Angeles, New York, San Francisco, and Washington, D.C., from February 1995 to January 1996 in accordance with generally accepted government auditing standards. We analyzed several factors related to company and program funding characteristics to determine whether they influenced the companies' assessment of the impact of MEP assistance on their overall business performance. We found that several company characteristics--relating to company level of involvement with MEP assistance, and company size and age--influenced the companies' assessment of the impact of MEP assistance on their overall business performance. However, the program funding characteristic we examined--whether the program received NIST funds--did not influence the companies' assessment of the impact of MEP assistance. We found that the level of companies' involvement played an important role in determining the outcome of MEP assistance. The manufacturers that had made financial investments in their company as a result of MEP assistance were 2.5 times more likely than those that did not to report an "extremely positive" impact on their overall business performance, as opposed to a "generally positive" impact. They also were 5.6 times as likely to report a generally positive impact as opposed to a "neutral" or "negative" impact. Companies whose staff spent relatively more time in activities related to MEP assistance were 1.7 times more likely to report an extremely positive impact of MEP assistance on their overall business performance, as opposed to a generally positive impact. Furthermore, the relatively small companies, which research has indicated are most in need of modernization assistance, were most likely to report that their overall business performance was improved by MEP assistance. According to the National Research Council, small- and medium-sized manufacturers generally lack the expertise, time, money, and information necessary to improve their manufacturing performance. We found through our survey that the companies whose fiscal year 1994 gross sales were less than $1 million were 3.1 times more likely to assess the impact of MEP assistance as extremely positive, as opposed to generally positive. Likewise, the companies started since 1985 were 2.0 times as likely as the older companies to report an extremely positive effect of MEP assistance on their overall business performance, as opposed to a generally positive effect. Our visits to manufacturers provided examples of how MEP assistance benefited growing companies. A furniture manufacturer said his company needed MEP assistance to make fewer mistakes in the growth process. This manufacturer said he used MEP experts to help identify and correct environmental and worker safety hazards, so the facility would comply with federal workplace standards. At a company that makes molded plastics, the company president said that the company needed MEP assistance to guide its rapid growth. MEP helped this company with strategic management, planning, worker training, and quality improvement. Our survey revealed no significant differences in how the companies viewed the impact on their overall business performance of MEP that did and did not receive NIST funds. MEP funding typically comes from a variety of sources, which may include federal and state government agencies, universities, industries, and fees. The combination of funding sources varies across programs, but our analysis revealed no significant distinction in how the companies assessed the impact of MEP that did and did not receive NIST funds. Specifically, MEP that received NIST funds were equally as likely as other MEP to have their impact on business performance rated positively by the companies. In commenting on our analysis, NIST officials said that, given the manufacturers' positive responses to our survey, they expected no difference in how the manufacturers viewed the impact of MEP that did and did not receive NIST funds. Moreover, they said that the function of NIST funding is to help MEP serve more clients, with a wider variety of services. Also, they said that they believed NIST support improves programs' efficiency and effectiveness, which are dimensions of MEP that our survey did not address. As part of our analysis, we compared what the companies said they expected from MEP assistance to the results they reported. We found that most of the companies (between 61 and 77 percent) reported that MEP assistance met or exceeded their expectations for improvements to specific business performance indicators, such as manufacturing time frames, the quality of market research, and sales to new and repeat customers. However, between 23 and 39 percent of the companies reported that their expectations were not met for improvements to these indicators. Our survey results indicate that equipment modernization and plant layout assistance improved manufacturing time frames for most of the companies expecting these improvements (see fig. 1). In particular, the survey results indicate that equipment modernization and plant layout assistance met or exceeded the expectations of a substantial number of the companies for reducing cycle times--the times required by machines or work stations to fully complete their sequence of operations (77 percent)--and setup time--the time it takes to prepare equipment for changes to production (76 percent). In addition, the assistance met a large number of the companies' expectations for improvements to worker output (76 percent). However, about 30 percent of companies we surveyed that received equipment modernization and plant layout assistance reported that they did not have their expectations met for reductions to manufacturing lead time, the time it took them to process an order, from start to finish, after design approval. Several companies commented on how MEP assistance affected their efforts to improve plant layout and modernize equipment. One manufacturer that we visited said the company was able to solve problems with congestion and redundant product movement on the plant floor after implementing MEP plant layout recommendations. The company was rewarded with faster production and lower costs. Another manufacturer responding to our survey commented that, by modernizing equipment and improving plant layout, the company was better able to meet its delivery schedules and, thus, satisfy its customers' needs. Most of the companies that received product design and development assistance reported in our survey that they achieved anticipated improvements to quality (see fig. 2). In particular, large proportions of these companies reported fewer incomplete product development projects (77 percent) and improved quality of market research (71 percent). Most of the comments we received regarding product design and development assistance were positive. For example, one respondent commented that the assistance it received made it possible for the company to develop a process that it could not have developed on its own. However, not all companies shared such views. One respondent wrote that it took too much management time to work with MEP consultants, and he felt that the company had educated the consultants, and not vice versa. Our survey also indicated that most companies' expectations for reduced product design and development time frames were satisfied. Seventy percent of the companies reported they received anticipated reductions in the time needed to get new products to market. One survey respondent commented about the importance of MEP assistance in getting a new product to market, noting that the assistance helped the company to overcome equipment problems, which freed the company to market new machine technology. Despite positive assessments such as these, our survey results show that product design and development assistance met fewer of the companies' expectations for reducing costs of product development (66 percent) and increasing access to new customers (65 percent), compared to other business performance indicators. Between 61 and 74 percent of the companies we surveyed that expected quality improvement assistance to bolster specific business performance indicators were satisfied with the results they received (see fig. 3). A substantial percentage of the companies had their expectations fulfilled regarding increased sales to repeat customers (74 percent) and new customers (69 percent). However, our results indicate that, for 39 percent of the companies, quality improvement assistance did not meet expectations for reducing rework and scrap levels. Customer satisfaction was an important goal of the companies seeking quality improvement assistance. Ninety-four percent of the companies we surveyed regarding quality improvement assistance said they sought the assistance in order to enhance their competitive position in the marketplace. In interviews, several manufacturers told us that they undertook quality improvement initiatives in order to retain and attract customers. They said that an increasing number of customers had high expectations for the quality of products. For example, at a foundry we visited, the company president said that many customers of foundry products were reducing the number of suppliers and were working on a closer, more long-term basis with the remaining suppliers. He said that this new customer-supplier relationship put more emphasis on quality than ever before and that it was extremely important to guarantee quality in order to retain customers. Another survey respondent said that the company was "forced" to comply with a quality assurance program by its customers, even though customers rejected virtually none of its products. Most of the companies that responded to our survey were satisfied with the service delivery features of the program they used. The companies ranked MEP staff expertise, timeliness, and affordability as the features most important to them. A majority of the companies (80 percent or more) also responded that they were satisfied that their program demonstrated each of the service delivery features they deemed important (see fig. 4). About 93 percent of the companies responding to our survey rated staff expertise as an important attribute for MEP in general, and 88 percent of respondents said they were satisfied with the expertise of the staff at the specific program they had used. In our visits to manufacturers, they cited several examples of how MEP staff expertise benefited their company. A manufacturer of heavy agricultural equipment said its three staff engineers were fully occupied solving day-to-day manufacturing problems, with no time to address the "big picture." The company used MEP experts to support company efforts to develop innovations to keep the company moving forward. A manufacturer of souvenir and collectible items was considering investing in over $600,000 worth of advanced production equipment. The manufacturer told us that MEP located a consultant who had the expertise to provide the company with an independent opinion about whether the equipment under consideration was appropriate for the company's needs. A hosiery mill had installed advanced knitting machines but continual machinery breakdowns had cut productivity by 70 percent. A senior company official told us that MEP brought experts in training, engineering, and human resources to help the company reverse this decline and benefit from the machinery upgrade. Most respondents looking for timely and affordable assistance said they found it through MEP. About 92 percent of the survey respondents rated timely assistance as an important MEP attribute, and 83 percent said they were satisfied with the timeliness of the assistance provided by the program they had used. Ninety-one percent of respondents rated reasonably priced MEP service fees and project proposals as important MEP attributes, and most were satisfied with the price of fees and proposals costs at their own program. Eighty percent of respondents who paid fees were satisfied that the fees were reasonable, and about 81 percent of respondents were satisfied that their program had project proposal costs within their financial means. Three hundred twenty-eight survey respondents (60 percent) paid a fee for MEP assistance. Of those, 58 percent said that the value added or worth of the assistance was worth more than what they paid for it, 27 percent said the assistance was worth about what they paid, and 11 percent said the assistance was worth less than the fee they had paid. As agreed with you, unless you announce the contents of this report earlier, we plan no further distribution until 14 days after the date of this letter. At that time, we will send copies to the Director of NIST, the Secretary of Commerce, and the Chairmen and Ranking Minority Members of congressional committees that have responsibilities related to these issues. Copies also will be made available to others upon request. The major contributors to this report are listed in appendix IV. Please contact me at (202) 512-8984 if you have any questions concerning this report. At the request of Chairwoman Constance A. Morella of the Subcommittee on Technology, House Committee on Science, we obtained manufacturers' views regarding the impact of manufacturing extension programs' (MEP) services on their business performance and the factors that affected the impact of MEP services. In August 1995, we reported that most manufacturers responding to our questionnaire believed MEP assistance had positively affected their overall business performance. Our objectives for this report were to analyze (1) the factors that may have contributed to the positive impact of MEP assistance on companies' overall business performance; (2) the question of whether companies' expectations were met regarding the impact of MEP assistance on specific business performance indicators, such as manufacturing time frames and labor productivity; and (3) the issue of whether MEP actually demonstrated attributes that companies indicated they valued most, such as MEP staff expertise, timely assistance, and reasonably priced fees. We did not verify either positive or negative impacts reported by manufacturers. To identify manufacturers that had used MEP services to survey regarding the services' impact on their business performance and the factors that had affected the services' impact, we (1) developed criteria for the type of MEP our study would include, (2) located all MEP that fit our criteria, and (3) asked these MEP for their cooperation in supplying names of clients that met our survey criteria (described in the following paragraphs). Since the term "MEP" could include a variety of programs and organizations, we consulted MEP literature and MEP experts to develop a set of criteria to use in identifying programs to include in our study. For the purpose of our study, we considered programs to be relevant if their primary function was to provide direct technical assistance to individual manufacturers, using program staff or supervised consultants. We defined "technical assistance" as one or more of the following activities: providing access to and encouraging the use of innovative and/or off-the-shelf manufacturing technologies and processes; disseminating scientific, engineering, technical, and management providing access to industry-related expertise and capability in university research departments; and transferring advanced manufacturing (i.e., cutting edge) technologies and techniques to companies. Our definition excluded business assistance programs such as the Small Business Administration's Small Business Development Centers; business incubators; financial assistance, funding, and grant programs; joint research ventures with universities and/or federal laboratories; on-line technical data base services; and industry networks. We located 80 MEP that met our criteria for inclusion and had been established before 1994. We used reports from the National Governor's Association, the Northeast-Midwest Institute, and the Battelle Memorial Institute in Ohio that contained references to existing MEP as the basis for identifying programs that would possibly fit our criteria. We confirmed and updated information in these reports by conducting structured telephone interviews with all programs that we believed matched our criteria. We interviewed officials from a total of 114 programs in 40 states. Eighty of them met our criteria for inclusion and had been established before January 1994. Fifty-seven of the 80 MEP that qualified for our study supplied us with the names of clients that met our survey criteria. Thirteen of these MEP received NIST funding for fiscal year 1994, accounting for 36 percent of survey respondents. In an effort to determine if the qualified programs that provided client information differed from the qualified programs that did not, we compared the two sets of programs on the basis of program age, total funding, federal funding, and type of administration. The results of the comparisons indicated that there were no significant differences between MEP that did and did not provide client data. We asked the 57 participating MEP to select from their records all manufacturers that met specific criteria that we developed in consultation with MEP officials and MEP evaluation experts. The client had to meet the following criteria: It had to be a manufacturing facility, which means that its products had to belong to one or more of the manufacturing categories in the Department of Commerce's Standard Industrial Classification codes. Our survey excluded nonmanufacturing facilities, such as service providers or farmers. It had to have received at least 40 hours of MEP assistance in 1993. Thus, when the facility received our survey in early 1995, at least 1 year would have elapsed since the MEP assistance ended. MEP evaluation experts have told us that 1 year would have been sufficient time for facilities to be able to gauge the value of the assistance and its impact on their business performance. Experts also have told us that 40 hours would have been enough assistance to have had a potential effect on a manufacturer's business performance. It had to have completed assistance in one or more of the four categories defined in the following paragraph. In cases in which a manufacturer completed more than one type of assistance, we asked the MEP official to choose the primary assistance provided to the manufacturer (i.e., the assistance requiring the most MEP time and/or resources). We did not verify the client information MEP provided against the programs' records. The assistance categories we included in our survey involved the following: Quality improvement. Technical assistance in planning, developing, and implementing a quality system to help a manufacturer attain higher quality standards. Equipment modernization and plant layout. The evaluation and analysis of plant layout and equipment to determine the most efficient means of manufacturing or assembly through reorganization of the process flow through the facility, and/or upgrading, reconfiguring, or replacing manufacturing equipment. Product design and development. Services to support the creation, enhancement, or marketing of a manufacturer's product. Environmental or energy assessment. Assessment of hazardous materials, discharge, waste products, energy use, and other environmental effects within a manufacturing operation. We chose these four assistance categories because they share important characteristics. They are types of assistance that MEP typically offer clients, so our survey potentially could include clients from most MEP. Also, the four types of assistance are defined in a similar way by most MEP, according to MEP officials. Other MEP services (such as worker training and strategic business planning) may vary considerably from one program to another. Finally, we selected types of assistance that were directed at clients' manufacturing operations. MEP clients receiving operations-related assistance were able to tell us (1) how they expected the assistance would affect their operations and/or performance and (2) whether or not these expectations were met. Other types of MEP assistance--examples are material engineering, electronic data exchange, and computer upgrading--have effects on manufacturers' operations that are less visible and less easily measured. As a result, manufacturers may have difficulty determining the expected and actual impact of these types of services on their business operations and performance. We designed four questionnaires, each focusing on one assistance category. In designing our survey questions, we obtained input from National Institute of Standards and Technology (NIST) and MEP officials, MEP evaluation experts, and managers at manufacturing facilities. We also reviewed client surveys that MEP used. Each questionnaire contained identical questions to obtain background information about the respondent and to get respondents' views on the impact of MEP services on their business performance and the factors affecting the impact of MEP services. However, the four surveys also had unique questions asking about the expected and actual outcomes of the assistance, because each type of assistance focuses on a different aspect of manufacturers' operations. We tailored these questions to ask about the kind of impacts that reasonably could be expected to result from the particular kind of assistance received. As part of our survey development, we tested all four surveys with manufacturers who had received MEP assistance in Texas, Iowa, New York, and Kansas. We chose those states in order to cover diverse areas of the country where MEP are located. We also interviewed eight manufacturers who had received MEP services and were given tours of their manufacturing facilities in Maryland, Georgia, North Carolina, and South Carolina. We visited these southern states because MEP directors had agreed to arrange for us to meet selected clients. We asked the manufacturers about their experiences with MEP services and the impact of those services on their business performance. Our final surveys initially were mailed to a total of 843 manufacturers from February 1995 through March 1995. Follow-up mailings were made through May 1995. Each manufacturer was sent one survey, based on MEP information on the primary type of service the manufacturer had received. The primary reason manufacturers did not respond to our survey was their inability to recall MEP assistance they had received. We wrote letters asking the nonrespondents why they did not return our survey. We received responses from 60 companies out of 274 nonrespondents. About 33 percent told us that no one at their facility could recall the assistance received in 1993 and/or that we had addressed the survey to a person who no longer worked at the facility. On the basis of this information, in addition to other information provided by our nonrespondents, we reduced our survey population from 843 to 766. We obtained an overall response rate of 72 percent across all four surveys. Response rates varied from a low of 63 percent for the environmental/energy survey to a high of 76 percent for the quality improvement survey. Our analysis of the companies that did and did not respond to our survey found nothing to indicate that our results would have been different if the nonrespondents had completed our questionnaire. The respondents and nonrespondents were similarly distributed across different geographic locations and different MEP. Since we did not evaluate the operations or management of specific federal programs, we did not obtain agency comments on this report. However, on February 12, 1996, we discussed a draft of this report with NIST officials, including the Director of the NIST Manufacturing Extension Partnership Program. He agreed with the technical accuracy of the report and offered minor clarifications, which we incorporated into the report where appropriate. We did our work primarily in Los Angeles, New York, San Francisco, and Washington, D.C., from February 1995 to January 1996 in accordance with generally accepted government auditing standards. We used logistic regression techniques to determine which factors were statistically significant in predicting the reported impact of MEP assistance on companies' overall business performance. We began our analysis by considering nine factors that may have affected how the manufacturers we surveyed assessed the impact of MEP assistance on their overall business performance. The factors included the following characteristics of those manufacturers: (1) the number of permanent employees as of January 1, 1995, (2) the number of hours company staff devoted to MEP assistance, (3) the year the company started operating, (4) the company's gross sales in fiscal year 1994, (5) whether the company paid any fees for MEP assistance, (6) whether the company made any financial investments as a result of the assistance, (7) whether the assistance included recommendations, and (8) the percentage of MEP recommendations the company implemented. We also considered whether the company used a program that had received NIST funds. These factors all are listed in the first column of table III.1. Odds ratios indicating the effects of the different factors on the odds of MEP being assessed as: Extremely Positive vs. Generally Positive vs. 0 = 100 or more; 1 = 20 - 99; 2 = less than 20 0 = less than 100; 1 = 100 - 250; 2 = more than 250 0 = before 1985; 1 = since 1985 0 = over $1 million; 1 = under $1 million 0 = no; 1 = yes 0 = no; 1 = yes 0 = no; 1 = yes 0 = few or none; 1 = some; 2 = all or almost all 0 = yes; 1 = no Number of permanent employees was dropped from the multivariate analysis because of its strong association with gross sales. Each of these two indicators of company size were significantly related to assessments when the other indicator was ignored. However, when we controlled for gross annual sales, the effect of number of permanent employees was not statistically significant. The percentage of recommendations implemented was dropped from the multivariate analysis because there were too few responses to perform the analysis. Only 70 percent of the companies received recommendations and provided information on the percentage of recommendations implemented. Some of these factors had many categories. We used loglinear methods to determine which of those categories differed with respect to companies' assessment of the overall impact of MEP. We combined the categories that were not significantly different from one another. The categories which ultimately were contrasted with one another are given in the second column of table III.1. For the purpose of our analysis, the factors were used as the independent variables. We used simple bivariate logistic regression models to estimate the individual influence of each factor on the reported impact of MEP assistance, without controlling for the influence of all other relevant factors identified in the survey. We estimated which of the nine factors, as categorized in Table III.1, were related to (1) the odds on the overall impact of MEP being assessed as extremely positive versus generally positive and (2) the odds on the overall impact of MEP being assessed as generally positive versus negative or neutral. Our bivariate estimates are given as odds ratios in the third and fifth columns of table III.1. As can be seen in that table, seven of the nine factors had a significant relationship to the likelihood that companies assessed the impact of MEP assistance as extremely positive, as opposed to generally positive. In addition, four of the nine factors were significantly related to the odds of companies assessing the impact of MEP assistance as generally positive, as opposed to neutral or negative. The bivariate odds ratios have a straightforward interpretation. The odds ratio gives an estimate of how each factor, as categorized in column 2 of Table III.1, affected companies' assessment of MEP assistance. For example, the companies with 20-99 employees were more than twice as likely as the companies with 100 or more employees to assess the impact of MEP as extremely positive as opposed to generally positive. Likewise, the companies with less than 20 employees were more than twice as likely as the companies with 20 to 99 employees to assess the impact of MEP as extremely positive, as opposed to generally positive. Similar interpretations can be given to the other odds ratios in the table. The bivariate odds ratios are estimates that do not take into account the effects of other variables. We also undertook multivariate analysis of the data. Multivariate analysis also estimated the individual effect of each factor on the reported impact of MEP assistance, but it controlled for the influence of all other relevant factors. It is necessary to control for the influence of multiple factors because some factors are associated with others, making it impossible to isolate their individual effect on the dependent variable. Our multivariate analysis did not include two factors used in the bivariate analysis: the number of permanent employees and the percentage of recommendations companies had implemented. The odds ratios in the fourth and sixth columns of table III.1 provide the results of multivariate analysis. Odds ratios that are marked by an asterisk represent statistically significant effects. Five factors had significant effects on the odds of whether programs were assessed extremely positively as opposed to generally positively: (1) the number of company staff hours devoted to the assistance, (2) when the company started operating, (3) the company's 1994 fiscal year gross sales, (4) whether the company paid any fees for the assistance, and (5) whether the company made any financial investments as a result of the assistance. Only two factors had significant effects on whether assessments were generally positive as opposed to neutral or negative: (1) the number of company staff hours devoted to the assistance and (2) whether the company made any financial investments as a result of the assistance. Many of the significant effects from the multivariate analysis are quite sizable. For example, the companies that made financial investments were 2.5 times as likely as those that had not made financial investments to assess the impact of MEP assistance as extremely positive, as opposed to generally positive. The companies that made financial investments also were 5.6 times as likely as companies that had not made financial investments to assess the impact of MEP assistance as generally positive, as opposed to neutral or negative. Other odds ratios can be similarly interpreted. Our letter report features the results of the multivariate analysis. The multivariate estimates may differ from the bivariate estimates because the multivariate analysis controlled for the effects of all other factors when estimating the influence of one factor. Bivariate analysis estimates the influence of one factor without controlling for the effects of other factors. In general, the multivariate and bivariate estimates for each factor are similar, with two exceptions. The first exception is company staff hours devoted to MEP assistance. In the bivariate analysis, this factor was unrelated to whether companies assessed the impact of MEP assistance as extremely positive versus generally positive. However, multivariate results indicate that company staff hours were significantly related to companies' assessment of the impact of assistance as extremely positive, as opposed to generally positive. We believe that the significance varies because of a relationship between company size and the number of company staff hours spent on MEP assistance. In particular, larger companies devoted more staff hours to the program. In order to accurately assess the independent influence of company staff hours, we needed to control for company size. Our multivariate model controls for company size by including the variable that measures gross sales. Therefore, the multivariate model provides a more accurate assessment of the impact of company staff hours, independent of company size. The second exception was the factor measuring whether MEP assistance included recommendations. In our bivariate analysis, this variable was significantly related to both extremely positive and generally positive assessments. However, its significance disappeared in our multivariate analysis. Companies receiving recommendations were more likely to devote more staff hours to the program and to make financial investments as a result of MEP assistance. Therefore, when the multivariate analysis controlled for company staff hours spent on the assistance and financial investments made as a result of the assistance, the effect of recommendations was rendered insignificant. Susan S. Westin, Assistant Director Douglas Sloane, Supervisory Social Science Analyst Stuart Kaufman, Senior Social Science Analyst Barry L. Reed, Senior Social Science Analyst Rona Mendelsohn, Senior Evaluator (Communications Analyst) Patrick F. Gormley, Assistant Director Amy L. Finkelstein, Evaluator-in-Charge Edward Laughlin, 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. 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Pursuant to a congressional request, GAO surveyed manufacturers' views regarding the impact of manufacturing extension programs (MEP), focusing on: (1) factors contributing to the positive impact of overall business performance reported by the majority of survey respondents; (2) whether companies' expectations were met regarding MEP impact on specific business performance indicators; and (3) whether companies thought that MEP actually demonstrated attributes they valued most. GAO found that: (1) the results of its survey could not be applied to all MEP participants or all MEP service categories; (2) companies that supplemented MEP assistance with their own resources, implemented more MEP recommendations, were small and relatively new, and did not pay fees for MEP assistance were more likely to view the MEP program positively; (3) the source of MEP funding did not influence companies' views of the assistance's impact; (4) National Institute of Standards and Technology (NIST) officials believed that NIST support improved MEP programs' efficiency and effectiveness and made MEP services more widely available; (5) about two-thirds to three-quarters of the companies that expected MEP assistance to enhance specific business indicators believed that the results met or exceeded their expectations; and (6) over 90 percent of the companies rated staff expertise, timely assistance, and reasonably priced MEP service fees and project proposals as important MEP features and most were satisfied with their specific MEP programs in these areas.

Annually, IRS audits some tax returns to determine whether taxpayers complied with the tax laws. IRS attempts to select returns for audit that have an indication of potential noncompliance based on, for example, its formula for flagging suspicious returns. IRS believes that a credible threat of being audited deters some noncompliance. IRS audits check compliance in reporting income, deductions, and other return items as well as in paying the correct tax liability. To conduct these compliance checks, IRS auditors ask taxpayers for documentation about specific items on their returns. IRS conducts two types of audits, face-to-face and correspondence, using three classes of auditors--revenue agents, tax auditors, and tax examiners. Face-to-face audits can be either (1) field audits, in which an IRS revenue agent visits an individual who has business income or a complex return, or (2) office audits, in which an individual who has a less complex return visits a tax auditor at an IRS office. Correspondence audits, as the name suggests, are done by tax examiners who correspond with taxpayers through the mail. Correspondence audits usually involve one line item on a return. Because correspondence audits involve fewer and usually simpler tax return items, they are less likely to burden taxpayers in terms of time, contacts with IRS, and documentation provided to IRS. IRS also checks compliance and contacts individual taxpayers through nonaudit enforcement programs. For example, IRS' math error program checks returns for math and consistency errors and contacts taxpayers if such errors are found. IRS' underreporter program matches the income reported on tax returns with the information returns (e.g., W-2 forms) filed by third parties, such as employers who pay wage income. If discrepancies are found, then taxpayers are mailed a notice. Although such contacts can be similar to correspondence audit contacts, IRS does not define them as audit contacts. Over the years, IRS has shifted contacts between the audit and nonaudit categories. For example, in fiscal 1997, IRS shifted over 700,000 cases involving missing or invalid social security numbers on tax returns from the correspondence audit program to the math error program. Changes in the definition of an audit could contribute to decreases or increases in the audit rate. To describe changes in audit rates for individuals (as opposed to partnership or corporate taxpayers), we used IRS' method for computing audit rates. For all taxpayers and by taxpayer categories, the audit rate equals the proportion of IRS audits closed in a fiscal year compared to returns filed in the previous calendar year. We used data from IRS' Databook, Audit Information Management System, and Statistics of Income about individual income tax returns filed in calendar years 1995 through 1999 and audits of the returns that closed in fiscal years 1996 through 2000. This allowed us to describe the changes and update the audit rate trends in earlier reports. We also described audit rates by various categories. One category was the income reported on individual income tax returns, which IRS divides into broad groups. Under IRS' grouping, lower income individuals report income under $25,000 and higher income individuals report $100,000 or more of income on their tax returns. Other categories included the types of IRS audit, IRS office locations, and the major income sources. Nonbusiness sources include individuals who generated most of their income from sources such as wages, dividends, and interest. Business sources include individuals who generated most of their income from self- employment and reported that income on a schedule C (nonfarm income) or schedule F (farm income). For comparisons of lower and higher income by source of income, we excluded schedule F income because IRS' data only split schedule F income into groups under and over $100,000. We did include Schedule F taxpayers in the overall audit rate. We interviewed officials from IRS' Examination Division and the Brookhaven Service Center to discuss IRS' reasons for changes in the audit rates from fiscal years 1996 through 2000. We also obtained available IRS data related to the reasons given by IRS officials. For example, we obtained IRS data on changes in the number of auditors and number of hours spent doing audits. We checked for inconsistencies between the raw data and the reasons that IRS officials gave us. However, due to time constraints, we did not do any more detailed analyses to determine the extent to which IRS' reasons explained the changes in audit rates. Nor did we attempt to identify reasons beyond those offered by IRS. To describe what is known about the potential effects of changes in the audit rates on tax compliance, we used our previous and ongoing work on IRS audits, other IRS enforcement programs, and tax compliance. We also used information from our discussions with IRS officials. We did our work at IRS' national office in Washington, D.C., between September 2000 and March 2001 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue. We received written comments from the Commissioner in a letter dated April 19, 2001. The comments are reprinted in appendix IV and discussed at the end of this letter. From fiscal years 1996 through 2000, the overall income tax audit rate of individuals declined. As table 1 shows, IRS' annual audit rates for individuals declined from 1.67 percent to 0.49 percent--about 70 percent. The table also shows that the audit rates fell for all major sources of income--nonbusiness as well as schedule C and schedule F business returns--over the 5 years. Table 1 also shows that the audit rate patterns for each year changed little from fiscal years 1996 to 2000. Schedule C business returns were more than twice as likely to be audited than the nonbusiness returns in each year. Table 2 shows that audit rates declined about equally--67 percent and 70 percent, respectively--for lower and higher income individuals. When taxpayers are separated into nonbusiness and business income groups, audit rates declined at least 42 percent from fiscal years 1996 to 2000 for lower and higher income individuals in the two groups. Table 2 also shows that higher income individuals were more likely to be audited than lower income individuals in each of the 5 years. However, exceptions to this pattern emerged when these audit rates by income level were analyzed by source of income. First, in the nonbusiness group, IRS was more likely to audit lower income individuals only in fiscal year 1999. Second, in the business group (schedule C), the rates fluctuated by income levels. IRS was more likely to audit lower income individuals in fiscal year 1996, higher income individuals in fiscal years 1997 and 1998, and lower income individuals in fiscal years 1999 and 2000. Most audits of lower income individuals were correspondence audits, with the proportion of audits of lower income individuals that were correspondence audits ranging from 69 to 84 percent over the 5 years. Audits of higher income individuals were mostly face-to-face audits, ranging from 62 to 75 percent over the 5 years. (See table 13 in app. I for details.) Correspondence and face-to-face audit rates also varied by taxpayer income. For example, in fiscal year 2000, the face-to-face audit rate (face- to-face audits divided by all returns filed) for higher income individuals was 0.60 percent compared with 0.13 percent for lower income individuals. For correspondence audits in fiscal year 2000, the audit rate for higher income individuals was 0.37 percent and for lower income individuals was 0.50 percent. (See table 14 in app. I for details.) Table 3 shows that both types of face-to-face audits (field and office) and correspondence audits declined by similar rates from 1996 to 2000. Table 3 also shows that correspondence/tax examiner audits accounted for over half of all audits in each year (ranging from 54 percent to 67 percent) and that the number of audits declined each year for all types of audits/auditors except for correspondence audits in fiscal year 1999. The declines in audit rates were spread uniformly across IRS' four regions. However, audit rates varied by region. The audit rates declined about 50 percent in each of IRS' four regional offices from fiscal years 1996 to 1999.For each of these 4 years, the range of audit rates was highest in the Western Region (1.09 to 0.47 percent) compared to the Northeast Region (0.44 to 0.23 percent), the Southeast Region (0.58 to 0.28), and the Midstates Region (0.62 to 0.32 percent). (See tables 18, 19, and 20 in app. III.) According to IRS officials, overall audit rates declined for fiscal years 1996 to 2000 for three main reasons. First, IRS had fewer auditors for individual returns for reasons that include a decline in staff and decisions to change staffing priorities to focus on customer service. Second, IRS was more likely to use the remaining auditors in other duties, such as assisting taxpayers. Third, audits took longer due to additional requirements, such as more written communications with taxpayers about the status of their audit. With respect to changes in the audit rate by income levels, IRS officials cited an increase in the number of high-income tax returns and an audit focus on noncompliance by earned income credit claimants, who are usually lower income individuals. IRS' raw data were generally consistent with all these reasons. However, due to time constraints, we did not analyze the data to determine the extent to which IRS' reasons explained the changes in audit rates. According to IRS officials, IRS did fewer audits between fiscal years 1996 and 2000, in part because it had fewer auditors. IRS officials explained that auditor staff levels declined for two reasons. First, tight budgets in the 1990s reduced overall staffing levels. Second, IRS put more staff in positions to serve taxpayers and generally has not hired revenue agents or tax auditors since 1995. As shown in table 4, the number of revenue agent and tax auditor positions assigned to audit individual income tax returns declined steadily since 1996. By fiscal year 2000, the number of these positions declined about 54 percent for revenue agents and about 61 percent for tax auditors. This represents a loss of over 2,000 staff years for audit staff devoted to field and office audits. On the other hand, tax examiner positions, which do the simpler correspondence audits, increased 13 percent, or 200 positions, between fiscal years 1997 and 2000 (data for fiscal year 1996 were not available). IRS officials also said that its auditors spent less time auditing in fiscal years 1996 through 2000. Our analysis of IRS' data, as shown in table 5, indicates that for individual income tax returns, the average amount of direct audit time--actual time doing audit work--has declined in comparison to time spent on nondirect audit activities. Nondirect audit activities include taxpayer assistance, other details, and training. Part of the reason for the decline in auditing is that revenue agents and tax auditors spent increasingly more time providing taxpayer assistance between fiscal years 1996 and 2000. The amount of time spent on taxpayer assistance by revenue agents increased from about 1.0 percent of available staff years in 1996 to about 4.4 percent of available staff years in 2000. The amount of time spent on taxpayer assistance by tax auditors increased from about 1.4 percent of available staff years in 1996 to about 12.3 percent of available staff years in 2000. IRS did not have comparable data for assistance provided by tax examiners who had been slated to do audits. In addition, revenue agents and tax auditors had less time to audit because of increased time in training. (See table 17 in app. II for additional information on revenue agent and tax auditor training.) Considering the 54-percent decrease in the number of revenue agents, the training time per revenue agent increased about 227 percent. The training time per tax auditor over the same 5 years increased about 95 percent. IRS did not have comparable training data on tax examiners. Finally, IRS officials said that auditors generally took longer to finish audits during fiscal years 1996 to 2000. Our analysis of IRS' data for this period (see table 16 in app. II) showed that the average time to finish an audit increased for all types of auditors, including about 37 percent (20.2 hours to 27.6 hours) for revenue agents (field audits), 56 percent (4.6 hours to 7.1 hours) for tax auditors (office audits), and 153 percent (0.7 hours to 1.8 hours) for tax examiners (correspondence audits). IRS officials told us that Internal Revenue Service Restructuring and Reform Act of 1998 requirements increased audit time. Among other things, these requirements resulted in IRS auditors having to send more notices to taxpayers and third parties that provide information about the taxpayer being audited. New requirements to explain innocent spouse provisions and to protect taxpayers under audit have generated more review work. These officials said the act has created many new tasks during audits. Other factors, such as the experience level of the auditor and complexity of the audit, also affected audit time per return. For example, IRS officials said that they lost many experienced auditors to higher graded positions elsewhere in IRS. Because multiple factors affect audit time per return, determining the contribution of each factor to changes in audit time could be difficult. Because of time constraints, we did not attempt such an analysis. IRS officials offered two reasons why the audit rates for lower income individuals exceeded the rates for higher income individuals in selected years among the nonbusiness and business groups. First, as table 6 shows, the number of higher income returns filed in calendar years 1995 through 1999 that were subject to audits in fiscal years 1996 to 2000 significantly increased compared with the number of lower income returns filed. For nonbusiness returns, the number of higher income returns filed rose 80 percent compared with a 5-percent decrease for lower income returns filed. For business returns, the number of higher income individual returns increased about three times the rate of lower income business returns. Second, IRS' audits in fiscal years 1997 through 2000 have continued to focus on EIC noncompliance, usually by lower income individuals. As table 7 shows, EIC audits, usually correspondence audits, accounted for a large percent of the audits of lower income taxpayers, regardless of their major source of income. In fact, the EIC portion of all audits for lower income taxpayers in fiscal year 2000 was more than double the fiscal year 1997 EIC portion of these audits. IRS officials also said that a project to address noncompliance by schedule C filers who claimed EIC explained the greater audit rates for lower income business filers compared with those with higher incomes during fiscal years 1999 and 2000. The specific effect of the recent decline in the audit rate on the level of voluntary compliance is not known. One reason is that IRS does not have current reliable information on the levels of voluntary compliance. IRS last measured overall income tax compliance for tax year 1988. IRS and others are concerned that changes in the tax laws, economy, and demographics since 1988 have made the compliance information out of date. Even if IRS had this information, IRS would still need to take a number of steps to try to determine the specific link between changes in audits and changes in voluntary compliance levels. Historically, measuring the specific impact of audit rate changes on voluntary compliance has been difficult. It is difficult to collect data on nonaudit factors that also can affect voluntary compliance levels, and then to control for these factors in order to isolate the impact of audit rate changes. For example, it is difficult to determine the effect of declining audit rates on voluntary compliance when IRS' nonaudit checks could offset to some degree any negative effects of declining audit rates on compliance. Since the 1970s, for example, the underreporter program has grown, covering more types of income especially among nonbusiness taxpayers. IRS also uses the math error program to help ensure taxpayer compliance. Since the math error and underreporter checks can be similar to correspondence audits, growth in these programs may offset to some degree the decline in the audit rate. Furthermore, it has also been difficult to measure how improvements in assisting and educating taxpayers about their tax obligations compensate for declining rates. These IRS efforts, although not designed to find noncompliance, could help taxpayers to voluntarily comply. To the extent that education efforts succeed in promoting compliance, overall compliance would not necessarily decline if the audit rate declines. IRS has been allocating more resources to taxpayer assistance and education. One example is the increased use of revenue agents and tax auditors to provide taxpayer assistance. Because IRS does not have a measure of voluntary compliance, we do not know the net effects on tax compliance levels of the declining audit rates, changes in the volume of nonaudit checks, and any improvements in IRS' educational efforts. On April 19, 2001, we received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. IV.). The Commissioner said that IRS agrees with our presentation and analysis of the audit rate data as well as with the need for current and reliable data on voluntary compliance. The Commissioner agreed that changes in the economy and tax laws have rendered IRS' compliance data obsolete. The Commissioner's comments also expanded on what IRS officials told us during our work about the reasons for the audit rate decline. Specifically, the comments said that two provisions (sections 1203 and 1204) of the Restructuring and Reform Act of 1998 created a cautionary environment that led to audits taking longer. The Commissioner also said that the report did not acknowledge historical data in two studies--one by IRS and one by external researchers--on the effects of the decline in audit rates on voluntary compliance. We did not acknowledge these studies in the report because, while they estimate a relationship between audits and compliance, they are not based on current data. The most recent of the studies used data from 1982 through 1991. Because of the possibility that changes over time in the economy, tax laws, demographics, and IRS compliance programs have changed the relationship between audit rates and voluntary compliance, we did not cite the studies. These two studies did report a positive relationship between audit rates and voluntary compliance. This finding is consistent with the concern, which we describe in the report, that a decline in audit rates could lead to a decline in voluntary compliance. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this letter until 30 days from its date of issue. We will then send copies to Representative William M. Thomas, Chairman, and Representative Charles B. Rangel, Ranking Minority Member, House Committee on Ways and Means; Representative William J. Coyne, Ranking Minority Member, Subcommittee on Oversight, House Committee on Ways and Means, and Senator Charles E. Grassley, Chairman, and Senator Max Baucus, Ranking Minority Member, Senate Committee on Finance. We will also send copies to the Honorable Paul H. O'Neill, Secretary of the Treasury; the Honorable Charles O. Rossotti, Commissioner of Internal Revenue; the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. Copies of this report will be made available to others upon request. If you have any questions, please contact me or Tom Short at (202) 512- 9110. Key contributors to this report are acknowledged in appendix V. Appendix I: Individual Income Tax Audit Rate Trends for Fiscal Years 1996 Through 2000 TPI = total positive income (income from positive sources only) Schedule C-TGR = total gross receipts (profit or loss from business) Schedule F-TGR = total gross receipts (profit or loss from farming) TPI = total positive income (income from positive sources only) Schedule C-TGR = total gross receipts (profit or loss from business) Schedule F-TGR = total gross receipts (profit or loss from farming) Note 1: We combined two of IRS' audit income levels ($25,000 to $50,000 and $50,000 to $100,000) into one income group ($25,000 to $100,000) because their audit rates were similar. Note 2: Returns filed in calendar years1995 through 1999 are used to compute fiscal years 1996 through 2000 audit rates. TPI = total positive income (income from positive sources only) Schedule C-TGR = total gross receipts (profit or loss from business) Schedule F-TGR = total gross receipts (profit or loss from farming) Business Lower income Higher income Combined nonbusiness and business Lower income Higher income Not applicable. The audit rate for lower income individuals is greater than the rate for higher income individuals for both nonbusiness and business filers in fiscal year 1999. However, when nonbusiness and business filers are combined into one category the audit rate for higher income individuals is greater than the audit rate for lower income individuals. This occurs due to the large number of lower income nonbusiness filers (57.4 million) compared to the number of lower income business filers (2.5 million). As a result, the combined audit rate for lower income individuals is more dominated by the audit rate for nonbusiness filers (1.18 percent) and less dominated by the audit rate for business filers (2.69 percent). Therefore, the combined audit rate only increases to 1.24 percent from the 1.18-percent audit rate for lower income nonbusiness filers. On the other hand, the difference between the number of higher income nonbusiness filers (7 million) and the number of higher income business filers (1.9 million) is not nearly as large as for lower income individuals. As a result, the combined audit rate for higher income filers is less dominated by the audit rate for nonbusiness filers (1.14 percent) and more dominated by the audit rate for business filers (2.40 percent) compared to lower income filers. Therefore, the combined audit rate increases to 1.40 percent from the 1.14-percent audit rate for higher income nonbusiness filers. Tax examiner totals for fiscal years 1998, 1999, and 2000 include service center and district office tax examiner totals. In addition to those named above, Helen Branch, Jay Pelkofer, Susan Baker, Michele Fejfar, Anne Rhodes-Kline, MacDonald Phillips, and Robert DeRoy made key contributions to this report.

The Internal Revenue Service (IRS) does various compliance checks to ensure the accuracy of information reported on taxpayers' returns. In recent years, the audit rate--the proportion of tax returns that IRS audits each year--has drawn attention because of a long-term decline in audit rates and the differences in audit rates for lower and higher income individuals. This report (1) describes the changes in audit rates for individual income tax returns overall and for categories, such as major sources (i.e., nonbusiness versus business) and levels of income for fiscal years 1996 through 2000; (2) discusses IRS' reasons and related data explaining the changes in audit rates; and (3) describes what is known about the effects of changes in the audit rates on tax compliance. In comparing fiscal years 1996 and 2000, GAO found that the overall tax audit rate of individuals declined about 70 percent. These rates declined regardless of the individual taxpayer's income level. IRS cited the following three reasons for the decline in audit rates for fiscal years 1996 to 2000: (1) the number of IRS auditors for individual returns declined by more than half due to a decline in total staff and decisions to change staffing priorities to focus on customer service; (2) the remaining auditors were used in other areas, such as assisting taxpayers; and (3) audits took longer due to additional audit requirements, such as more written communications with taxpayers about the status of their audit. To explain the changes in the audit rates by income levels, IRS officials cited increases in the number of high-income tax returns and an audit focus on noncompliance by earned income credit claimants, who are lower income individuals. Finally, neither IRS nor external observers know how the decline in audit rates affects voluntary tax compliance.

DOD defines a UAV as a powered aerial vehicle that does not carry a human operator; can be land-, air-, or ship-launched; uses aerodynamic forces to provide lift; can be autonomously or remotely piloted; can be expendable or recoverable; and can carry a lethal or nonlethal payload. Generally, UAVs consist of the aerial vehicle, a flight control station, information and retrieval or processing stations, and sometimes wheeled land vehicles that carry launch and recovery platforms. UAVs have been used in a variety of forms and for a variety of missions for many years. After the Soviet Union shot down a U-2 spy plane in 1960, certain UAVs were developed to monitor Soviet and Chinese nuclear testing. Israel used UAVs to locate Syrian radars and was able to destroy the Syrian air defense system in Lebanon in 1982. The United States has used UAVs in the Persian Gulf War, Bosnia, Operation Enduring Freedom, and Operation Iraqi Freedom for intelligence, surveillance, and reconnaissance missions and to attack a vehicle carrying suspected terrorists in Yemen in 2002. The United States is also considering using UAVs to assist with border security for homeland security or homeland defense. Battlefield commanders' need for real time intelligence has been a key reason for the renewed interest in UAVs. According to the Congressional Research Service, UAVs are relatively lightweight and often difficult to detect. Additional advantages include longer operational presence, greater operations and/or procurement cost-effectiveness, and no risk of loss of life of U.S. service members. DOD operates three UAV types--small, tactical, and medium altitude endurance--in its force structure. The Air Force has operated the MQ-1 Predator since 1996 in intelligence, surveillance, and reconnaissance missions, using a variety of sensors and satellite data links to relay information, and in an offensive combat role using Hellfire missiles. The Air Force also operates a small UAV called Desert Hawk, a 5-pound aerial surveillance system used by security personnel to improve situational awareness for force protection. The Army, Navy, and Marine Corps have at various times operated the RQ-2 Pioneer since 1986. Only operated by the Marine Corps today, the Pioneer provides targeting, intelligence, and surveillance. The Marine Corps also operates a small UAV called Dragon Eye for over-the-hill reconnaissance. This small, 4.5-pound UAV is currently in full-rate production. Originally envisioned to be a joint Army/Navy/Marine Corps program, the RQ-5 Hunter was cancelled in 1996 after low-rate initial production. The Army currently operates the residual Hunters for intelligence, surveillance, and reconnaissance. The Army also has selected the RQ-7 Shadow to provide intelligence, surveillance, and reconnaissance at the brigade level, and full-rate production was approved in 2002. Another system, the Raven, a small, 4-pound UAV is being purchased commercially off the shelf by both the Army for regular unit support and the Air Force for special operations. Numerous other UAVs of various sizes remain in development. These include the RQ-4 Global Hawk, a nearly 27,000-pound, jet-powered UAV with a wing span of over 116 feet used for intelligence, surveillance, and reconnaissance over an area of up to 40,000 square nautical miles per day; the RQ-8 Fire Scout, a vertical takeoff and landing UAV weighing nearly 2,700 pounds; and the Neptune, weighing under 100 pounds with a wingspan of 7 feet and optimized for sea-based operations. In addition, congressional action in recent years has been directed toward promoting an increase in the number and type of missions on which UAVs can be used. For example, section 220 of the Department of Defense Authorization Act for Fiscal Year 2001 specifies that it shall be a goal of the armed forces that one-third of the aircraft in the operational deep strike aircraft fleet be unmanned by 2010. Moreover, in section 1034 of the National Defense Authorization Act for fiscal year 2004, Congress mandated a DOD report of the potential for UAVs to be used for a variety of homeland security and counter drug missions. Finally, the fiscal year 2004 Defense Appropriations Conference Report directs that DOD prepare a second report by April 2004 detailing UAV requirements that are common to each of the uniformed services. Most of our prior work has focused on the development, testing, and evaluation of unmanned aerial vehicles. As recently as September 2000, we reported that DOD was deciding to procure certain UAV systems before adequate testing had been completed. We found that buying systems before successfully completing their testing had led repeatedly to defective systems that were later terminated or required costly retrofits or redesigns to achieve satisfactory performance. Conversely, when DOD focused UAV acquisition on mature technologies that proved the military utility of a given vehicle, the department had an informed knowledge base upon which to base a decision. For example, even though the Predator UAV was based on the existing Gnat 750 UAV, the department required Predator's performance to be validated. As a result, Predator moved quickly to full-rate production and, at the time of our current review, had performed a variety of operational missions successfully. Through our prior work, we have also periodically raised the question of the potential for duplication of efforts among the services and the effectiveness of overarching strategy documents and management approaches to avoid duplication and other problems. For example, in June 2003 we reported that the Air Force and Navy, which previously were independently developing unmanned combat aerial vehicles, had agreed to jointly develop a new system for offensive combat missions that met both of their needs. However, we also pointed out that while one program is more efficient than two, the participation of two services would increase the challenges of sustaining funding and managing requirements. Similarly, as early as 1988, we raised concerns about a variety of management challenges related to UAV development. At that time, various congressional committees had expressed concern about duplication in the services' UAV programs and stressed the need to acquire UAVs that could meet the requirements of more than one service, as the Air Force and Navy have recently agreed to try. In response to congressional direction, DOD developed a UAV master plan, which we reviewed at that time. We identified a number of weaknesses in the 1988 master plan, including that it (1) did not eliminate duplication, (2) continued to permit the proliferation of single-service programs, (3) did not adequately consider cost savings potential from manned and unmanned aircraft trade-offs, and (4) did not adequately emphasize the importance of common payloads among different UAV platforms. DOD generally concurred with that report and noted that it would take until 1990 to reconcile service requirements for acquiring a common family of UAVs. Since our 1988 report, the overall management of defense UAV programs has gone full circle. In 1989 the DOD Director of Defense Research and Engineering set up the UAV Joint Project Office as a single DOD organization with management responsibility for UAV programs. With the Navy as the Executive Agency, within 4 years the Joint Project Office came under criticism for a lack of progress. Replacing the office in 1993, the Defense Airborne Reconnaissance Office was created as the primary management oversight and coordination office for all departmentwide manned and unmanned reconnaissance. In 1998, however, this office also came under criticism for its management approach and slow progress in fielding UAVs. In that same year, this office was dissolved and UAV program development and acquisition management were given to the services, while the Assistant Secretary of Defense for Command, Control, Communications and Intelligence was assigned to provide oversight for the Secretary of Defense. Overall, Congress has provided funding for UAV development and procurement that exceeds the amounts requested by DOD during the past 5 fiscal years, and the services to date have obligated about 99 percent of these funds. From fiscal year 1999 through fiscal year 2003, DOD requested approximately $2.3 billion, and Congress, in its efforts to encourage rapid employment of UAVs by the military services, has appropriated nearly $2.7 billion to develop and acquire UAVs. In total, the services have obligated $2.6 billion of the appropriated funds. (See table 1.) Generally, the additional funding provided by Congress was targeted for specific programs and purposes, enabling the services to acquire systems at a greater rate than originally planned. For example, in fiscal year 2003 the Air Force requested $23 million to acquire 7 Predators, but Congress provided over $131 million--an increase of approximately 470 percent-- enough to acquire 29 Predators to meet operational demands in the war against terrorism. The Air Force has obligated 71 percent of the Predator 2003 funding during its first program year. About $1.8 billion (67 percent) of the money appropriated during the fiscal year 1999-2003 period went for research, development, test and evaluation of the various models, as shown in table 2. The programs were generally divided into efforts to develop tactical UAVs and medium-to-high-altitude endurance UAVs and, until 2002 when the Predator was armed, were focused on meeting surveillance and reconnaissance needs. Only three systems--the Army's Shadow and the Air Force's Predator and Global Hawk--have matured to the point where they required procurement funding during fiscal years 1999 through 2003. By fiscal year 2003, appropriations totaled nearly $880 million, as shown in table 3. DOD estimates that an additional $938 million in procurement funding will be needed through fiscal year 2005. DOD's planning for developing and fielding UAVs does not provide reasonable assurance that UAVs will be integrated into the force structure efficiently, although the department has taken certain positive steps to improve its management of the UAV program. Specifically, DOD created a joint UAV Planning Task Force and developed a key planning document, the UAV Roadmap 2002-2027. However, neither the Joint Task Force nor the Roadmap is sufficient to provide DOD with reasonable assurance that it is efficiently integrating UAVs into the force structure. Consequently, the individual services are developing their own UAVs without departmentwide guidance, thus increasing the risk of unnecessarily duplicating capabilities and leading to potentially higher costs and greater interoperability challenges. Since 2000 DOD has taken positive steps to improve the management of the UAV program. In October 2001 the Under Secretary of Defense for Acquisition, Technology, and Logistics created the joint UAV Planning Task Force to function as the joint advocate for developing and fielding UAVs. The Task Force is the focal point to coordinate UAV efforts throughout DOD, helping to create a common vision for future UAV- related activities and to establish interoperability standards. For example, the Task Force is charged with developing and coordinating detailed UAV development plans, recommending priorities for development and procurement efforts, and providing the services and defense agencies with implementing guidance for common UAV programs. Moreover, the development of the 2002 Roadmap has been the Task Force's primary product to communicate its vision and promote UAV interoperability. The Roadmap is designed to guide U.S. military planning for UAV development from 2002 to 2027 and describes current programs, identifies potential missions for UAVs, and provides guidance on developing emerging technologies. The Roadmap is also intended to assist DOD decision makers in building a long-range strategy for UAV development and acquisition to support defense plans contained in such future planning efforts as the Quadrennial Defense Review. While the creation of the joint Task Force and the UAV Roadmap are important steps to improve management of the UAV program, they are not enough to provide reasonable assurance that DOD is developing and fielding UAVs efficiently. The UAV Roadmap does not constitute a comprehensive strategic plan for developing and integrating UAVs into force structure. Moreover, the Joint Task Force's authority is generally limited to program review and advice but is insufficient to enforce program direction. While DOD has some elements of a UAV strategic-planning approach in place, it has not established a comprehensive strategic plan or set of plans for developing and fielding UAVs across DOD. The Government Performance and Results Act of 1993 provides a framework for establishing strategic-planning and performance measurement in the federal government, and for ensuring that federal programs with the same or similar goals are closely coordinated and mutually reinforcing. The strategic planning requirement of this framework consists of six key components, described in table 4. When applied collectively and combined with effective leadership, the components can provide a management framework to guide major programs, efforts, and activities, including the development and integration of UAVs into the force structure. However, neither the UAV Roadmap nor other DOD guidance documents represent a comprehensive strategy to guide the development and fielding of UAVs that complement each other, perform the range of priority missions needed, and avoid duplication. DOD officials acknowledged that the Office of the Secretary of Defense has not issued any guidance that establishes an overall strategy for UAVs in DOD. While high-level DOD strategic-planning documents provide some general encouragement to pursue transformational technologies, including the development of UAVs, these documents do not provide any specific guidance on developing and integrating UAVs into the force structure. Nonetheless, the Roadmap represents a start on a strategic plan because it incorporates some of the key components of strategic planning provided by the Results Act framework as shown by the following: Long Term Goals--The Roadmap states its overall purpose and what it hopes to encourage the services to attain. The Roadmap refers to the Defense Planning Guidance's intent for UAVs as a capability and indicates that the guidance encourages the rapid advancement of this capability. At the same time, it does not clearly state DOD's overall or long-term goals for its UAV efforts. Similarly, while it states that it wants to define clear direction to the services, it does not clearly identify DOD's vision for its UAV force structure from 2002 through 2027. Approaches to Obtain Long-Term Goals--The Roadmap's Approach section provides a strategy for developing the Roadmap and meeting its goal. This approach primarily deals with identifying requirements and linking them to needed UAV payload capabilities, such as sensors and associated communication links. The approach then ties these requirements to forecasted trends in developing technologies as a means to try to develop a realistic assessment of the state of the technology in the future and the extent to which this technology will be sufficient to meet identified requirements. At the same time, however, the Roadmap does not provide a clear description of a strategy for defining how to develop and integrate UAVs into the future force structure. For example, the Roadmap does not attempt to establish UAV development or fielding priorities nor does it identify the most urgent mission-capability requirements. Moreover, without the sufficient identification of priorities, the Roadmap cannot link these priorities to current or developing UAV programs and technology. Beyond strategic planning, the Results Act calls for agencies to establish results-oriented performance measures and to collect performance data to monitor progress. The Roadmap addresses, in part, key elements of performance measurement, as shown in the following: Performance Goals--The Roadmap established 49 specific performance goals to accomplish a variety of tasks. Some of these goals are aimed at fielding transformational capabilities without specifying what missions will be supported by the new capabilities. Others are to establish joint standards and control costs. Nonetheless, of the 49 goals, only 1 deals directly with developing and fielding a specific category of UAV platform to meet a priority mission-capability requirement--suppression of enemy air defenses or strike electronic attack. The remaining goals, such as developing heavy fuel aviation engines suitable for UAVs, are predominantly associated with developing UAV or related technologies, and UAV-related standards and policies to promote more efficient and effective joint UAV operations. Thus, the Roadmap does not establish overall UAV program goals. Performance Indicators--Some of the 49 performance goals have performance indicators that could be used to evaluate progress, such as the reliability goal for decreasing the annual mishap rate for large UAVs. However, many other goals have no established indicators, such as developing standards to maximize UAV interoperability. Furthermore, the Roadmap does not establish indicators that readily assess how well the program will meet the priority mission capabilities needed by the services and theater commanders. While the Roadmap has incorporated some key strategic-planning components, it only minimally addresses the other key components. According to officials in the Office of the Secretary of Defense, the UAV Roadmap was not intended to provide an overarching architecture for UAVs departmentwide. It does, however, provide some significant guidance for developing UAV and related technologies. In addition to the 49 separate goals, the Roadmap also provides a condensed description of DOD's current UAVs, categorizing them as operational, developmental, and other (residual and conceptual) UAV systems. The Roadmap further sought to identify current and emerging requirements for military capabilities that UAVs could address. In addition to the Roadmap, the Joint Requirements Oversight Council has reviewed several UAVs and issued guidance for some systems, such as the Army's Shadow and the Air Force's Predator. According to Joint Staff officials, however, neither the Joint Staff nor the council has issued any guidance that would establish a strategic plan or overarching architecture for DOD's current and future UAVs. In addition, in June 2003 the Chairman of the Joint Chiefs of Staff created the Joint Capabilities Integration and Development System to provide a top-down capability-based process. Under the system, five Functional Capabilities Boards have been chartered, each representing a major warfighting capability area as follows: (1) command and control, (2) force application, (3) battle space awareness, (4) force protection, and (5) focused logistics. Each board has representatives from the services, the Combatant Commanders, and certain major functions of the Under Secretary of Defense. Each board is tasked with developing a list of capabilities needed to conduct joint operations in its respective functional area. Transformation of these capabilities is expected, and the boards are likely to identify specific capabilities that can be met by UAVs. Nonetheless, according to Joint Staff officials, these initiatives will also not result in an overarching architecture for UAVs. However, the identification of capabilities that can be met by UAVs is expected to help enhance the understanding of DOD's overall requirement for UAV capabilities. As a joint advocate for UAV efforts, the joint UAV Planning Task Force's authority is limited to program review and advice. The Task Force Director testified in March 2003 that the Task Force does not have program directive authority, but provides the Under Secretary of Defense for Acquisition, Technology, and Logistics with advice and recommended actions. Without such authority, according to the Director, the Task Force seeks to influence services' programs by making recommendations to them or proposing recommended program changes for consideration by the Under Secretary. Nonetheless, according to DOD officials, the Task Force has attempted to influence the joint direction of service UAV efforts in a variety of ways, such as reviewing services' budget proposals, conducting periodic program reviews, and participating in various UAV- related task teams. For example, the Task Force has encouraged the Navy to initially consider an existing UAV rather than develop a unique UAV for its Broad Area Marine Surveillance mission. The Task Force has also worked with the Army's tactical UAV program, encouraging it to consider using the Navy's Fire Scout as an initial platform for the Future Combat Systems class IV UAV. The Task Force also regularly reviews services' UAV program budgets and, when deemed necessary, makes budget change proposals. For example, the Task Force, in conjunction with other Secretary of Defense offices, was successful in maintaining the Air Force's Unmanned Combat Aerial Vehicle program last year when the Air Force attempted to terminate it. The Task Force was also successful in overturning an attempt by the Navy to terminate the Fire Scout rotary wing UAV program. However, the Task Force cannot compel the services to adopt any of its suggestions. For example, according to the Director, no significant progress has been made in achieving better interoperability among the Services in UAV platform and sensor coordination, but work continues with the services, intelligence agencies, Department of Homeland Security, and U.S. Joint Forces Command to this end. As they pursue separate UAV programs, the services and DOD agencies risk developing UAVs with duplicate capabilities, potentially leading to greater costs and increased interoperability challenges. The House Appropriation Committee, in a 2003 report, expressed concern that without comprehensive planning and review, there is no clear path toward developing a UAV force structure. Thus, the committee directed that each service provide an updated UAV roadmap. These reports were to address the services' plans for the development of UAVs and how current UAVs are being employed. Officials from each of the services indicated that their UAV roadmap was developed to primarily address their individual service's requirements and operational concepts. However, in their views, high-level DOD guidance--such as the Joint Vision 2020, National Military Strategy, and Defense Planning Guidance--did not constitute strategic plans for UAVs that would guide the development of their individual service's UAV roadmap. These officials further stated that the Office of the Secretary of Defense's 2002 UAV Roadmap provided some useful guidance, especially in regard to UAV technology, but was not used to guide their UAV roadmap's development. Moreover, they did not view the Office of the Secretary of Defense's Roadmap as a departmentwide strategic plan nor an overarching architecture for integrating UAVs into the force structure. Moreover, according to the service officials developing the service-level UAV roadmaps, there was little collaboration with other services' UAV efforts. Thus, DOD has little assurance that the current approach to developing and fielding UAVs in the services will result in closely coordinated or mutually reinforcing program efforts, as recommended by the Results Act. While the Office of the Secretary of Defense and the Joint Chiefs of Staff have tried to coordinate these efforts through the Joint UAV Planning Task Force, the absence of a guiding strategy and sufficient authority has made it difficult to have reasonable assurance that development and fielding are being done efficiently. If not managed effectively, this process can potentially lead to the development and fielding of UAVs across DOD and the services, which may unnecessarily duplicate each other. For example, the Army, Marine Corps, and Air Force are individually developing small, backpackable, lightweight UAVs for over-the-horizon and force protection reconnaissance missions. Likewise, both the Marine Corps and Army are individually pursuing various medium-sized tactical UAVs with both fixed and rotary wings to accomplish a variety of missions, including tactical reconnaissance, targeting, communications relay, and force protection. Without a strategic plan and an oversight body with sufficient program directive authority to implement the plan, DOD has little assurance that its investment will result in UAV programs being effectively integrated into the force structure. Consequently, DOD risks poorly integrating UAVs into the force structure, which could increase development, procurement, and logistics costs; increase the risk of future interoperability problems; and unnecessarily duplicate efforts from one service to the next. To enhance management control over the UAV program, we recommend that the Secretary of Defense take the following two actions: establish a strategic plan or set of plans that are based on mission requirements to guide UAV development and fielding by modifying the Roadmap or developing another document or documents and, at a minimum, ensure that the plan links operational requirements with development plans to ensure that the services develop systems that complement each other, will perform the range of missions needed, and avoid duplication and designate the UAV Task Force or another appropriate organization to oversee the implementation of a UAV strategic plan; provide this organization with sufficient authority to enforce the plan's direction, and promote joint operations and the efficient expenditure of funds. In written comments on a draft of this report, DOD partially concurred with our first recommendation and disagreed with the second. DOD partially concurred with our recommendation that the Secretary of Defense establish a strategic plan or set of plans to guide the development and fielding of UAVs by modifying the Roadmap or developing another appropriate document. DOD stated that its preferred way to address UAV planning was through the Joint Capabilities Integration and Development System, which is a capability-based planning process at the Joint Staff level that will identify UAV capabilities as needed across the five major joint warfighting areas through the use of the Functional Capabilities Boards. We continue to believe that DOD needs a departmentwide strategic plan establishing the mission capabilities required of UAVs and the detailed strategy for effectively developing and acquiring these capabilities. DOD acknowledged that its UAV Roadmap is not a broad strategic plan. Moreover, as we pointed out in our report, DOD recognized in its UAV Roadmap the need for a focused strategic plan for UAV capabilities, stating that the Roadmap was "to assist Department of Defense decision makers in developing a long-range strategy for UAV development and acquisition in future Quadrennial Defense Reviews and other planning efforts"--a strategy that has yet to be created. Such a strategic plan would provide the Office of the Secretary of Defense, the joint UAV Planning Task Force, or other appropriate authorities with the additional leverage and guidance to ensure effective oversight of the services' development and integration of UAV capabilities into the joint warfighting force structure. The Joint Capabilities Integration and Development System process, which DOD referred to, may be a useful tool for DOD to implement its capabilities-based planning approach. However, we continue to believe that a strategic plan for UAVs would be an important element in assuring UAV decisions and development reflect decisions made within the Joint Capabilities Integration and Development System process and are consistent with the strategic plan's intent. DOD did not concur with our recommendation to designate the UAV Planning Task Force or another appropriate organization to oversee the implementation of a UAV strategic plan and provide this organization with sufficient authority to enforce the plan's direction. In its response, DOD indicated that the Secretary of Defense already has the authority needed to accomplish the intent of our recommendation. To buttress its point, DOD identified four actions taken to influence service development, evaluation, acquisition, and fielding of certain UAVs. We acknowledge in our report that the formation of the Task Force represents a step in the right direction for DOD and that the Task Force has achieved some successes in coordinating some UAV programs. In our recent report on the Unmanned Combat Aerial Vehicle, in fact, we gave the Task Force credit for bringing the Air Force and Navy programs together into a joint program. However, the Task Force has not always been successful. For example, no significant progress has been made in achieving better interoperability among Service UAVs and sensors. Our concern is that with UAVs assuming ever-greater importance as key enabling technologies, and with increasing sums of money being allocated for a growing number of UAV programs, DOD needs more than a coordination mechanism. It needs an organization with authority to achieve the most cost-effective development of UAVs. Consequently, we continue to believe that the recommendation is sound, and that to effectively implement a strategic plan for UAVs, the Secretary needs to designate an appropriate office with the authority to oversee and implement the strategy. DOD's comments are included in their entirety in appendix II. DOD provided technical comments, which we included in our report as appropriate. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days from its issue date. At that time,we will send copies of this report to other appropriate congressional committees; the Secretary of Defense; and the Director, Office of Management and Budget, and it will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4914. Key contributors to this report are listed in appendix III. To determine the extent to which the Department of Defense (DOD) requested, received, and used funds for major unmanned aerial vehicle (UAV) development efforts during fiscal years 1999-2003, we reviewed department and service documentation for major operational UAV programs, programs that are in procurement, and programs that are under development and to be procured by 2010. Funding data were obtained from various sources. We obtained the funding levels that DOD requested for UAV programs from the justification books used to support DOD's budget requests and the DOD Comptroller's Congressional Funding tracking database. We also obtained the funding levels appropriated to service UAV programs by analyzing the services' Appropriation Status by Fiscal Year Program and Subaccounts reports. Additionally, we analyzed these reports to determine the extent to which these appropriated funds were obligated within their allowed program years. We did not conduct a comprehensive audit to reconcile the differences in appropriated and obligated funds. To assess whether DOD's approach to developing and employing UAVs ensures that UAVs will be efficiently integrated into the force structure, we reviewed key departmentwide strategic documents, such as the Defense Planning Guidance, to identify the level of DOD's strategic planning for UAVs and its impact on service planning. We discussed the level of strategic planning for UAVs with key DOD and service officials from organizations with key roles in DOD's g development, such as the Office of the Secretary of Defense's Joint UAV Planning Task Force; the Office of the Assistant Secretary of Defense for Command, Control, Communications and Intelligence; the Joint Requirements Oversight Council; and U.S. Joint Forces Command. We reviewed each service's current UAV roadmap and held discussions with officials from service activities involved in planning and developing their UAV force structure roadmaps. We also reviewed in detail the Office of the Secretary of Defense's Unmanned Aerial Vehicles Roadmap 2002-2027, and assessed the extent to which it establishes an overall DOD management framework for developing and employing UAVs departmentwide. We used the principles embodied in the Government Performance and Results Act of 1993 as criteria for assessing the UAV Roadmap. We performed our work from June 2003 to February 2004 in accordance with generally accepted government auditing standards. In addition to the person named above, Fred Harrison, Lawrence E. Dixon, James Mahaffey, James Driggins, R.K. Wild, and Kenneth Patton also made major contributions to this report. Nonproliferation: Improvements Needed for Controls on Exports of Cruise Missile and Unmanned Aerial Vehicles. GAO-04-493T. Washington, D.C.: March 9, 2004. Nonproliferation: Improvements Needed to Better Control Technology Exports for Cruise Missiles and Unmanned Aerial Vehicles. GAO-04-175. Washington, D.C.: January 23, 2004. Defense Acquisitions: Matching Resources with Requirements Is Key to the Unmanned Combat Air Vehicle Program's Success. GAO-03-598. Washington, D.C.: June 30, 2003. Unmanned Aerial Vehicles: Questionable Basis for Revisions to Shadow 200 Acquisition Strategy. GAO/NSIAD-00-204. Washington, D.C.: September 26, 2000. Unmanned Aerial Vehicles: Progress of the Global Hawk Advanced Concept Technology Demonstration. GAO/NSIAD-00-78. Washington, D.C.: April 25, 2000. Unmanned Aerial Vehicles: DOD's Demonstration Approach Has Improved Project Outcomes. GAO/NSIAD-99-33. Washington, D.C.: August 30, 1999. Unmanned Aerial Vehicles: Progress toward Meeting High Altitude Endurance Aircraft Price Goals. GAO/NSIAD-99-29. Washington, D.C.: December 15, 1998. Unmanned Aerial Vehicles: Outrider Demonstrations Will Be Inadequate to Justify Further Production. GAO/NSIAD-97-153. Washington, D.C.: September 23, 1997. Unmanned Aerial Vehicles: DOD's Acquisition Efforts. GAO/T-NSIAD-- 97-138. Washington, D.C.: April 9, 1997. Unmanned Aerial Vehicles: Hunter System Is Not Appropriate for Navy Fleet Use. GAO/NSIAD-96-2. Washington, D.C.: December 1, 1995. Unmanned Aerial Vehicles: Performance of Short Range System Still in Question. GAO/NSIAD-94-65. Washington, D.C.: December 15, 1993. Unmanned Aerial Vehicles: More Testing Needed Before Production of Short Range System. GAO/NSIAD-92-311. Washington, D.C.: September 4, 1992. Unmanned Aerial Vehicles: Medium Range System Components Do Not Fit. GAO/NSIAD-91-2. Washington, D.C.: March 25, 1991. Unmanned Aerial Vehicles: Realistic Testing Needed Before Production of Short Range System. GAO/NSIAD-90-234. Washington, D.C.: September 28, 1990. Unmanned Vehicles: Assessment of DOD's Unmanned Aerial Vehicle Master Plan. GAO/NSIAD-89-41BR. Washington, D.C.: December 9, 1988.

The current generation of unmanned aerial vehicles (UAVs) has been under development for defense applications since the 1980s. UAVs were used in Afghanistan and Iraq in 2002 and 2003 to observe, track, target, and strike enemy forces. These successes have heightened interest in UAVs within the Department of Defense (DOD) and the services. GAO was asked to (1) determine how much funding DOD requested, was appropriated, and was obligated for major UAV development efforts during fiscal years 1999-2003 and (2) assess whether DOD's approach to planning for UAVs provides reasonable assurance that its investment in UAVs will facilitate their integration into the force structure. During the past 5 fiscal years, Congress provided more funding for UAV development and procurement than requested by DOD, and to date the services have obligated most of these funds. To promote rapid employment of UAVs, Congress has provided nearly $2.7 billion for UAV development and procurement compared with the $2.3 billion requested by DOD. Because Congress has appropriated more funds than requested, the services are able to acquire systems at a greater rate than planned. For example, in fiscal year 2003, the Air Force requested $23 million to buy 7 Predator UAVs, but Congress provided over $131 million--enough to buy 29 Predators. DOD's approach to planning for developing and fielding UAVs does not provide reasonable assurance that its investment in UAVs will facilitate their integration into the force structure efficiently, although DOD has taken positive steps to improve the UAV program's management. In 2001 DOD established a joint Planning Task Force in the Office of the Secretary of Defense. To communicate its vision and promote commonality of UAV systems, in 2002, the Task Force published the UAV Roadmap, which describes current programs, identifies potential missions, and provides guidance on emerging technologies. While the Roadmap identifies guidance and priority goals for UAV development, neither it nor other key documents represent a comprehensive strategic plan to ensure that the services and DOD agencies develop systems that complement each other, perform all required missions, and avoid duplication. Moreover, the Task Force serves in an advisory capacity to the Under Secretary of Defense for Acquisition, Technology, and Logistics, but has little authority to enforce program direction. Service officials indicated that their service-specific planning documents were developed to meet their own needs and operational concepts without considering those of other services. Without a strategic plan and an oversight body with sufficient authority to enforce program direction, DOD risks fielding a poorly integrated UAV force structure, which could increase costs and the risk of future interoperability problems.

Our objectives were to assess (1) the overall status of State's efforts to identify and correct its date-sensitive systems and (2) the appropriateness of State's strategy and actions for remediating Year 2000 problems. In conducting our review, we assessed State's Year 2000 efforts against our Year 2000 Assessment Guide. This guide addresses common issues affecting most federal agencies and presents a structured approach, as well as a checklist, to aid in planning, managing, and evaluating Year 2000 programs. This guidance describes five phases supported by program and project management activities. Each phase represents a major Year 2000 program activity or segment. The phases and a description of each follow. Awareness - Define the Year 2000 problem and gain executive-level support and sponsorship for a Year 2000 program. Establish a Year 2000 program team and develop an overall strategy. Ensure that everyone in the organization is fully aware of the issue. Assessment - Assess the Year 2000 impact on the enterprise. Identify core business areas and processes, inventory and analyze systems supporting the core business areas, and prioritize their conversion or replacement. Develop contingency plans to handle data exchange issues, lack of data, and bad data. Identify and secure the necessary resources. Renovation - Convert, replace, or eliminate selected platforms, systems, databases, and utilities. Modify interfaces. Validation - Test, verify, and validate converted or replaced platforms, systems, databases, and utilities. Test the performance, functionality, and integration of converted or replaced platforms, systems, databases, utilities, and interfaces in an environment that faithfully represents the operational environment. Implementation - Implement converted or replaced platforms, systems, databases, utilities, and interfaces. Implement any and all contingency plans needed. We also assessed State's efforts against our Year 2000 Business Continuity and Contingency Planning Guide, which was issued as an exposure draft in March 1998. The guide provides a conceptual framework for helping large agencies manage the risk of potential Year 2000-induced disruptions to their operations. Like our Assessment Guide, it offers a structured approach for reviewing the adequacy of agency Year 2000 business continuity and contingency planning efforts. To determine the overall status of State's Year 2000 program, we analyzed the Department of State's Year 2000 database, which includes data collected on a monthly basis from all of State's bureaus, for four separate reporting periods: August 1997, December 1997, March 1998, and May 1998. State uses this database to track and measure program progress. We also reviewed the status reports State provided to the Office of Management and Budget (OMB) on a quarterly basis. To determine how State's bureaus were implementing department policy and managing their Year 2000 program efforts, we interviewed Year 2000 coordinators at bureaus including Consular Affairs, Financial Management and Planning, Personnel, Diplomatic Security, and Information Management. We met with officials from the Diplomatic Telecommunications Service Program Office to determine what steps they were taking to ensure that telecommunications systems were Year 2000 compliant. We also reviewed internal State documents and reviews. We conducted our work from April 1997 through July 1998 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Secretary of State or her designee. The Acting Chief Financial Officer provided us with written comments that are discussed in the "Agency Comments and Our Evaluation" section and are reprinted in appendix I. Most of State's automated information systems are vulnerable to the Year 2000 problem, which is rooted in the way dates are recorded and computed in automated information systems. For the past several decades, systems have typically used two digits to represent the year, such as "97" representing 1997, in order to conserve on electronic data storage and reduce operating costs. With this two-digit format, however, the Year 2000 is indistinguishable from 1900, or 2001 from 1901, etc. In addition, any electronic device that contains a microprocessor or is dependent on a timing sequence may also be vulnerable to Year 2000 problems. This includes, but is not limited to, computer hardware, telecommunications equipment, building security systems, elevators, and medical equipment. Should State fail to address the Year 2000 problem in time, its mission-critical operations could be severely degraded or disabled as the following examples illustrate. The failure of State's Consular Lookout and Security System (CLASS) would hinder the ability of overseas posts to effectively screen visa applicants who may have a criminal and/or terrorist background. Embassy operations, such as property management and visa and passport processing, could be hindered at certain locations if State is unable to replace all of its noncompliant systems. State's messaging systems, which are critical to the effective conduct of diplomatic missions, could fail if telecommunications devices are not replaced or upgraded. State has 262 systems comprising approximately 35 million lines of code written in over 17 programming languages. Major corporate systems include the Central Financial Management System (CFMS), the Central Personnel System (CPS), and CLASS. Through a strategy of system conversion and replacement, the department plans to remediate all of its noncompliant systems by March 31, 1999. State supports its systems on a variety of hardware platforms, most of which are not Year 2000 compliant and will need to be fixed. Some of its corporate systems are operated on IBM mainframe computers at data processing centers in the Washington, D.C., area and overseas. According to State, some of its operating systems use antiquated "home grown" code and are presently not Year 2000 compliant. This environment is not stable, and State is currently working to resolve the issue. The department also operates a variety of decentralized information technology platforms at posts around the world, including about 250 Wang VS minicomputers; 20,000 personal computers; and several hundred local area networks. Foreign service officers rely on this equipment for electronic mail, word processing, and other functions to develop reports and communicate information in support of State's foreign policy objectives. The Wang minicomputers will be replaced as part of State's effort to modernize its information technology infrastructure. This project is known as A Logical Modernization Approach (ALMA). According to State's IRM Tactical Plan, the ALMA project will (1) ensure that legacy Wang VS equipment and software is replaced by December 31, 1999, and (2) implement modern, open, and standards-based systems throughout the department. Under the direction of State's Bureau of Information Resources Management, the department plans to deploy the ALMA infrastructure to all of State's posts by the end of fiscal year 1999. State plans to resolve its Year 2000 problem using a phased process. In keeping with its decentralized approach to information technology management, State has charged its bureaus with responsibility for ensuring that all of their systems process dates correctly. Further, State is requiring the bureaus to redirect existing funds to correct their systems and will provide no additional funds for Year 2000 remediation. Although State estimated in its May 1998 quarterly report to OMB that it would cost $153 million to address its Year 2000 problem, in commenting on a draft of this report, the department stated that it is currently collecting and analyzing cost data and that an overall figure has not been finalized. State's Chief Information Officer (CIO) has overall responsibility for ensuring Year 2000 compliance. In addition, State has appointed a full-time Deputy CIO for Year 2000. The department also established a Year 2000 Steering Committee to (1) review new and ongoing information resources management (IRM) and non-IRM systems with regard to Year 2000 compliance, (2) conduct monthly reviews of Year 2000 efforts of all bureaus, and (3) reallocate resources across the department to meet Year 2000 needs as necessary. The Year 2000 Steering Committee is chaired by the Under Secretary for Management, and its membership includes the CIO, the Deputy CIO for Year 2000, the Chief Financial Officer, the Inspector General, the Assistant Secretaries of State for Diplomatic Security, Consular Affairs and Administration, and other senior officials. The CIO and the Year 2000 project manager monitor critical project implementation at key decision points and make specific recommendations to the Steering Committee. This committee meets monthly. Table 1 depicts the organizations involved in Year 2000 activities and their respective responsibilities. To increase the awareness of Year 2000 problems and to foster coordination among components, State has taken the following actions. In an April 1996 memo, the CIO alerted bureaus to the problem and called on them to attend a meeting to discuss the issue. In May 1996, State established a Year 2000 Project Office to manage the department's Year 2000 program. In April 1997, the Year 2000 Project Office issued its Year 2000 Project Plan, which outlines the department's strategy for achieving Year 2000 compliance. Subsequently, the project office distributed formal standards and guidance, including (1) a memorandum to all application developers (both in-house and contractor) providing guidance on Year 2000 data formats governing internal and external data exchange between information systems, (2) cable notices to all overseas posts informing them about the Year 2000 problem and identifying the steps they need to take to resolve the problem, and (3) Year 2000 planning and reporting guidance requiring bureaus to develop Year 2000 project plans and to provide quarterly (later changed to monthly) progress reports. In December 1997, State's Year 2000 Project Office issued draft Year 2000 test planning and certification guidance to the department. This document describes the department's Year 2000 test planning requirements, strategy, and schedule. In addition, the guidance identifies Year 2000 renovation test facilities for the IBM Mainframe, Wang, and PC/LAN test environments. In March 1998, State enlisted the Inspector General to help monitor its Year 2000 program, validate the data on Year 2000 status being reported by each component, identify problem areas, and recommend corrective actions. In March 1998, State reorganized the management of its Year 2000 effort. A Deputy CIO for Year 2000 was appointed as part of the general CIO office. The Under Secretary of State (Management) made each of the assistant secretaries personally responsible for ensuring that each of their bureaus is Year 2000 compliant. Finally, an additional contractor, KPMG Peat Marwick LLP, was brought in to work alongside State personnel and the contractor already in place, Adsystech. KPMG Peat Marwick LLP was tasked with assisting in the overall management of the Year 2000 effort; Adsystech had been given responsibility for providing technical advice to bureaus for remediating systems. Adsystech is also responsible for collecting and analyzing data on the remediation process, and coordinating technical matters between State Department management and individual bureaus. Using its assessment methods, State has identified a total of 262 systems, 64 mission critical and 198 nonmission critical. State has also determined that 40 mission-critical systems need to be remediated--27 of these need to be replaced and 13 need to be converted. In addition, State reports that 146 nonmission-critical systems need to be converted, replaced, or retired. Details of State's assessment of its systems, as reported for May 1998, are shown in table 2. State's progress in remediating systems has been inadequate. Of the 40 systems State has identified as mission-critical and is either converting or replacing, only 17 (about 42.5 percent) have completed renovation, 11 have completed validation, and only two have completed implementation. Tables 3 and 4 show the number of applications that have completed each phase along with the number of applications that have started but have not yet completed the phase. In addition, the department has already conceded that it will not achieve its goal of eliminating all of its Wang software and hardware systems by the year 2000. As part of its IRM modernization program, State originally planned to eliminate all of its Wang VS systems (which include 21 mission-critical noncompliant systems) and begin running them on the Windows NT platform before January 1, 2000. According to State officials, however, because of delays in converting the Wang Systems to the Windows NT platform, the department will have to continue running some systems on the Wang platform after January 1, 2000. If all of the Wang systems cannot be replaced or made compliant before the year 2000, the department will not be able to run all of its mission-critical administrative applications overseas. Further, a May 1998 report found that five of the mission-critical systems reported to OMB as compliant were, in fact, noncompliant and needed some form of additional remediation. The report also noted that 13 of all mission-critical systems were in a low degree of preparedness for certification and 8 systems were in a moderate degree of preparedness. In addition, seven of the mission-critical systems in a low degree of preparedness were scheduled to miss the OMB milestone date for implementation by 5 months, pushing their expected implementation to September 1999. These included systems essential to citizen services, such as immigrant and nonimmigrant visa issuance and tracking, and embassy and post security. One of these systems, the Immigrant Visa System, was reported to OMB as compliant. An additional system, the Non-Immigrant Visa System, was scheduled to miss the OMB milestone date for implementation by 1 month. As noted in our Assessment Guide and our Contingency Planning Guide, the Year 2000 problem is not just an information technology problem, but primarily a business problem. Thus, the process of identifying, ranking, and remediating information systems should include an identification of core business areas and business processes and assessments of the impact of information system failures on those business areas and processes. If this is not done, the agency will not have a good basis for prioritizing systems for correction or developing contingency plans that focus on the continuity of operations. Until recently, State's Year 2000 effort lacked a mission-based perspective. For example, at the time of our review, State had not determined its core business functions and linked these functions to its mission or to its support systems. In addition, the department had not conducted formal risk analyses of the majority of its systems. In responding to a draft of this report, State noted that it is currently developing a framework for a mission-based perspective for its Year 2000 problem. It has recently determined its core business functions and linked these functions to its mission. However, it has not yet linked its core business functions to support systems necessary to conduct these operations. As further illustrated below, until it fully adopts this perspective, State will not be able to adequately prioritize its systems or develop meaningful contingency plans. According to our Assessment Guide, an important aspect of the assessment phase is determining and prioritizing the correction of the systems that have the highest impact on an agency's mission and thus need to be corrected first. This helps an agency ensure that its most vital systems are corrected before systems that do not support the agency's core business. State has provided its bureaus with a definition of priorities--routine, critical, and mission-critical--and charged them with the task of identifying and ranking their respective systems according to this definition. Mission critical, the highest priority, was defined as crucial to worldwide operations, affecting the public directly, or having national security implications. Subsequently, the bureaus assessed their respective systems and each provided the Year 2000 Project Office with a list of systems--64 in total--that they determined were mission-critical to department operations. However, this process is flawed because it provides no means of distinguishing between individual bureaus' priorities--some of which are essential to State's core mission and some of which are not. For example, the following systems have been ranked by individual bureaus as mission critical: REGIS, a system designed to register and track students who attend the MSE Network, a system used to sort and track unclassified mail and CLASS, a system designed to identify criminals and possible terrorists in order to block their entry into the United States; CRIS, an on-line database used to track citizens involved in crises overseas; and ICARS, a system used for immigration control and reporting. Clearly, CLASS, CRIS, and ICARS are much more important to State's core missions than REGIS and MSE. But under State's Year 2000 approach, they rank equally. Until State begins focusing on core business areas and processes, it will not have a basis for further ranking these systems for remediation. Additionally, it appears that State has not placed enough priority on fixing its mission-critical systems before its nonmission-critical systems. In fact, as tables 3 and 4 indicate, State is making better progress on its nonmission-critical systems than on its mission-critical systems. For example, 31, or 21 percent, of nonmission-critical systems have reportedly completed the implementation phase, while only 2, or 5 percent, of mission-critical systems have done so. State officials agree that the current prioritization process is flawed. In responding to a draft of this report, the department stated that it had recently identified its core business functions and planned to link them to the 64 systems previously identified as mission critical, thereby providing a functional basis for prioritizing their efforts. However, State did not plan to reassess the 198 systems previously identified as nonmission-critical using its new mission-based approach. Without reassessing all of its systems, State will not be able to fully ensure that the most critical functions will not be disrupted by the Year 2000 problem. To mitigate the risk that Year 2000-related problems will disrupt operations, our guide on business continuity and contingency planning recommends that agencies perform risk assessments and develop realistic contingency plans during the assessment phase to ensure the continuity of critical operations and business processes. Contingency plans are vital because they identify the manual or other fallback procedures to be employed should systems miss their Year 2000 deadline or fail unexpectedly. These plans also define the specific conditions that will cause their activation. State has directed its bureaus to develop written contingency plans for all mission-critical systems. At the time of our review, State reported that 16 written plans had been prepared, covering less than half of the 40 systems State identified as mission-critical and noncompliant. However, State was able to provide us with only six of these plans. These plans included only brief risk assessments and summary statements about possible alternate approaches for providing system functionality. They did not discuss the impact of the failure of system functionality on State's mission. Furthermore, State's contingency planning is insufficient because it has not focused on ensuring the continuity of department operations and business processes. As noted in our Contingency Planning Guide, the risk of failure is not limited to an organization's internal information systems. Many federal agencies also depend on information and data provided by their business partners--including other federal agencies, state and local agencies, international organizations, and private sector entities. In addition, they depend on services provided by the public infrastructure--including power, water, transportation, and voice and data telecommunications. Because of these risks, agencies must not limit their contingency planning effort to the risks posed by the Year 2000-induced failures on internal information systems. Rather, they must include the potential Year 2000 failures of others, including business partners and infrastructure service providers. By focusing only on its internal systems, State will not be able to protect itself against major disruptions of business operations. In its May 1998 quarterly report to OMB on the status of its Year 2000 program, State acknowledged that its contingency planning efforts to date have focused on information technology systems rather than on the "larger picture of continuity of business operations." To strengthen contingency planning, State has established a business continuity work group which includes members from the Year 2000 Steering Committee and is chaired by the Under Secretary for Management. This group is responsible for the development of business continuation strategies for Year 2000 risks. State has not identified a deadline for this group to complete its work. State systems interface with each other as well as with systems belonging to other federal agencies and international entities as shown in the following examples. State's central messaging system, which is used to transmit official diplomatic cables to overseas posts and other U.S. sites worldwide, interfaces with the Department of Defense. State's central personnel system interfaces with its payroll system to support payroll processing functions. State's CLASS system receives data on persons wanted for, or convicted of, drug-related crimes from the Drug Enforcement Agency's (DEA) Lookout System. As a result, it is essential that State ensure that all of its interfaces are Year 2000 compliant and that noncompliant interfacing partners will not introduce Year 2000-related errors into compliant State systems. Our Year 2000 Assessment Guide recommends that agreements with interface partners be initiated during the assessment phase to determine how and when interface conflicts will be resolved. State has not managed the identification and correction of its interfaces effectively. First, it is still in the process of identifying its interfaces, even though our Year 2000 Assessment Guide recommended that this be done during the assessment phase. At the time of our review, State had identified 12 interfaces between mission-critical and external systems belonging to State and other agencies and organizations and 28 internal interfaces between bureaus that are affected by the Year 2000 problem. In addition, in June 1998, State reported to the President's Council on Year 2000 Conversion that it maintained interfaces with commercial banks in 157 countries. According to State, 17 percent of its overseas accounts were Year 2000 compliant, 48 percent were scheduled to be compliant by December 1998, 7 percent in March 1999, 3 percent in June 1999, and 22 percent in December 1999. Three percent of the accounts were reported as having inadequate compliance plans. However, State recently acknowledged that it could not identify every interface with other agencies or among the bureaus or verify whether all system owners were reporting on their interfaces or reporting correctly. State is now in the process of identifying these interfaces and verifying their progress. Second, State has made little progress in developing agreements with its interface partners, which our Year 2000 Assessment Guide also recommended be done in the assessment phase in order to allow enough time for conflicts to be resolved. As of May 1998, State's bureaus were reporting that Memorandums of Understanding had been completed for only 10 interfaces for systems that it has assessed as mission critical and noncompliant. Until it has agreements in place for the remaining interfaces, State will not have assurance that partners are working to correct interfaces effectively or in a timely manner. Moreover, a May 27, 1998, report listed seven mission-critical systems as having a low degree of preparedness for Year 2000 certification based on the condition of their interfaces. The report also found problems with 20 other mission-critical systems due to interface problems. The effective conduct of State operations hinges on its ability to successfully remediate its mission-critical computer systems before the Year 2000 deadline. While State has taken a number of actions to address this issue, its progress in several critical areas has been inadequate: only 17 of 40 systems that State has designated as mission-critical have completed renovation and it has not yet identified all of its interfaces. Further, if State continues its current approach, which lacks a mission-based perspective, it will risk spending time and resources fixing systems that have little bearing on its overall mission. It will also not be prepared to respond to unforeseen problems and delays. We recommend that the Secretary of State ensure that senior program managers and the Chief Information Officer: (1) Reassess all of State's systems using the new mission-based approach to identify those systems supporting the most critical business operations. (2) Ensure that systems identified as supporting critical business functions pursuant to recommendation 1 receive priority attention and resources over those systems that do not support critical business functions. (3) Redirect its contingency planning efforts to focus on the core business functions and supporting systems, particularly those supporting systems that are already scheduled to miss the OMB milestone date for implementation. (4) Ensure that the bureaus have identified and corrected interfaces and developed written memorandums of agreement with interface partners. State generally agreed with the conclusions and recommendations in our report. The department noted that it has already begun to respond to our observations and recommendations and that many of the specific concerns we raised have been independently identified by the department's own consulting firm, KPMG Peat Marwick LLP. Additionally, State provided updated information about its management initiatives to address the Year 2000 problem, stating that it is rapidly implementing corrective measures for the problems cited in our report. While these changes demonstrate increased management awareness and attention to the Year 2000 problem, it will be critical for the department to follow through on these initiatives and ensure that they have a positive impact on the remediation, testing, and implementation of systems. Furthermore, the department noted in its comments that it has recently identified its core business functions and linked these functions to its mission. The department also stated that it planned to link its core business functions to the 64 systems previously identified as mission critical. However, State did not plan to reevaluate the 198 systems previously identified as nonmission-critical. Until State applies its new mission-based perspective to all of its systems, it will not be able to fully ensure that the most critical functions will not be disrupted by the Year 2000 problem. We are providing copies of this letter to the Ranking Minority Members of the Subcommittee on the Departments of Commerce, Justice, State, the Judiciary and Related Agencies, House Committee on Appropriations, and the House Committee on International Relations. We are also sending copies to the Chairmen and Ranking Minority Members of the Senate Special Committee on the Year 2000 Technology Problem, the Subcommittee on Commerce, Justice, and State, the Judiciary, and Related Agencies, Senate Committee on Appropriations, Senate Committee on Governmental Affairs, the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform and Oversight, and the Subcommittee on Civil Service, House Committee on Government Reform and Oversight. We are also sending copies to the Secretary of State, the Director of the Office of Management and Budget, and other interested parties. Copies will be made available to others upon request. If you have any questions on matters discussed in this report, please call me at (202) 512-6240. Major contributors to this report are listed in appendix II. The following are GAO's comments on the Department of State's letter dated July 30, 1998. 1. State's detailed statistical information about its Year 2000 effort is constantly changing as State's Year 2000 program evolves and remediation efforts progress. The information in our report represents the official figures reported to OMB in May 1998. The figures that State claims are more current are not substantially different from those reported in May 1998 and would not have any significant impact on our findings and recommendations. 2. Our assessment of the relative priority of fixing mission-critical and nonmission-critical systems did not include systems that State had designated as "compliant." Instead, this assessment is based on the comparative number of noncompliant mission-critical and nonmission-critical systems that have completed the implementation phase. Only 2 (5 percent) of the 40 mission-critical noncompliant systems had been implemented as of May 1998 whereas 31 (21 percent) of the 146 nonmission-critical noncompliant systems had been implemented. We agree that systems currently considered "compliant" may not actually meet criteria for compliance and need to undergo their own, separate certification process. 3. State's comments indicate that it is still taking a flawed approach to contingency planning. Like the prioritization of systems, contingency planning needs to be a top down rather than a bottom up process. That is, agencies must first identify their core business processes and assess the Year 2000 risk and impact of these processes. Subsequently, they can develop plans for each core business process and infrastructure component. As noted in our Year 2000 Contingency Planning Guide, this approach enables agencies to consider and mitigate risks that extend beyond individual applications or systems. For example, as noted in our report, State depends on information and data provided by other federal agencies, international organizations, and private sector entities. It also depends on services provided by the public infrastructure, including power, water, transportation, and voice and data telecommunications. Neither of these dependencies will be considered if contingency planning is focused on individual internal systems. 4. State provided no evidence of increased identification and awareness of commercial bank interfaces. Neither could the Department identify the number of international interfaces it might have. 5. In May 1998, State reported to OMB that its estimated cost to address its Year 2000 problem was $153 million. In our final report, we have noted that State no longer considers this figure to be accurate. John Deferrari, Assistant Director Frank Deffer, Assistant Director Brian Spencer, Technical Adviser R.E. Canjar, Evaluator-In-Charge Cristina Chaplain, 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. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Department of State's progress in solving its year 2000 computer systems problem, focusing on the: (1) overall status of State's efforts to identify and correct its date-sensitive systems; and (2) appropriateness of State's strategy and actions to correct its year 2000 problems. GAO noted that: (1) State has taken many positive actions to increase awareness, promote sharing of information, and encourage its bureaus to make year 2000 remediation efforts a high priority; (2) however, State's progress in responding to the problem has been slow; (3) for example, of the 40 systems that State identified as mission critical and needing either converting or replacing, only 17 (42.5 percent) have completed renovation; (4) more importantly, until recently, State's year 2000 effort lacked a mission-based perspective, that is, it had not determined its core business functions or linked these functions to its mission or to the support systems necessary to conduct these operations; (5) because the year 2000 problem is primarily a business problem, agencies need to take a business perspective in all aspects of it; that is, they should identify their core business areas and processes and assess the impact of system failures; (6) until it takes these steps, State will not have a good basis for prioritizing its systems for the purposes of correction or developing contingency plans that focus on the continuity of operations; (7) in responding to GAO's draft report, State noted that it has recently determined its core business functions and linked these functions to its mission; (8) it has not yet linked its core business functions to support systems necessary to conduct these operations; (9) State has not been managing the identification and correction of its interfaces effectively; (10) specifically, it is still identifying its interfaces, even though this task should have been completed in the assessment phase, and it has developed written agreements with data exchange partners for only a small portion of its systems; and (11) as a result, State has increased the risk that year 2000 errors will be propagated from one organization's systems to another's.

Social Security has provided significant income protection for the nation's women. While women, on average, have lower earnings than men, the program has several features that are advantageous to women. First, unlike lifetime annuities purchased from private insurance companies, Social Security does not reduce women's benefits to account for the fact that, as a group, they live longer than men. Second, Social Security uses a progressive formula to calculate individual benefits, which replaces a relatively larger proportion of lifetime earnings for people with low earnings than for people with high earnings. Because women typically earn less than men, women's monthly benefits replace a larger proportion of their earnings. The program also provides benefits to retirees' dependents--such as spouses, ex-spouses, and survivors--and roughly 99 percent of these benefits go to women. Nevertheless, women receive lower Social Security benefits than men. In December 1997, the average monthly retired worker benefit for women was $662.40 compared to $860.50 for men. This is because Social Security benefits are based primarily on a worker's lifetime covered earnings, which on average are much lower for women. Although labor market differences between men and women have narrowed over time, the Bureau of Labor Statistics does not project that they will disappear entirely, even in the long term. Thus, women can expect to continue to receive lower average monthly benefits than men, although these differences are partially offset by the presence of spousal benefits. women's Social Security benefits relative to men's, since under the current rules Social Security calculates monthly benefits on the basis of lifetime taxable earnings averaged over a worker's 35 years of highest earnings. Because women generally spend more time out of the labor force than men (primarily for reasons associated with child rearing), they have fewer years of taxable earnings; thus, more years with zero earnings are included in calculating their benefits. Even if women and men had identical annual earnings when they both worked, women's shorter time spent in the labor force results in lower average lifetime earnings, which in turn leads to lower retirement benefits. In 1993, the average 62-year-old man had worked 36 years, whereas the average 62-year-old woman had worked only 25 years. Almost 60 percent of these 62-year-old men had a full 35 years of covered earnings compared with less than 20 percent of women. A second cause of lower lifetime earnings is women's lower wage rates. In part, this reflects the fact that women are more likely to work part-time, and part-time workers tend to earn lower wages than full-time workers. However, even if only year-round, full-time male and female workers are compared, the median earnings for women are still less than 75 percent of men's. The gap narrows when differences in education, years of work experience, age, and other relevant factors are taken into account. The changes contained in various Social Security reform proposals would likely have a disproportionate effect on women. Many reform proposals include provisions that would reduce current benefit levels, for example, reductions in the cost-of-living adjustment and increases in the normal or early retirement ages. Reducing all benefits proportionately would hit hardest those who have little retirement income other than Social Security. Reducing Social Security benefits by, for example, 10 percent would result in a 10-percent reduction in total retirement income for those who have no other source of income but would cause only a 5-percent reduction for those who rely on Social Security for only half their retirement income. Women, especially elderly women, are more likely to rely heavily, if not entirely, on Social Security. Among Social Security beneficiaries aged 65 or older in 1996, about half the married couples, two-thirds of the unmarried men, and three-fourths of the unmarried women (who accounted for almost half of the three groups) relied on Social Security for at least half their retirement income. One-fourth of the unmarried women relied on Social Security for all their retirement income. Other changes could exacerbate existing disadvantages for some women. For example, some proposals would extend the period for computing benefits from 35 years to 38 or 40 years. Because most women do not have even 35 years with covered earnings, increasing the computation period would increase the number of years with zero earnings used in calculating their benefits and, thus, lower their average benefit. The Social Security Administration (SSA) forecasts that fewer than 30 percent of women retiring in 2020 will have 38 years of covered earnings, compared with almost 60 percent of men. SSA estimates that extending the computation period to 38 years would reduce women's benefits by 3.9 percent, while extending the period to 40 years would reduce their benefits by 6.4 percent. The comparable impact on men from an extension to 38 or 40 years is 3.1 percent and 5.2 percent, respectively. Some reform proposals include a specific provision designed to improve the status of survivors, who are predominantly widows, but simultaneously reduce spousal benefits that generally accrue to women. Under the current system, a retired worker's spouse who is not entitled to benefits under her own work records will receive a benefit up to 50 percent of her husband's benefit and a widow will receive up to 100 percent of her deceased husband's benefit. One proposal would reduce the spousal benefit from 50 percent to 33 percent of the worker's benefit but would increase the survivor's benefit to either 75 percent of the couple's combined benefit or 100 percent of the worker's benefit, whichever is greater. One-earner couples would receive reduced lifetime benefits because the spousal benefit would be reduced while both the retiree and spouse were alive, but the survivor benefit would remain the same as under current law. Two-earner couples would lose some benefits while both were alive if one spouse was dually entitled, but the survivor would receive higher benefits than under current law. Many reform proposals would fundamentally restructure Social Security by creating retirement accounts that would be owned and managed by individuals. While such accounts can increase benefits for retirees, women on average might not reap the same advantages such an investment could bring to men. As stated earlier, the difference is partly the result of women having shorter work histories and lower earning levels, which suggests they generally will contribute less to these accounts. The difference is also partly the result of differences in investment behavior. Economists have found evidence suggesting that women generally are more risk averse than men in financial decisionmaking. Studies indicate that, compared with men, women might choose a relatively low-risk investment strategy that earns them lower rates of return for their retirement income accounts. Although proponents argue that individual accounts could raise retirement benefits for both sexes, an overly conservative investment strategy could leave women with lower final account balances than men, even if both make the same contributions. Thus, even though women could improve their financial situation under a retirement system that included individual accounts, the gap between the benefits received by men and women could increase. invest less in stocks than men. Our analysis, using different data and focusing on individuals in their prime working and saving years, increases the robustness of this conclusion. By investing less in these riskier assets, women benefit less from the potentially greater rates of return that, in the long run, stocks could generate. At the same time, however, they are not as exposed to large losses from riskier assets. While it is true that in the past U.S. stocks have almost always posted higher returns than less risky assets, there is no guarantee that they will always do so. Some pension specialists believe that information is a critical factor in helping individuals make the most of their retirement investments. Providing investors with information that covers general investment principles and financial planning advice might help both women and men to better manage their investments and close the gap in the average investment returns received by men and women. While employers are not legally required to provide this type of information, many have done so in the case of 401(k) accounts. It is not clear who would provide such information to workers under a restructured Social Security system that included mandatory individual accounts. The nature and extent of such information and education efforts, when combined with the design of related investment options, are likely to help maximize the effectiveness of, and minimize the risk associated with, individual accounts under the Social Security system. How individual account accumulations are paid out will also make a difference in retirement income for many women. Unless otherwise specified, workers could choose to receive their individual account balances at retirement as a lump-sum payment, as some pension plans now allow, to spend as they see fit. If retirees and their spouses do not accurately predict their remaining life spans and consume their account balances too quickly, they may end up with very small incomes late in life. individual accounts and still end up with very different monthly benefits if they were to purchase annuities and if the annuities were based on gender-specific life tables. Insurance companies that sell annuities usually take into account women's longer life expectancy and either provide a lower monthly benefit to women or charge women more for the same level of benefits given to men. In the case of employer-provided group annuities, gender-neutral life tables must be used in the calculation of monthly benefits, which ensures equal benefits for men and women with the same lifetime earnings. Requirements to use gender-neutral life tables involve cross-subsidies between men and women. Insurance companies also pay lower benefits for a joint and survivor annuity that covers both husband and wife than for a single life annuity that covers only the worker during his or her lifetime--again because the total time in which the benefits are expected to be paid is longer. Women are more likely to receive the survivor portion of this type of annuity, since they are more likely to outlive their husbands. Thus, while the total lifetime annuity benefits for men and women may be similar, the monthly benefit women receive, either as retirees or as survivors, will likely be lower and could result in a lower standard of living in retirement. Other groups of women will also need to be considered if individual accounts are introduced. Under current Social Security provisions, divorced spouses and survivors are entitled to receive benefits based on their former spouse's complete earnings record if they were married at least 10 years. Most of those receiving benefits under this provision are women. Many individual retirement account proposals do not acknowledge divorcees and survivors as having any specific claim on the individual accounts of their former spouses. Under these proposals, the current automatic provision of these benefits would be eliminated. The money in these accounts could become a part of the settlement at the time of a divorce, but the current benefit guarantee to these benefits might be lost. gender-neutral life tables would create cross-subsidies between men and women. However, doing so could protect retired women against a lower living standard that would result simply because they usually live longer than men. The needs of former spouses will also need to be considered in developing individual accounts. While the Social Security system has benefited women significantly through the spousal benefit and the progressivity of the benefit formula, women generally receive lower Social Security benefits than men because they work fewer years and earn lower wages. These work and earnings characteristics will affect the relative changes in average benefits for men and women under some reform proposals. In particular, these characteristics will work against women should reforms based on years with covered earnings be enacted. Because of women's longer life expectancy, the creation of mandatory individual retirement accounts could also decrease women's benefits relative to men's if women continue to invest more conservatively than men. Women might also be disadvantaged if the accumulations in these accounts are paid as a lump sum rather than as a joint and survivor annuity based on gender-neutral life tables. Whether reforms include relatively modest modifications to the current system or more major restructurings that could include mandatory individual retirement accounts, some elements of the reform proposals could adversely affect many elderly women. Because elderly women are at risk for living in poverty, understanding how various elements of the population will be affected by different changes will be necessary if we are to protect the most vulnerable members of our society. This concludes my prepared statement. I would be happy to answer any questions you or other Members of the Subcommittee might have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed: (1) how women currently fare under social security; (2) how they might be affected by some of the proposed changes in benefits to restore solvency; and (3) how women might fare under a system restructured to include individual accounts. GAO noted that: (1) women have benefited significantly from the social security program; (2) many women who work are advantaged by the progressive benefit formula that provides larger relative benefits to those with lower lifetime earnings; (3) women who did not work or had low lifetime earnings and who were married benefit from the program's spousal and survivor benefit provisions; (4) however, women typically receive lower monthly benefits than men because benefits are based on earnings and the number of years worked; (5) any across-the-board benefit cuts to restore solvency might fall disproportionately on women as a group because they rely more heavily on social security income than men; (6) other types of reform approaches can have positive or negative effects on women depending on how the reforms are designed; (7) restructuring social security to include individual accounts also will likely have different effects on men and women; (8) because women earn less than men, contributions of a fixed percentage of earnings would put less into women's individual retirement accounts; (9) available evidence indicates that women also tend to invest more conservatively than men, and thus would likely earn smaller returns on their accounts, although they would bear less risk; (10) in addition, how such accounts are structured will be extremely important to women; (11) for example, whether individuals will be required to purchase annuities with the proceeds of their accounts at retirement and how the annuities are priced could affect women quite differently from men; and (12) how benefits might be distributed to divorcees and how accounts are transferred to survivors could affect the retirement income of some elderly women.

According to the President's budget, the federal government plans to invest more than $96 billion on IT in fiscal year 2018--the largest amount ever. However, as we have previously reported, investments in federal IT too often result in failed projects that incur cost overruns and schedule slippages, while contributing little to the desired mission-related outcomes. For example: The Department of Veterans Affairs' Scheduling Replacement Project was terminated in September 2009 after spending an estimated $127 million over 9 years. The tri-agency National Polar-orbiting Operational Environmental Satellite System was halted in February 2010 by the White House's Office of Science and Technology Policy after the program spent 16 years and almost $5 billion. The Department of Homeland Security's Secure Border Initiative Network program was ended in January 2011, after the department obligated more than $1 billion for the program. The Office of Personnel Management's Retirement Systems Modernization program was canceled in February 2011, after spending approximately $231 million on the agency's third attempt to automate the processing of federal employee retirement claims. The Department of Veterans Affairs' Financial and Logistics Integrated Technology Enterprise program was intended to be delivered by 2014 at a total estimated cost of $609 million, but was terminated in October 2011. The Department of Defense's Expeditionary Combat Support System was canceled in December 2012 after spending more than a billion dollars and failing to deploy within 5 years of initially obligating funds. Our past work found that these and other failed IT projects often suffered from a lack of disciplined and effective management, such as project planning, requirements definition, and program oversight and governance. In many instances, agencies had not consistently applied best practices that are critical to successfully acquiring IT. Federal IT projects have also failed due to a lack of oversight and governance. Executive-level governance and oversight across the government has often been ineffective, specifically from chief information officers (CIO). For example, we have reported that some CIOs' authority was limited because they did not have the authority to review and approve the entire agency IT portfolio. Recognizing the severity of issues related to the government-wide management of IT, FITARA was enacted in December 2014. The law was intended to improve agencies' acquisitions of IT and enable Congress to monitor agencies' progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes specific requirements related to seven areas. Federal data center consolidation initiative (FDCCI). Agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing their data centers (to include planned cost savings), and quarterly updates on progress made. The law also requires OMB to develop a goal for how much is to be saved through this initiative, and provide annual reports on cost savings achieved. Enhanced transparency and improved risk management. OMB and covered agencies are to make detailed information on federal IT investments publicly available, and agency CIOs are to categorize their IT investments by level of risk. Additionally, in the case of major IT investments rated as high risk for 4 consecutive quarters, the law requires that the agency CIO and the investment's program manager conduct a review aimed at identifying and addressing the causes of the risk. Agency CIO authority enhancements. CIOs at covered agencies are required to (1) approve the IT budget requests of their respective agencies, (2) certify that OMB's incremental development guidance is being adequately implemented for IT investments, (3) review and approve contracts for IT, and (4) approve the appointment of other agency employees with the title of CIO. See appendix I for details on the current status of federal CIOs. Portfolio review. Agencies are to annually review IT investment portfolios in order to, among other things, increase efficiency and effectiveness and identify potential waste and duplication. In establishing the process associated with such portfolio reviews, the law requires OMB to develop standardized performance metrics, to include cost savings, and to submit quarterly reports to Congress on cost savings. Expansion of training and use of IT acquisition cadres. Agencies are to update their acquisition human capital plans to address supporting the timely and effective acquisition of IT. In doing so, the law calls for agencies to consider, among other things, establishing IT acquisition cadres or developing agreements with other agencies that have such cadres. Government-wide software purchasing program. The General Services Administration is to develop a strategic sourcing initiative to enhance government-wide acquisition and management of software. In doing so, the law requires that, to the maximum extent practicable, the General Services Administration should allow for the purchase of a software license agreement that is available for use by all executive branch agencies as a single user. Maximizing the benefit of the Federal Strategic Sourcing Initiative. Federal agencies are required to compare their purchases of services and supplies to what is offered under the Federal Strategic Sourcing Initiative. OMB is also required to issue regulations related to the initiative. In June 2015, OMB released guidance describing how agencies are to implement FITARA. This guidance is intended to, among other things: assist agencies in aligning their IT resources with statutory establish government-wide IT management controls that will meet the law's requirements, while providing agencies with flexibility to adapt to unique agency processes and requirements; clarify the CIO's role and strengthen the relationship between agency CIOs and bureau CIOs; and strengthen CIO accountability for IT costs, schedules, performance, and security. The guidance identified several actions that agencies were to take to establish a basic set of roles and responsibilities (referred to as the common baseline) for CIOs and other senior agency officials, which were needed to implement the authorities described in the law. For example, agencies were required to conduct a self-assessment and submit a plan describing the changes they intended to make to ensure that common baseline responsibilities were implemented. Agencies were to submit their plans to OMB's Office of E-Government and Information Technology by August 15, 2015, and make portions of the plans publicly available on agency websites no later than 30 days after OMB approval. As of November 2016, all agencies had made their plans publicly available. In addition, in August 2016, OMB released guidance intended to, among other things, define a framework for achieving the data center consolidation and optimization requirements of FITARA. The guidance includes requirements for agencies to: maintain complete inventories of all data center facilities owned, operated, or maintained by or on behalf of the agency; develop cost savings targets for fiscal years 2016 through 2018 and report any actual realized cost savings; and measure progress toward meeting optimization metrics on a quarterly basis. The guidance also directs agencies to develop a data center consolidation and optimization strategic plan that defines the agency's data center strategy for fiscal years 2016, 2017, and 2018. This strategy is to include, among other things, a statement from the agency CIO stating whether the agency has complied with all data center reporting requirements in FITARA. Further, the guidance indicates that OMB is to maintain a public dashboard that will display consolidation-related costs savings and optimization performance information for the agencies. In February 2015, we introduced a new government-wide high-risk area, Improving the Management of IT Acquisitions and Operations. This area highlighted several critical IT initiatives in need of additional congressional oversight, including (1) reviews of troubled projects; (2) efforts to increase the use of incremental development; (3) efforts to provide transparency relative to the cost, schedule, and risk levels for major IT investments; (4) reviews of agencies' operational investments; (5) data center consolidation; and (6) efforts to streamline agencies' portfolios of IT investments. We noted that implementation of these initiatives was inconsistent and more work remained to demonstrate progress in achieving IT acquisition and operation outcomes. Further, our February 2015 high-risk report stated that, beyond implementing FITARA, OMB and agencies needed to continue to implement our prior recommendations in order to improve their ability to effectively and efficiently invest in IT. Specifically, from fiscal years 2010 through 2015, we made 803 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations. These recommendations included many to improve the implementation of the aforementioned six critical IT initiatives and other government-wide, cross-cutting efforts. We stressed that OMB and agencies should demonstrate government-wide progress in the management of IT investments by, among other things, implementing at least 80 percent of our recommendations related to managing IT acquisitions and operations within 4 years. In February 2017, we issued an update to our high-risk series and reported that, while progress had been made in improving the management of IT acquisitions and operations, significant work still remained to be completed. For example, as of May 2017, OMB and the agencies had fully implemented 380 (or about 47 percent) of the 803 recommendations. This was a 24 percent increase compared to the percentage we reported as being fully implemented in 2015. Figure 1 summarizes the progress that OMB and the agencies had made in addressing our recommendations, as compared to the 80 percent target, as of May 2017. In addition, in fiscal year 2016, we made 202 new recommendations, thus further reinforcing the need for OMB and agencies to address the shortcomings in IT acquisitions and operations. Also, beyond addressing our prior recommendations, our 2017 high-risk update noted the importance of OMB and federal agencies continuing to expeditiously implement the requirements of FITARA. To further explore the challenges and opportunities to improve federal IT acquisitions and operations, we convened a forum on September 14, 2016, to explore challenges and opportunities for CIOs to improve federal IT acquisitions and operations--with the goal of better informing policymakers and government leadership. Forum participants, which included 13 current and former federal agency CIOs, members of Congress, and private sector IT executives, identified key actions related to seven topics: (1) strengthening FITARA, (2) improving CIO authorities, (3) budget formulation, (4) governance, (5) workforce, (6) operations, and (7) transition planning. A summary of the key actions, by topic area, identified during the forum is provided in figure 2. In addition, in January 2017, the Federal CIO Council concluded that differing levels of authority over IT-related investments and spending have led to inconsistencies in how IT is executed from agency to agency. According to the Council, for those agencies where the CIO has broad authority to manage all IT investments, great progress has been made to streamline and modernize the federal agency's footprint. For the others, where agency CIOs are only able to control pieces of the total IT footprint, it has been harder to achieve improvements. The administration has initiated two efforts aimed at improving federal IT. Specifically, in March 2017, it established the Office of American Innovation to, among other things, improve federal government operations and services, and modernize federal IT. The office is to consult with both OMB and the Office of Science and Technology Policy on policies and plans intended to improve government operations and services, improve the quality of life for Americans, and spur job creation. In May 2017, the administration also established the American Technology Council to help transform and modernize federal IT and how the government uses and delivers digital services. The President is the chairman of this council, and the Federal CIO and the United States Digital Service administrator are members. Agencies have taken steps to improve the management of IT acquisitions and operations by implementing key FITARA initiatives. However, agencies would be better positioned to fully implement the law and, thus, realize additional management improvements, if they addressed the numerous recommendations we have made aimed at improving data center consolidation, increasing transparency via OMB's IT Dashboard, implementing incremental development, and managing software licenses. One of the key initiatives to implement FITARA is data center consolidation. OMB established FDCCI in February 2010 to improve the efficiency, performance, and environmental footprint of federal data center activities and the enactment of FITARA reinforced the initiative. However, in a series of reports that we issued over the past 6 years, we noted that, while data center consolidation could potentially save the federal government billions of dollars, weaknesses existed in several areas, including agencies' data center consolidation plans and OMB's tracking and reporting on related cost savings. In these reports, we made a total of 141 recommendations to OMB and 24 agencies to improve the execution and oversight of the initiative. Most agencies and OMB agreed with our recommendations or had no comments. As of May 2017, 75 of our recommendations remained open. Also, in May 2017, we reported that the 24 agencies participating in FDCCI collectively had made progress on their data center closure efforts. Specifically, as of August 2016, these agencies had identified a total of 9,995 data centers, of which they reported having closed 4,388, and having plans to close a total of 5,597 data centers through fiscal year 2019. Notably, the Departments of Agriculture, Defense, the Interior, and the Treasury accounted for 84 percent of the completed closures. In addition, 18 of the 24 agencies reported achieving about $2.3 billion collectively in cost savings and avoidances from their data center consolidation and optimization efforts from fiscal year 2012 through August 2016. The Departments of Commerce, Defense, Homeland Security, and the Treasury accounted for approximately $2.0 billion (or 87 percent) of the total. Further, 23 agencies reported about $656 million collectively in planned savings for fiscal years 2016 through 2018. This is about $3.3 billion less than the estimated $4.0 billion in planned savings for fiscal years 2016 through 2018 that agencies reported to us in November 2015. Figure 3 presents a comparison of the amounts of cost savings and avoidances reported by agencies to OMB and the amounts the agencies reported to us. As mentioned previously, FITARA required agencies to submit multi-year strategies to achieve the consolidation and optimization of their data centers no later than the end of fiscal year 2016. Among other things, this strategy was to include such information as data center consolidation and optimization metrics, and year-by-year calculations of investments and cost savings through October 1, 2018. Further, OMB's August 2016 guidance on data center optimization contained additional information for how agencies are to implement the strategic plan requirements of FITARA. Specifically, the guidance stated that agency data center consolidation and optimization strategic plans are to include, among other things, planned and achieved performance levels for each optimization metric; calculations of target and actual agency- wide spending and cost savings on data centers; and historical cost savings and cost avoidances due to data center consolidation and optimization. OMB's guidance also stated that agencies were required to publicly post their strategic plans to their agency-owned digital strategy websites by September 30, 2016. As of April 2017, only 7 of the 23 agencies that submitted their strategic plans--the Departments of Agriculture, Education, Homeland Security, and Housing and Urban Development; the General Services Administration; the National Science Foundation; and the Office of Personnel Management--had addressed all five elements required by the OMB memorandum implementing FITARA. The remaining 16 agencies either partially met or did not meet the requirements. For example, most agencies partially met or did not meet the requirements to provide information related to data center closures and cost savings metrics. The Department of Defense did not submit a plan and was rated as not meeting any of the requirements. To better ensure that federal data center consolidation and optimization efforts improve governmental efficiency and achieve cost savings, in our May 2017 report, we recommended that 11 of the 24 agencies take action to ensure that the amounts of achieved data center cost savings and avoidances are consistent across all reporting mechanisms. We also recommended that 17 of the 24 agencies each take action to complete missing elements in their strategic plans and submit their plans to OMB in order to optimize their data centers and achieve cost savings. Twelve agencies agreed with our recommendations, 2 did not agree, and 10 agencies and OMB did not state whether they agreed or disagreed. To facilitate transparency across the government in acquiring and managing IT investments, OMB established a public website--the IT Dashboard--to provide detailed information on major investments at 26 agencies, including ratings of their performance against cost and schedule targets. Among other things, agencies are to submit ratings from their CIOs, which, according to OMB's instructions, should reflect the level of risk facing an investment relative to that investment's ability to accomplish its goals. In this regard, FITARA includes a requirement for CIOs to categorize their major IT investment risks in accordance with OMB guidance. Over the past 6 years, we have issued a series of reports about the Dashboard that noted both significant steps OMB has taken to enhance the oversight, transparency, and accountability of federal IT investments by creating its Dashboard, as well as concerns about the accuracy and reliability of the data. In total, we have made 47 recommendations to OMB and federal agencies to help improve the accuracy and reliability of the information on the Dashboard and to increase its availability. Most agencies agreed with our recommendations or had no comments. As of May 2017, 17 of these recommendations have been implemented. In June 2016, we determined that 13 of the 15 agencies selected for in- depth review had not fully considered risks when rating their major investments on the Dashboard. Specifically, our assessments of risk for 95 investments at the 15 selected agencies matched the CIO ratings posted on the Dashboard 22 times, showed more risk 60 times, and showed less risk 13 times. Figure 4 summarizes how our assessments compared to the selected investments' CIO ratings. Aside from the inherently judgmental nature of risk ratings, we identified three factors which contributed to differences between our assessments and the CIO ratings: Forty of the 95 CIO ratings were not updated during April 2015 (the month we conducted our review), which led to differences between our assessments and the CIOs' ratings. This underscores the importance of frequent rating updates, which help to ensure that the information on the Dashboard is timely and accurately reflects recent changes to investment status. Three agencies' rating processes spanned longer than 1 month. Longer processes mean that CIO ratings are based on older data, and may not reflect the current level of investment risk. Seven agencies' rating processes did not focus on active risks. According to OMB's guidance, CIO ratings should reflect the CIO's assessment of the risk and the investment's ability to accomplish its goals. CIO ratings that do no incorporate active risks increase the chance that ratings overstate the likelihood of investment success. As a result, we concluded that the associated risk rating processes used by the 15 agencies were generally understating the level of an investment's risk, raising the likelihood that critical federal investments in IT are not receiving the appropriate levels of oversight. To better ensure that the Dashboard ratings more accurately reflect risk, we recommended that the 15 agencies take actions to improve the quality and frequency of their CIO ratings. Twelve agencies generally agreed with or did not comment on the recommendations and three agencies disagreed, stating that their CIO ratings were adequate. However, we noted that weaknesses in these three agencies' processes still existed and that we continued to believe our recommendations were appropriate. As of May 2017, these recommendations have not yet been fully implemented. OMB has emphasized the need to deliver investments in smaller parts, or increments, in order to reduce risk, deliver capabilities more quickly, and facilitate the adoption of emerging technologies. In 2010, it called for agencies' major investments to deliver functionality every 12 months and, since 2012, every 6 months. Subsequently, FITARA codified a requirement that agency CIOs certify that IT investments are adequately implementing OMB's incremental development guidance. However, in May 2014, we reported that 66 of 89 selected investments at five major agencies did not plan to deliver capabilities in 6-month cycles, and less than half of these investments planned to deliver functionality in 12-month cycles. We also reported that only one of the five agencies had complete incremental development policies. Accordingly, we recommended that OMB clarify its guidance on incremental development and that the selected agencies update their associated policies to comply with OMB's revised guidance (once made available), and consider the factors identified in our report when doing so. Four of the six agencies agreed with our recommendations or had no comments, one agency partially agreed, and the remaining agency disagreed with the recommendations. The agency that disagreed did not believe that its recommendations should be dependent upon OMB taking action to update guidance. In response, we noted that only one of the recommendations to that agency depended upon OMB action, and we maintained that the action was warranted and could be implemented. Subsequently, in August 2016, we reported that agencies had not fully implemented incremental development practices for their software development projects. Specifically, we noted that, as of August 31, 2015, 22 federal agencies had reported on the Dashboard that 300 of 469 active software development projects (approximately 64 percent) were planning to deliver usable functionality every 6 months for fiscal year 2016, as required by OMB guidance. Table 1 lists the total number and percent of federal software development projects for which agencies reported plans to deliver functionality every 6 months for fiscal year 2016. Regarding the remaining 169 projects (or 36 percent) that were reported as not planning to deliver functionality every 6 months, agencies provided a variety of explanations for not achieving that goal. These included project complexity, the lack of an established project release schedule, or that the project was not a software development project. Further, in conducting an in-depth review of seven selected agencies' software development projects, we determined that 45 percent of the projects delivered functionality every 6 months for fiscal year 2015 and 55 percent planned to do so in fiscal year 2016. However, significant differences existed between the delivery rates that the agencies reported to us and what they reported on the Dashboard. For example, for four agencies (the Departments of Commerce, Education, Health and Human Services, and Treasury), the percentage of delivery reported to us was at least 10 percentage points lower than what was reported on the Dashboard. These differences were due to (1) our identification of fewer software development projects than agencies reported on the Dashboard and (2) the fact that information reported to us was generally more current than the information reported on the Dashboard. We concluded that, by not having up-to-date information on the Dashboard about whether the project is a software development project and about the extent to which projects are delivering functionality, these seven agencies were at risk that OMB and key stakeholders may make decisions regarding the agencies' investments without the most current and accurate information. As such, we recommended that the seven selected agencies review major IT investment project data reported on the Dashboard and update the information as appropriate, ensuring that these data are consistent across all reporting channels. Finally, while OMB has issued guidance requiring agency CIOs to certify that each major IT investment's plan for the current year adequately implements incremental development, only three agencies (the Departments of Commerce, Homeland Security, and Transportation) had defined processes and policies intended to ensure that the CIOs certify that major IT investments are adequately implementing incremental development. Accordingly, we recommended that the remaining four agencies--the Departments of Defense, Education, Health and Human Services, and the Treasury--establish policies and processes for certifying that major IT investments adequately use incremental development. The Departments of Education and Health and Human Services agreed with our recommendation, while the Department of Defense disagreed and stated that its existing policies address the use of incremental development. However, we noted that the department's policies did not comply with OMB's guidance and that we continued to believe our recommendation was appropriate. The Department of the Treasury did not comment on its recommendation. In total, we have made 23 recommendations to OMB and agencies to improve their implementation of incremental development. As of May 2017, 17 of our recommendations remained open. Federal agencies engage in thousands of software licensing agreements annually. The objective of software license management is to manage, control, and protect an organization's software assets. Effective management of these licenses can help avoid purchasing too many licenses, which can result in unused software, as well as too few licenses, which can result in noncompliance with license terms and cause the imposition of additional fees. As part of its PortfolioStat initiative, OMB has developed policy that addresses software licenses. This policy requires agencies to conduct an annual, agency-wide IT portfolio review to, among other things, reduce commodity IT spending. Such areas of spending could include software licenses. In May 2014, we reported on federal agencies' management of software licenses and determined that better management was needed to achieve significant savings government-wide. In particular, 22 of the 24 major agencies did not have comprehensive license policies and only 2 had comprehensive license inventories. In addition, we identified five leading software license management practices, and the agencies' implementation of these practices varied. As a result of agencies' mixed management of software licensing, agencies' oversight of software license spending was limited or lacking, thus, potentially leading to missed savings. However, the potential savings could be significant considering that, in fiscal year 2012, 1 major federal agency reported saving approximately $181 million by consolidating its enterprise license agreements, even when its oversight process was ad hoc. Accordingly, we recommended that OMB issue needed guidance to agencies; we also made 135 recommendations to the 24 agencies to improve their policies and practices for managing licenses. Among other things, we recommended that the agencies regularly track and maintain a comprehensive inventory of software licenses and analyze the inventory to identify opportunities to reduce costs and better inform investment decision making. Most agencies generally agreed with the recommendations or had no comments. As of May 2017, 123 of the recommendations had not been implemented, but 4 agencies had made progress. For example, three agencies--the Department of Education, General Services Administration, and U.S. Agency for International Development--regularly track and maintain a comprehensive inventory of software licenses. In addition, two of these agencies also analyze agency-wide software licensing data to identify opportunities to reduce costs and better inform investment decision making. The National Aeronautics and Space Administration uses its inventory to make decisions and reduce costs, but does not regularly track and maintain a comprehensive inventory. While the other agencies had not completed the actions associated with these recommendations, they had plans in place to do so. Table 2 reflects the extent to which agencies implemented recommendations in these areas. In conclusion, with the enactment of FITARA, the federal government has an opportunity to improve the transparency and management of IT acquisitions and operations, and to strengthen the authority of CIOs to provide needed direction and oversight. The forum we held also recommended that CIOs be given more authority, and noted the important role played by the Federal CIO. Most agencies have taken steps to improve the management of IT acquisitions and operations by implementing key FITARA initiatives, including data center consolidation, efforts to increase transparency via OMB's IT Dashboard, incremental development, and management of software licenses; and they have continued to address recommendations we have made over the past several years. However, additional improvements are needed, and further efforts by OMB and federal agencies to implement our previous recommendations would better position them to fully implement FITARA. To help ensure that these efforts succeed, OMB's and agencies' continued implementation of FITARA is essential. In addition, we will continue to monitor agencies' implementation of our previous recommendations. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staffs have any questions about this testimony, please contact me at (202) 512-9286 or at [email protected]. Individuals who made key contributions to this testimony are Kevin Walsh (Assistant Director), Chris Businsky, Rebecca Eyler, and Jessica Waselkow (Analyst in Charge). As of May 2017, 9 of the 25 federal CIO positions were filled by acting CIOs that do not permanently hold the position. Of the 9, 2 were career positions and the remaining positions require some form of appointment. Table 3 summarizes the status of the CIO position at the federal level.

The federal government plans to invest almost $96 billion on IT in fiscal year 2018. Historically, these investments have too often failed, incurred cost overruns and schedule slippages, or contributed little to mission-related outcomes. Accordingly, in December 2014, Congress enacted FITARA, aimed at improving agencies' acquisitions of IT. Further, in February 2015, GAO added improving the management of IT acquisitions and operations to its high-risk list. This statement summarizes agencies' progress in improving the management of IT acquisitions and operations. This statement is based on GAO prior and recently published reports on (1) data center consolidation, (2) risk levels of major investments as reported on OMB's IT Dashboard, (3) implementation of incremental development practices, and (4) management of software licenses. The Office of Management and Budget (OMB) and federal agencies have taken steps to improve information technology (IT) through a series of initiatives, and as of May 2017, had fully implemented about 47 percent of the approximately 800 related GAO recommendations. However, additional actions are needed. Consolidating data centers . OMB launched an initiative in 2010 to reduce data centers, which was reinforced by the Federal Information Technology Acquisition Reform Act (FITARA) in 2014. GAO reported in May 2017 that agencies had closed 4,388 of the 9,995 total data centers, and had plans to close a total of 5,597 through fiscal year 2019. As a result, agencies reportedly saved or avoided about $2.3 billion through August 2016. However, out of the 23 agencies that submitted required strategic plans, only 7 had addressed all required elements. GAO recommended that agencies complete their plans to optimize their data centers and achieve cost savings and ensure reported cost savings are consistent across reporting mechanisms. Most agencies agreed with the recommendations. Enhancing transparency . OMB's IT Dashboard provides information on major investments at federal agencies, including ratings from Chief Information Officers that should reflect the level of risk facing an investment. GAO reported in June 2016 that agencies had not fully considered risks when rating their investments on the Dashboard. In particular, of the 95 investments reviewed, GAO's assessments of risks matched the ratings 22 times, showed more risk 60 times, and showed less risk 13 times. GAO recommended that agencies improve the quality and frequency of their ratings. Most agencies generally agreed with or did not comment on the recommendations. Implementing incremental development . OMB has emphasized the need for agencies to deliver investments in smaller parts, or increments, in order to reduce risk and deliver capabilities more quickly. Since 2012, OMB has required investments to deliver functionality every 6 months. In August 2016, GAO reported that while 22 agencies had reported that about 64 percent of 469 active software development projects planned to deliver usable functionality every 6 months for fiscal year 2016, the other 36 percent of the projects did not. Further, for 7 selected agencies, GAO identified differences in the percentages of software projects reported to GAO as delivering functionality every 6 months, compared to what was reported on the Dashboard. GAO made recommendations to agencies and OMB to improve the reporting of incremental data on the Dashboard. Most agencies agreed or did not comment on the recommendations. Managing software licenses . Effective management of software licenses can help avoid purchasing too many licenses that result in unused software. In May 2014, GAO reported that better management of licenses was needed to achieve savings. Specifically, only two agencies had comprehensive license inventories. GAO recommended that agencies regularly track and maintain a comprehensive inventory and analyze that data to identify opportunities to reduce costs and better inform decision making. Most agencies generally agreed with the recommendations or had no comments; as of May 2017, 4 agencies had made progress in implementing them. From fiscal years 2010 through 2015, GAO made about 800 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations, and included recommendations to improve the oversight and execution of the data center consolidation initiative, the accuracy and reliability of the Dashboard, incremental development policies, and software license management. Most agencies agreed with GAO's recommendations or had no comments. In addition, in fiscal year 2016, GAO made about 200 new recommendations in this area. GAO will continue to monitor agencies' implementation of these recommendations.

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss our observations on the General Services Administration's (GSA) strategic plan. This plan was prepared for submission to the Office of Management and Budget (OMB) and Congress on September 30, 1997, as required by the Government Performance and Results Act of 1993 (the Results Act). Building on our July 1997 report on GSA's April draft plan, I will discuss the improvements GSA has made and areas where GSA's strategic plan can be improved as it evolves over time. GSA's April 28 draft strategic plan contained all the six components required by the Results Act. However, the draft plan generally lacked clarity, context, descriptive information, and linkages among the components. GSA has since made a number of improvements, and the six components better achieve the purposes of the Act. However, additional improvements would strengthen the September 30 plan as it evolves over time. The September 30 plan continues to have general goals and objectives that seem to be expressed in terms that may be challenging to translate into quantitative analysis. The strategies component is an improvement over the prior version but would benefit from a more detailed discussion of how each goal will actually be accomplished. Although the key external factors component in the September 30 plan is clearer and provides more context, the factors are not clearly linked to the general goals and objectives. The program evaluations component provides a listing of the various program evaluations that GSA used, but it does not include the required schedule of future evaluations. Although the plan does a much better job of setting forth GSA's statutory authorities, this addition could be further improved by linking the different authorities to either the general goals and objectives or the performance goals. The plan also refers to three related areas--crosscutting issues, major management problems, and data reliability--but the discussion is limited and not as useful as it could be in trying to assess the impact of these factors on meeting and measuring the goals. This is especially true for major management and data reliability problems, which can have a negative impact on measuring progress and achieving the goals. In the 1990s, Congress put in place a statutory framework to address long-standing weaknesses in federal government operations, improve federal management practices, and provide greater accountability for achieving results. This framework included as its essential elements financial management reform legislation, information technology reform legislation, and the Results Act. In enacting this framework, Congress sought to create a more focused, results-oriented management and decisionmaking process within both Congress and the executive branch. These laws seek to improve federal management by responding to a need for accurate, reliable information for congressional and executive branch decisionmaking. This information has been badly lacking in the past, as much of our work has demonstrated. Implemented together, these laws provided a powerful framework for developing fully integrated information about agencies' missions and strategic priorities, data to show whether or not the goals are achieved, the relationship of information technology investment to the achievement of those goals, and accurate and audited financial information about the costs of achieving mission results. The Results Act focuses on clarifying missions, setting goals, and measuring performance toward achieving those goals. It emphasizes managing for results and pinpointing opportunities for improved performance and increased accountability. Congress intended for the Act to improve the effectiveness of federal programs by fundamentally shifting the focus of management and decisionmaking away from a preoccupation with tasks and services to a broader focus on results of federal programs. strategies) to achieve the goals and objectives and the various resources needed; (4) a description of the relationship between the long-term goals/objectives and the annual performance plans required by the Act; (5) an identification of key factors, external to the agency and beyond its control, that could significantly affect achievement of the strategic goals; and (6) a description of how program evaluations were used to establish and revise strategic goals and a schedule for future program evaluations. We reported in July that the April 28 draft plan included the six components required by the Results Act and the general goals and objectives in the plan reflected GSA's major statutory responsibilities. However, our analysis showed that the plan could have better met the purposes of the Act and related OMB guidance. Two of the required components--how goals and objectives were to be achieved and program evaluations--needed more descriptive information on how goals and objectives were to be achieved, how program evaluations were used in setting goals, and what the schedule would be for future evaluations to better achieve the purposes of the Act. The four other required components--mission statement, general goals and objectives, key external factors, and relating performance goals to general goals and objectives--were more responsive to the Act but needed greater clarity and context. We also noted that the general goals and objectives and the mission statement in the draft plan did not emphasize economy and efficiency, as a reflection of taxpayers' interests. Also, the general goals and objectives seem to have been expressed in terms that may be challenging to translate into quantitative or measurable analysis, and there could have been better linkages between the various components of the plan. We also reported that the plan could have been made more useful to GSA, Congress, and other stakeholders by providing a fuller description of statutory authorities and an explicit discussion of crosscutting functions, major management problems, and the adequacy of data and systems. Although the plan reflected the major pieces of legislation that establish GSA's mission and explained how GSA's mission is linked to key statutes, we reported that GSA could provide other useful information, such as listing laws that broaden its responsibilities as a central management agency and which are reflected in the goals and objectives. accomplishment of goals and objectives. It also made no mention of whether GSA coordinated the plan with its stakeholders. The plan was also silent on the formidable management problems we have identified over the years--issues that are important because they could have a serious impact on whether GSA can achieve its strategic goals. Finally, the plan made no mention of how data limitations would affect its ability to measure performance and ultimately manage its programs. We reported that consideration of these areas would give GSA a better framework for developing and achieving its goals and help stakeholders better understand GSA's operating constraints and environment. The September 30 plan reflects a number of the improvements that we suggested in our July 1997 report. The clarity of the September 30 plan is improved and it provides more context, descriptive information, and linkages within and among the six components that are required by the Act. Compared to the April 28 draft, the September 30 plan generally should provide stakeholders with a better understanding of GSA's overall mission and strategic outlook. Our analysis of the final plan also showed that, in line with our suggestion, GSA placed more emphasis on economy and efficiency in the comprehensive mission statement and general goals and objectives components. The September 30 plan also generally described the operational processes, staff skills, and technology required, as well as the human, information, and other resources needed, to meet the goals and objectives. The strategic plan now contains a listing of program evaluations that GSA used to prepare the plan and a more comprehensive discussion of the major pieces of legislation that serve as a basis for its mission, reflecting additional suggestions we made in our July 1997 report. Furthermore, the September 30 plan's overall improvement in clarity and context should help decisionmakers and other stakeholders better understand the crosscutting, governmentwide nature of GSA's operations as a central management agency. The September 30 plan makes some reference to major management problems in the program evaluations component and also addresses the importance of data reliability in the general goals and objectives component. The improvements that GSA has made are a step in the right direction, and the six components better achieve the purposes of the Act. However, we believe that additional improvements, which are described in the following section, would strengthen the strategic plan as it evolves over time. As we discussed in our July 7, 1997, report on the draft plan, the September 30 plan continues to have general goals and objectives that seem to be expressed in terms that may be challenging to translate into quantitative or measurable analysis. This could make it difficult to determine whether they are actually being achieved. For example, the goal to "compete effectively for the federal market" has such objectives as "provide quality products and services at competitive prices and achieve significant savings" and "open GSA to marketplace competition where appropriate to reduce costs to the government and improve customer service." However, this goal, its related objectives, and the related narrative do not state specifically how progress will be measured, such as the amount of savings GSA intends to achieve or the timetable for opening the GSA marketplace for competition. OMB Circular A-11 specifies that general goals and objectives should be stated in a manner that allows a future assessment to be made of whether the goals are being met. The OMB guidance states that general goals that are quantitative facilitate this determination, but it also recognizes that the goals need not be quantitative and that related performance goals can be used as a basis for future assessments. However, we observed that many of the performance goals that GSA included in the plan also were not expressed in terms that could easily enable quantitative analysis, which could make gauging progress difficult in future assessments. The strategies component--how the goals and objectives will be achieved--described the operational processes, human resources and skills, and information and technology needed to meet the general goals and objectives. This component is an improvement over the prior version we reviewed, and applicable performance goals are listed with each of these factors. Although GSA chose to discuss generally the factors that will affect its ability to achieve its performance goals, we believe that a more detailed discussion of how each goal will actually be accomplished would be more useful to decisionmakers. To illustrate with a specific example, the plan could discuss the approaches that GSA will use to meet the performance goals related to its general goal of promoting responsible asset management using operational processes, human resources and skills, information and technology, and capital/other resources. is achieving its goals and objectives. We also noted that the strategies component does not discuss priorities among the goals and objectives. Such a discussion would be helpful to decisionmakers in determining where to focus priorities in the event of a sudden change in funding or staffing. Finally, GSA deferred to the President's budget its discussion about capital and other resources. We believe it seems reasonable to include in this component at least some general discussion of how capital and other resources will be used to meet each general goal. Although the external factors component in the September 30 plan is much clearer and provides more context than the draft version we reviewed, the factors are not clearly linked to the general goals and objectives. OMB Circular A-11 states that the plan should include this link, as well as describe how achieving the goals could be affected by the factors. This improvement would allow decisionmakers to better understand how the factors potentially will affect achievement of each general goal and objective. The program evaluations component in the September 30 plan provides a listing of the various program evaluations that GSA indicates were used in developing the plan. However, it still does not include a schedule of future evaluations. Instead, the plan states that the schedule for future program evaluations is under development and that GSA intends to use the remainder of the consultation process to obtain input from Congress and stakeholders concerning the issues that should be studied on a priority basis. However, OMB Circular A-11 indicates that the schedule should have been completed and included in the September 30 plan, together with an outline of the general methodology to be used and a discussion of the particular issues to be addressed. Although the plan does a much better job of setting forth GSA's statutory authorities in the attachment, this description could be further improved if the different statutory authorities discussed therein were linked with either the general goals and objectives or the performance goals included in the plan. Further, the plan only makes limited reference to the other important areas we identified in our July 1997 report--crosscutting issues, major management problems, and data reliability. The plan's improved clarity and context should help decisionmakers understand the crosscutting issues that affect GSA as a central management agency. However, explicit discussion of these issues is limited, and the September 30 plan makes no reference to the extent to which GSA coordinated with stakeholders. The September 30 plan references major management problems in the program evaluations component, but it does not explicitly discuss these problems or identify which problems could have an adverse impact on meeting the general goals and objectives. Our work has shown over the years that these types of problems have significantly hampered GSA's and its stakeholder agencies' abilities to accomplish their missions. For example, the plan could address how GSA will attempt to ensure that its information systems meet computer security requirements or how GSA plans to address the year 2000 problem in its computer hardware and software systems. The plan does reference data reliability in the general goals and objectives component. However, the discussion of data reliability, which is so critical for measuring progress and results, is limited and not as useful as it could be in attempting to assess the impact that data problems could have on meeting the general goals and objectives. We continue to believe that greater emphasis on how GSA plans to resolve management problems and on the importance of data reliability could improve the plan. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed its observations on the General Services Administration's (GSA) September 30, 1997, strategic plan. GAO noted that: (1) GSA's April 1997 draft strategic plan contained all six components required by the Government Performance and Results Act; (2) however, the draft plan generally lacked clarity, context, descriptive information, and linkages among the components; (3) GSA has since made a number of improvements, and the six components now better achieve the purposes of the act; (4) however, additional improvements would strengthen the September 30 plan as it evolves over time; (5) the September 30 plan continues to have general goals and objectives that seem to be expressed in terms that may be challenging to translate into quantitative analysis; (6) the strategies component is an improvement over the prior version but would benefit from a more detailed discussion of how each goal will actually be accomplished; (7) although the external factors in the September 30 plan are clearer and provide more context, the factors are not clearly linked to the general goals and objectives; (8) the program evaluations component provides a listing of the various program evaluations that GSA used, but it does not include a required schedule of future evaluations; (9) although the plan does a much better job of setting forth GSA's statutory authorities, this addition could be further improved by linking the different authorities to either the general goals and objectives or the performance goals; (10) the plan also refers to three related areas--crosscutting issues, major management problems, and data reliability--but the discussion is limited and not as useful as it could be in articulating how these issues might affect successful accomplishment of goals and objectives; and (11) this is especially true for major management and data reliability problems, which can have a negative impact on measuring progress and achieving the goals.

Medicare's home health benefit enables certain beneficiaries with post- acute-care needs (such as recovery from joint replacement) and chronic conditions (such as congestive heart failure) to receive care in their homes. To qualify for home health care, beneficiaries must be confined to their residence ("homebound"); require part-time or intermittent skilled nursing, physical therapy, or speech therapy; be under the care of a physician; and have the services furnished under a plan of care prescribed and periodically reviewed by a physician. If these conditions are met, Medicare will pay for the following types of visits: skilled nursing; physical, occupational, and speech therapy; medical social service; and home health aide. As long as beneficiaries continue to remain eligible for home health services, they may receive an unlimited number of visits. Beneficiaries are not liable for any out-of-pocket costs for this benefit. Medicare home health payments grew at an average annual rate of 25 percent between 1990 and 1997, more than three times the rate of spending growth for the entire Medicare program. The growth in spending was attributable primarily to increases in the number of visits provided and not in the payment per visit. The number of Medicare beneficiaries receiving home health almost doubled during that period, from 57 to 109 beneficiaries per 1,000. At the same time, the average number of visits provided per home health user grew from 36 to 73 visits. The rapid growth in home health use was due, in part, to the cost-based payment method. Under the cost-based system, HHAs were paid their costs up to a per-visit limit for each visit provided. This method, at a time when there was little program oversight, offered few incentives to provide visits efficiently or only when needed. By 1997, home health utilization--as measured by the number of home health users per 1,000 Medicare beneficiaries and the number of visits provided--varied widely across geographic regions. For example, 48 Medicare beneficiaries per 1,000 in Hawaii received home health care in 1997. In the same year, more than 157 beneficiaries per 1,000 received home health care in Louisiana. Meanwhile, Medicare home health users in Washington received an average of 32 visits, compared to an average of 161 visits per user in Louisiana. This wide variation in use persisted even after controlling for patient diagnosis. This variability is partly due to the lack of standards for necessary or appropriate care. Furthermore, even the most basic unit of service--the visit--was not well defined in terms of either the amount of time spent with a patient or the type of services provided. To constrain Medicare home health spending growth, BBA required HCFA to replace Medicare's cost-based, per-visit payment method with a PPS by fiscal year 2000. Until PPS could be implemented, BBA imposed spending controls under the IPS: For 3 years beginning October 1, 1997, the IPS incorporated tighter per-visit cost limits than had previously been in place and subjected each HHA to an annual Medicare revenue cap, which was the product of an HHA-specific, per-beneficiary amount and the number of beneficiaries that the HHA served. Under the PPS, an HHA receives a single payment for all items and services furnished during each 60-day episode of care. The payment rate is based on the national average cost of providing care in 1997, not an HHA's actual costs. Because the payment is divorced from an HHA's cost of delivering care, an HHA that delivers care for less than the payment amount can profit; conversely, an HHA will lose financially if its service costs are higher than the payment. To account for differences in beneficiary care needs, PPS episode payments are adjusted from a base rate (which was $2,115 in fiscal year 2001). These adjustments are based on a classification system that groups home health beneficiaries into 80 payment groups. The payment for a beneficiary in the most intensive payment group is approximately five times greater than the payment for a beneficiary in the least intensive group. In fiscal year 2001, episode payments ranged from $1,114 to $5,947. We have reported the strong financial incentives under the home health PPS to reduce the costs of providing an episode of care. HHAs can do this by reducing unnecessary or excessive visits, delivering care more efficiently, or underserving beneficiaries. We expressed concern that it may be hard to detect when the latter occurs. The lack of standards for necessary or appropriate care makes it difficult to review care and take steps to ensure that needed services are being delivered. We also said that the PPS could lead to substantial overpayments to some HHAs relative to the level of services being provided. Further, we noted industry concerns about the ability of some HHAs to respond to PPS incentives to reduce their costs and about inadequacies in the method used to adjust payments to account for differences in beneficiary care needs. As a result of these concerns, we recommended that risk sharing be incorporated into the PPS design. Risk sharing would limit the total losses and gains an HHA could experience over a period of time for treating beneficiaries by establishing formulas to share losses or gains with the Medicare program. This would involve a settlement process in which an HHA's actual costs of delivering care over the relevant period would be compared to its actual payments. Such an approach would simultaneously protect beneficiaries against underservice, the Medicare program from overpaying for services, and HHAs serving beneficiaries with greater than average needs when the costs are not accounted for in the payment adjustments. HCFA did not agree with our recommendation, stating that the PPS design and payment adjustments would address our concerns and that risk sharing would be difficult to implement. We subsequently suggested that the Congress consider requiring HCFA to implement risk sharing with the PPS. The average episode payment HHAs received to provide an episode of care in the first 6 months of 2001 was about 35 percent higher than the average estimated cost of providing that care. The average episode payment, accounting for the mix of beneficiaries treated in the first 6 months of 2001, was $2,691. (See table 1.) During this period, we estimated that the cost of providing an episode of care was $1,997 after adjusting for the mix of services provided by agencies and changes in the average time spent for each type of visit since the introduction of the PPS. This large difference between the average episode payment and estimated cost is due to three factors. First, the PPS episode payment amount was calculated on the assumption that about 32 visits would be provided during an average episode, although immediately prior to PPS implementation only about 29 visits per episode were provided. Second, HHAs have further lowered their costs since PPS by providing, on average, only about 22 visits per episode during the first half of 2001. Third, HHA payments have increased because a larger proportion of home health users have been categorized into higher payment groups. While the PPS adjusts payment rates to account for expected variation in costs due to patient care needs, the relationship between average payments and average estimated costs masks wider differences between payments and estimated costs across the 80 home health payment groups. The relationship between payments and estimated costs for the 10 payment groups that account for almost half of home health episodes ranged from 72 percent above the estimated cost to 4 percent below in the first 6 months of 2001. (See table 2.) For the five payment groups with the lowest payments relative to estimated costs, which accounted for 8 percent of all episodes, the payment ranged from about 9 percent below to about equal the average estimated cost of services provided. The payment was greater than the average estimated cost for the remaining groups. For any HHA, the relationship between Medicare payments and the costs of providing care will likely vary from the averages we report here. The PPS was designed to provide adequate payments to HHAs that operate efficiently and to provide incentives for HHAs to become more efficient. But certain HHAs may have costs higher than payments if they face extraordinary costs not accounted for by the PPS payment groups. The Medicare program is paying HHAs on average considerably more than the estimated cost of care beneficiaries are receiving. Consequently, implementation of the BBA-mandated 15 percent payment reduction, which would lower fiscal year 2003 PPS payments by 7 percent, should not affect HHAs' ability to serve Medicare beneficiaries. This payment reduction would move the Medicare program closer to becoming a prudent purchaser of home health care, but the reduction by itself is not sufficient. A single payment to cover all services provided during a 60-day episode of care, combined with the lack of standards for what constitutes necessary or appropriate home health care, leaves beneficiaries vulnerable to underservice, Medicare vulnerable to future overpayments, and HHAs with a disproportionate number of beneficiaries with extensive needs vulnerable to underpayments. Implementing the 15 percent reduction would not lessen these vulnerabilities. This is why we have previously recommended that the PPS include risk sharing to simultaneously protect beneficiaries, the Medicare program, and HHAs. The Congress should consider making no change in the requirement for a reduction in Medicare home health payments. We continue to urge the Congress to require CMS to incorporate risk sharing into the PPS design. In written comments on a draft of this report, CMS stated that our findings are consistent with its preliminary analysis of data for the first year of the PPS. It noted that cost report data, which are not yet available for the first year of the PPS, would be required to determine the costs of home health services under the PPS with certainty. CMS reiterated its concerns about implementing risk sharing as a part of the PPS. It believes that risk sharing would undermine the main benefit of PPS, which is payments that are timely and predictable. Further, CMS stated its belief that the outlier payment policy under the home health PPS and planned monitoring activities should mitigate our concern that some HHAs may be vulnerable to underpayments. Finally, CMS stated that risk sharing is administratively difficult. Although cost report data would more accurately reflect an HHA's costs, our episode cost estimates build on historic visit costs, adjusted for inflation and changes in visit time, and reflect actual service use, a major determinate of episode costs. We believe that the new evidence we present on the wide disparity between payments and estimated costs on average and across payment groups demonstrates the need for and the value of risk sharing in conjunction with the home health PPS. Risk sharing would not remove the incentives under the PPS for HHAs to provide care efficiently, because they would continue to benefit financially when their costs are below their payments and lose financially when their costs are above their payments. Yet, risk sharing would mitigate extreme gains and losses under the PPS. While the monitoring activities and refinements that CMS discusses such as revisions to the payment groups could mitigate extreme gains or losses, it could be some time until they are implemented. Furthermore, outlier payments, which account for less than 3 percent of payments, are not by themselves sufficient to protect vulnerable HHAs that have higher than average costs across a number of patients, nor do they protect the Medicare program from excessive spending. We believe that CMS could overcome any administrative difficulties in implementing risk sharing. CMS incorporated a risk-sharing arrangement in its demonstration project on the home health PPS while ensuring predictable and timely payments. We note that CMS has considerable experience in adjusting prospective payments to providers based on expectations for a provider's costs in the coming year, most recently in implementing the hospital outpatient PPS, which has a provision to protect hospitals from losses. CMS' comments are included as appendix II. We received oral comments on a draft of this report from representatives of three home health care associations--American Association for Homecare (AAHomecare), National Association for Home Care (NAHC), and Visiting Nurse Associations of America (VNAA). These organizations disagreed with our conclusions. All three associations expressed concern about the effect of a potential payment reduction on the industry's stability and, in particular, its ability to care for medically complex patients. The associations said it was too early in the experience of the PPS to accurately measure home health care use, visit costs, episode costs, or industry profit margins. VNAA stated that our cost estimates do not reflect current fixed costs under the PPS. NAHC raised questions about the timeliness of payments if risk sharing is a part of the home health PPS. The associations said that more information was needed on how low- utilization episodes, partial episodes, and outlier payments would affect the relationship between average episode costs and payments to HHAs. Our results are consistent with CMS' analysis of a full year of experience under the PPS. Our analysis of 1.48 million episodes did not consider the payment reduction for partial episodes, payment enhancement for outliers, or variable payment adjustments for a significant change in a beneficiary's condition. When calculating episode payments and estimated costs we treated these as full episodes. The impact of these payment adjustments on average episode payments is likely to be minimal because they are partially offsetting and apply to less than 8 percent of episodes. Whether the visit costs for these types of episodes is different from the average visit costs is not known. We excluded low-utilization episodes from our analysis because they are not paid an episode rate. HHA visits per user have been dropping since 1997, allowing ample time for HHAs to bring their fixed costs in line with current use patterns. The magnitude of the difference between payments and estimated costs provides compelling evidence that the legislated reduction would not destabilize the home health industry. Further, risk sharing if implemented would moderate any negative effects on the HHAs that may incur costs that are higher than these estimates including when HHAs treat medically complex patients. We are sending copies of this report to the Administrator of CMS. We will also make copies available to others upon request. If you or your staff have any questions, please call me at (202) 512-7114. Other contacts and staff who contributed to this report are listed in appendix III. We conducted our analyses using Medicare provider, claims, and beneficiary files for calendar years 2000 and 2001. We included only those providers that were listed as active in each year. For episodes ending on January 1, 2001 through June 30, 2001, we used all final bills from the home health Standard Analytic File (SAF) for 2001 that were available as of January 24, 2002. Our file of 1.48 million episodes, which excludes all low-utilization episodes, does not include any claims for the first 6 months of 2001 submitted after January 24, 2002. For 2000, we used all final bills ending on January 1, 2000 through June 30, 2000. To compute our estimate of average episode costs, we used HCFA's per- visit cost estimates that were used to establish the PPS episode rates and that were calculated from the sample of fiscal year 1997 audited costs reports. The per-visit costs, which include all costs of home health services covered and paid for on a reasonable cost basis, were inflated to 2001 cost levels using the market basket index for home health services. Then we adjusted the per-visit costs to account for the change in the time spent for each type of visit in 2001 compared to 2000. We estimated episode costs by multiplying the adjusted per-visit cost for each type of visit by the average mix of visits provided in each payment group in a 2001 episode. We also added an additional amount for the costs of other services not included in the per-visit costs. Our methodology assumes that the relationship between direct patient care costs and overhead costs has remained the same over time and therefore that administrative costs have not increased or decreased since the PPS. We calculated the average payment as the payment amount for each of the 80 payment groups weighted by the proportion of all episodes in 2001 provided within each payment group. We interviewed CMS officials and industry representatives from the American Association for Homecare, National Association for Home Care, Gentiva Health Services, Rocky Mountain Health Care, and the Visiting Nurse Associations of America regarding the changes in provider practices since the implementation of PPS. In addition to those named above, Leslie V. Gordon, Dan Lee, Carolyn Manuel-Barkin, Lynn Nonnemaker, and Paul M. Thomas made key contributions to this report.

The Balanced Budget Act of 1997 significantly changed Medicare's home health care payments to home health agencies (HHAs). Under a prospective payment system (PPS), HHAs are paid a fixed amount, adjusted for beneficiary care needs, for providing up to 60 days of care---termed a "home health episode." The act also imposed new interim payment limits to moderate spending until the PPS could be implemented. Although PPS was designed to lower Medicare spending below what it was under the interim system, GAO found that Medicare's payments for full home health care episodes were 35 percent higher than estimated in the first six months of 2001. These disparities indicate that Medicare's PPS overpays for services actually provided, although some HHAs facing extraordinary costs not accounted for by the payment system may be financially disadvantaged.

FPS is responsible for protecting federal employees and visitors in approximately 9,600 federal facilities under the custody and control of GSA. The level of security FPS provides at each of the facilities (including whether guards are deployed) varies depending on the building's facility security level. To fund its operations, FPS charges fees for its security services to federal tenant agencies in GSA-controlled facilities. For fiscal year 2013, FPS expects to receive $1.3 billion in fees. FPS has about 1,200 full-time employees and about 13,500 contract security guards deployed at approximately 5,650 (generally level III and IV facilities) of GSA's 9,600 facilities. Figure 1 shows the location of FPS's 11 regions and the approximate number of guards serving under contracts in each of these regions. FPS's contract guard program is the most visible component of the agency's operations, and the agency relies on its guards to be its "eyes and ears" while performing their duties. Contract guards are responsible for controlling access to facilities; conducting screening at access points to prevent the introduction of prohibited items, such as weapons and explosives; enforcing property rules and regulations; detecting and reporting criminal acts; and responding to emergency situations involving facility safety and security. In general, guards may only detain, not arrest, individuals, and guards' authorities typically do not extend beyond the facility. However some guards may have arrest authority under conditions set forth by the individual states. According to FPS's contract for guard service, its private-sector contract guard companies have primary responsibility for training and ensuring that guards have met certification and qualification requirements; however, FPS is ultimately responsible for oversight of the guards. FPS relies on its Contracting Officer Representatives (COR) and inspectors located in its 11 regions to inspect guard posts and verify that training, certifications, and time cards are accurate, among other responsibilities. CORs are individuals appointed by the contracting officer to assist in the monitoring or administration of a contract including monitoring contractor performance, receiving reports and other documentation, performing inspections, and maintaining contact with both the contract guard company and the contracting officer.for providing and maintaining all guard services as described in the contract statement of work, including management, supervision, training, equipment, supplies, and licensing. Before guards are assigned to a post or an area of responsibility at a federal facility, FPS requires that they all have contractor employee fitness determinations (the employee's fitness to work on behalf of the government based on character and conduct) and complete approximately 120 hours of training provided by the contractor and FPS, including basic training, firearms training, and screener (X-ray and magnetometer) training. Guards must also pass an FPS-administered written examination and possess the necessary certificates, licenses, and permits as required by the contract. Additionally, FPS requires its guards to complete 40 hours of refresher training every 3 years. Some states and localities require that guards obtain additional training and certifications. See table 1 for a detailed list of FPS's guard training, certification, and qualification requirements. We found similarities in the ways that FPS and six federal agencies we reviewed ensure that contract guards have received required training, certifications, and qualifications. Similar to FPS, each of the six agencies we examined--DOE, NASA, PFPA, State, the Kennedy Center, and the Holocaust Museum--depend largely on the contract guard companies to ensure guards are trained, certified, and qualified. They also depend on the guard companies to document compliance with contract requirements. All six agencies and FPS require basic, firearms, and screener (x-ray and magnetometer) training for their armed guards. In addition, FPS and five of the six agencies we reviewed require refresher training. FPS continues to experience difficulty providing required screener (x-ray and magnetometer equipment) training to all guards. In 2009 and 2010, we reported that FPS had not provided screener training to 1,500 contract guards in one FPS region. In response to our reports, FPS stated that it planned to implement a program to train its inspectors to provide screener training to all of its contract guards. Under this program, FPS planned to first provide x-ray and magnetometer training to its inspectors who would subsequently be responsible for training the guards. However, FPS continues to have guards deployed to federal facilities without this training. As noted in table 1, FPS requires all guards to receive 8 hours of initial screener training provided by FPS. Screener training is important because guards control access points at federal facilities and thus must be able to properly operate x-ray and magnetometer machines and understand their results. However, 3 years after our 2010 report, guards are deployed to federal facilities who have never received this training. For example, an official at one contract guard company stated that 133 of its approximately 350 guards (about 38 percent) on three separate FPS contracts (awarded in 2009) have never received their initial x-ray and magnetometer training from FPS. The official stated that some of these guards are working at screening posts without having received the training. Further, officials at another guard company in a different FPS region stated that, according to their records, 78 of 295 guards (about 26 percent) deployed under their contract have never received FPS's x-ray and magnetometer training. These officials stated that FPS's regional officials were informed of the problem, but allowed guards to continue to work under this contract, despite not having completed required training. Because FPS is responsible for this training, according to guard company officials, no action was taken against the company. In May 2013, FPS headquarters officials stated that they were unaware of any regions in which guards had not received screener training. In July 2013, according to FPS officials, the agency began designing a "train-the-trainer" pilot program with four guard companies. Through this pilot program, contract guard company instructors, in addition to FPS inspectors, will be certified to provide screener training to guards. FPS officials stated that they plan to implement the pilot program in the first quarter of 2014. According to FPS officials, once implemented, FPS's train-the-trainer program should increase the number of certified instructors capable of providing screener training nationwide. If this program is fully implemented, FPS screener training could be provided largely by the guard companies. This is the method by which four of the six agencies we spoke with provide their guards with screener training. In addition, officials from 13 of the 31 guard companies that we interviewed stated that responsibility for x-ray and magnetometer training should be shifted to the guard companies to alleviate scheduling problems, while officials from 7 companies stated that FPS should retain this responsibility. The remaining 11 guard companies did not state an opinion on this issue. FPS's train-the-trainer program could provide resources to address the challenges it faces in providing screener training to guards. However, the program is in its beginning stages and there are still guards deployed to federal facilities who have not received required screener training. Screener training is essential to helping prevent unauthorized individuals and items from entering federal facilities. Thus, it is critical that FPS immediately provide this training to those guards who have not received it. According to FPS officials, the agency requires its guards to receive training on how to respond to an active-shooter scenario, but we found that some guards have not received it. According to DHS, an active shooter is an individual killing or attempting to kill people in a confined and populated area. Since June 2009 there have been several incidents involving active-shooters at government facilities. For instance, in 2010 an active-shooter opened fire in the Lloyd D. George Federal Courthouse in Las Vegas, Nevada, killing a security officer and wounding a deputy U.S. Marshal. According to FPS officials, since 2010, it has provided training on how guards should respond during an active-shooter incident to guards as part of the 8-hour FPS-provided orientation training guards receive. FPS officials were not able to specify how much time is devoted to this training, but said that it is a small portion of the 2-hour special situations In addition, officials stated that guards hired before 2010 should training.have received this information during guard-company-provided training on the guards' post orders (which outline the duties and responsibilities associated with each guard post and include information on responding to an active-shooter situation) during basic and refresher training. However, when we asked contract guard company officials if their guards had received training on how guards should respond during active- shooter incidents, responses varied. For example, of the 16 contract guard companies we interviewed about this topic: eight contract guard company officials stated that their guards have received active-shooter scenario training during orientation, five guard company officials stated that FPS has not provided active- shooter scenario training to their guards, and three guard companies stated that FPS had not provided active- shooter scenario training to their guards during the FPS-provided orientation training, but that the topic was covered in one of the following ways: during guard company-provided basic training or refresher training, FPS provided on-the-job instruction on the topic during post FPS provided a link to an active-shooter training video, which the company shows its guards. The six agencies we reviewed--State, the Holocaust Museum, NASA, PFPA, the Kennedy Center, and DOE--also recognize this threat and five of them require active-shooter response training for their contract guards. According to officials at DOE, the agency is in the process of requiring guards to complete active-shooter response training to ensure they are capable of addressing this threat and protecting facility occupants. Similarly, Holocaust Museum officials stated that they require this training because current trends in law enforcement warrant active-shooter response training for guards. In May 2013, an FPS official stated that the agency is collaborating with its guard companies to develop a standardized national lesson plan for guards and revising the Security Guard Information Manual (SGIM). FPS officials stated that the lesson plan being developed is meant to standardize the training guards receive. However, according to the official, FPS has not yet decided whether the national lesson plan will specify countermeasures necessary to mitigate threats from active shooters. FPS does not have a timeline for developing or implementing a national lesson plan for guards. Until it develops one, some guards may continue to go without training on how guards should respond to incidents at federal facilities involving an active shooter. FPS requires some contract guard company instructor certifications, but does not require guard company instructors to be certified to teach basic or refresher training or have any training in basic instructional techniques. According to ISC guidance, training is a critical component of developing a well-qualified guard force and all training should be done with a certified instructor or training organization. Similarly, Federal Law Enforcement Training Accreditation Board (FLETA)training programs have an instructor development course and review process to ensure that instructors provide consistent, quality instruction. FPS requires that guard instructors be certified to provide training in CPR, first aid, AED, and firearms and have a minimum of 2 years of law enforcement, military, or security training experience. However, FPS has no certification requirements for instructors teaching the guards' basic and refresher training, nor does FPS require instructors to be knowledgeable in instructional techniques. Basic training, which represents 64 hours of the initial 120 hours of training that guards receive, and the 40-hour refresher class cover topics included in the SGIM, such as access control and crime detection and response. In contrast to FPS, three of the six selected agencies that we reviewed (NASA, DOE, and the Holocaust Museum) require guard instructors to attend instructor training or to be certified by the agency. For example, NASA requires contract guard company instructors to be certified by a NASA training academy. NASA stated that instructor certification requirements have reduced legal liabilities, ensured standardization of training, and led to greater efficiency of its training programs throughout the agency. Under NASA's instructor certification program, instructors must meet the following requirements, among others: completed training from the Federal Law Enforcement Training Center (FLETC); 2-week internship as a student instructor to observe and work with an established instructor, including an evaluation; physical fitness requirements; re-evaluation every 2 years to ensure instructors are effective and follow required lesson plans; and annual workshop for instructors on curriculum development. Similarly, DOE requires that in addition to specific certifications for the level of training they provide, instructors must complete a basic instructor training course and be evaluated for competency at least once every 36 months. According to some of FPS's guard companies, the absence of an instructor certification requirement has affected the quality of training provided to some guards. For example, 6 of FPS's 31 contract guard companies stated that they have experienced problems related to training quality when taking over a contract from a previous guard company and employing guards who had worked for the previous company. The companies stated that they either retrained or did not hire guards who they believed had been inadequately trained by the previous company. In these situations, costs may be passed on to FPS via increased rates for guard services to account for the increased training costs to guard companies. Four of the 31 guard companies stated that they already have additional requirements or training for instructors. However, such additional requirements and training are on a company-by-company basis and do not necessarily conform to any standards. Sixteen of the guard companies and officials from FLETA and CALEA stated that FPS should standardize instructor training and certification requirements or require FPS certification for guard instructors. Such standardization would help ensure quality and consistency in the training received by guards providing protective services across GSA's federal buildings. FPS officials stated that FPS reviews each instructor's resume to ensure that instructors have the minimum qualifications necessary to provide guard instruction. Some contract guard files we reviewed did not contain all required documentation. We reviewed 276 randomly selected (non-generalizeable) guard files maintained by 11 of the 31 guard companies we interviewed and found that 212 files (77 percent) contained the required training and certification documentation, but 64 files (23 percent) were missing one or more required documents. See table 2 for information on the results of our review. These 64 files were maintained by 9 of the 11 companies. According to FPS's policies and contracts for guard service, each contract guard company must maintain a file for each guard to document that all FPS training, certification, and qualification requirements have been met and are current. We examined the files against the required training, certification, and qualification documentation listed by FPS on the forms it uses to conduct its monthly file reviews. As shown in table 2, the 64 guard files were missing 117 total documents. For example: Three files were missing documentation of basic training, and 15 were missing documentation of refresher training, both of which cover the guards' roles and responsibilities and duties such as access control. Five files were missing documentation of screener training, which as mentioned above, is meant to prepare guards to prevent prohibited items from being brought into federal facilities. Seventeen files were missing documentation of initial weapons training, which indicates guards have passed the 40-hour weapons training, including 32 hours of firearms training. One file was missing the form that certifies that a guard has not been convicted of a crime of domestic violence. In addition to the 117 missing documents, there was no indication that FPS had monitored firearms qualifications in 68 of the 276 guard files reviewed. The other 208 files had a current firearms qualification form with an indication (such as initials or a signature) that FPS witnessed the qualification. The FPS Protective Security Officer (PSO) File Review Form lists documentation requirements as "Firearms Qualifications Witnessed by an FPS Employee," but is not clear regarding whether documentation of the FPS witness is required in the file. Although FPS has taken some steps to address its challenges in this area, our previous recommendations are a guide to furthering its efforts. For example, we recommended that FPS rigorously and consistently monitor contract guard companies' performance and step up enforcement against guard companies that are not complying with the terms of the contract. Although FPS agreed with this recommendation, it has yet to implement it. According to FPS officials, it plans to address this recommendation in the near future. DHS agreed with our 2010 and 2012 recommendations to develop a comprehensive and reliable system for contract guard oversight, but it still does not have such a system. Without a comprehensive guard management system, FPS has no independent means of ensuring that its contract guard companies have met contract requirements, such as providing qualified guards to federal facilities. According to FPS officials, it plans to address this recommendation in the near future. GAO's Standards for Internal Control in the Federal Government also states that program managers need access to data on agency operations to determine whether they are meeting goals for the effective and efficient use of resources. The standards state that such information should be captured and distributed in a form that permits officials to perform their duties efficiently. In the absence of a comprehensive guard-data-management system, FPS requires its guard companies to maintain files containing guard training and certification information and to submit a monthly report with this information to their CORs. FPS headquarters officials stated that the monthly reports are primarily to ensure that regional managers have access to training and certification information, although there are no requirements for regional officials to use or analyze the monthly reports. The officials stated that regions are occasionally asked to supply these reports to FPS headquarters as a check to ensure regions and guard companies are sharing this information, but that headquarters officials do not analyze the data. Although FPS does not have a system to track guard data, 13 of FPS's 31 guard companies maintain training, certification, and qualification data in either proprietary or commercially available software programs with various management capabilities. For example, one system used by multiple companies tracks the training and certification status of each guard and prevents the company from scheduling the guard to work if the guard is not in compliance with requirements. Virginia's Department of Criminal Justice Services (DCJS) has a database system that also allows training academies, guards, and guard companies to upload training and certification documentation so that DCJS can track the training and certification status of guards. According to industry stakeholders and contract guard company officials, a comprehensive guard management system could: provide FPS direct access for updating guard training, certification, and qualification data while performing post inspections and other oversight activities such as file reviews; enable FPS and guard company officials to more easily develop reports and identify trends in data to recognize areas that need attention; store training, certification, and qualification documentation, that could reduce the need to obtain documentation from a prior guard company when a new company takes over a contract; and help identify guards working under more than one FPS contract and verify that they do not work more than the maximum of 12 hours in one day. FPS's monthly reviews of contract guard companies' guard files are its primary management control for ensuring that the companies are complying with contractual requirements for guards' training, certification, and qualifications. FPS's directive for monthly file reviews requires, for example, that: Ten percent of the guard files for each contract are to be selected randomly for the monthly review. Selected files should be compared to the data in the reports provided to FPS by the contract guard company that month. FPS reviewers must note any deficiencies in which the file documentation and dates do not match the data included in the monthly report and promptly notify the guard company, COR, and FPS regional program manager of the deficiencies. If there are deficiencies in 40 percent or more of the reviewed files, the region must immediately initiate an audit of 100 percent of the company's guard files. Results should be recorded in FPS's Administrative Audit Form and individual Protective Security Officer File Review Forms. An effort should be made to exclude files that have been reviewed within the last 6 months from the selection process. FPS's directive on its monthly file reviews does not include specific information about the importance of randomly selecting guard files and ensuring contract guard company personnel do not know which files will be reviewed. In the absence of specific guidance regarding how files are to be selected, the four regions we visited varied in how they conducted the monthly file reviews. For example, three of the four regions we visited told us that they review randomly selected files either at the guard company's office or the guard company gives them electronic access to the files for review. In contrast, officials in the fourth FPS region stated that they submit a list of the selected guard files to the guard company 24 to 48 hours before the file review and request that the files be delivered either electronically or in hard copy to the regional office. As such, contract guard company officials in that region stated that they can review the selected files to ensure that they comply with requirements prior to delivering them to FPS. FPS headquarters officials stated that this indicates that guard company officials are performing due diligence to ensure the file is up to date. However, this practice decreases the utility of randomly selecting files for review and reduces the ability of FPS reviewers to accurately assess the guard company's ongoing ability to keep all of its guard files up to date. Additionally, officials at a contract guard company in another FPS region stated that the COR occasionally asks the guard company to select the files for review and bring them to the regional office. FPS stated that this is not standard practice. Allowing contract guard company officials to select files for review by FPS could result in selection bias and affect the results of FPS's review. FPS headquarters officials stated that monthly file review results are reported to headquarters and that the data are combined into a spreadsheet, summarizing the number of deficiencies by contract, region, and nationally. Officials stated that these data are used to identify possible trends in vendor documentation and to determine if corrective actions need to be taken at the regional level. However, if file review results are affected by selection bias or by guard company actions to alter the contents of the files selected for review, these data may not lead to an accurate understanding of trends or the need for corrective action. The Government Performance and Results Act Modernization Act of 2010 requires agencies to develop an approach to validation and verification in order to assess the reliability of performance data. However, FPS's directive regarding monthly file reviews, discussed above, does not include requirements for reviewing and verifying the results of the file reviews. From March 2012 through March 2013, FPS reviewed more than 23,000 guard files as part of its monthly review process. FPS found that a majority of the guard files had the required documentation but more than 800 (about 3 percent) did not. FPS's file reviews for that period showed files missing, for example, documentation of screener training, initial weapons training, CPR certification, and firearms qualifications. However, without an approach to reviewing and verifying results, FPS is not able to use these results to accurately assess the performance of its contract guard companies in complying with training and certification requirements. As part of its monthly file reviews for November 2012 through March 2013, FPS reviewed some of the same guard files we examined, but our results differed substantially from what FPS found. Specifically, we compared the results of FPS's file reviews for the 11 contracts for which we conducted file reviews; we found that 29 of the 276 files we reviewed had also been reviewed by FPS. FPS's review and our examination of each file occurred in the same month. For each of the 29 files, FPS did not identify any missing documentation. In contrast, we found that 6 of the 29 files did not have the required training and certification documentation (and some were missing more than one required document). In 4 of the 6 guard files, FPS's review indicated that required documentation was present, but we were not able to find documentation of training and certification, such as initial weapons training, DHS orientation, and pre- employment drug screenings. We also identified files with expired documentation. For example, 2 of the 6 files had expired refresher- training documentation and another guard file had expired firearms qualification documentation. Since we used FPS's file review checklist to conduct our file review, it is unclear why the results differed. FPS officials were unsure about the reasons for this, but stated that human error and contract requirements that differ from the requirements listed on administrative audit forms may have been factors. Additionally, differing results may be due to differences in the type of documentation accepted by GAO and FPS. For example, in our review of FPS monthly file review records for one contract, we identified 2 files for which, according to the PSO file review form, the FPS reviewer accepted documentation of CPR and AED training that we did not accept as valid. While FPS guard contracts require guard files to contain a copy of the CPR and AED certification card, the FPS reviewer accepted a roster of individuals who attended the training. However, the roster did not indicate whether attendees had passed the course or been officially certified and was not signed by an instructor. FPS can take action against guard companies if it determines that a contract guard company has not complied with contractual requirements, but it may not have accurate information to do so. FPS's contracts for guard services state that if guard companies do not comply with contract requirements (e.g., guard training, certification, and qualification requirements), FPS may require the contractor to take actions to ensure compliance in the future and also may reduce the contract price to reflect the reduced value of the service provided. Determining the extent to which FPS took actions against guard companies for not complying with guard training and certification requirements was not within the scope of our engagement. However, the results of our comparison of FPS's guard file reviews to our reviews raises questions about whether FPS has effective management controls in place to identify areas in which guard companies have not complied with requirements. FPS continues to lack the management controls to ensure that its approximately 13,500 contract guards have the required training, certification, and qualifications, which are central to effectively protecting employees and visitors in federal facilities. FPS agreed with the recommendations in our 2010 and 2012 reports. We recommended, among other things, that FPS develop and implement a comprehensive system for guard oversight. Without such a system, among other things, FPS has no independent means of ensuring that its 13,500 guards deployed to federal facilities are properly trained and qualified. As such, we strongly encourage FPS to continue addressing the challenges we identified in our prior work and to be more proactive in managing its contract guard workforce. Although FPS has taken steps to address some of our prior recommendations, we found that FPS still has challenges providing screener training to some guards. Consequently, some guards deployed to federal facilities may be using x-ray and magnetometer equipment that they are not qualified to use. This raises questions about the capability of some guards to screen access control points at federal facilities-one of their primary responsibilities. According to FPS officials, the agency has recently decided to make changes to its guard program, including developing a national lesson plan. We agree with this decision, given the problems that we have identified. A national lesson plan could help FPS standardize and ensure consistency in its training efforts. For example, without ensuring that all guards receive training on how to respond to incidents at federal facilities involving an active shooter, FPS has limited assurance that its guards are prepared for this threat. Similarly, the lack of certification requirements for instructors who teach basic and refresher training may ultimately affect guards' ability to perform their duties. Finally, inconsistencies in how FPS regional officials conduct monthly file reviews (which are FPS's primary management control for ensuring compliance with the guard contract requirements) indicate that the current guidance for monthly file reviews is insufficient to ensure that, for instance, guard companies do not have the opportunity to select files for review and thus affect the results of the file reviews. Further, our work raises questions about the reliability and quality of FPS's monthly file reviews. These findings are of particular concern given that FPS continues to pay guard companies over half a billion dollars annually to provide qualified guards yet it appears that some guards have been deployed to federal facilities without meeting all of the training, certification, and qualification requirements. To improve the management and oversight of FPS's contract guard program, we recommend that the Secretary of Homeland Security direct the Under Secretary of NPPD and the Director of FPS to take the following three actions: take immediate steps to determine which guards have not had screener or active-shooter scenario training and provide it to them and, as part of developing a national lesson plan, decide how and how often these trainings will be provided in the future require that contract guard companies' instructors be certified to teach basic and refresher training courses to guards and evaluate whether a standardized instructor certification process should be implemented; and develop and implement procedures for monthly guard-file reviews to ensure consistency in selecting files and verifying the results. We provided a draft of this report to DHS for review and comment. DHS concurred with our recommendations and provided written comments that are reprinted in appendix II. DHS also 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 of this report to appropriate congressional committees, the Secretary of Homeland Security, and other interested parties. In addition, the report will be available at no charge on GAO's web site at http//www.gao.gov. If you have 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. In addition to the contact name above, Tammy Conquest, Assistant Director; Antoine Clark; Colin Fallon; Kathleen Gilhooly; Katherine Hamer; Amanda Miller; Ramon Rodriguez; William Woods; and Gwyneth Woolwine made key contributions to this report.

FPS relies on a privately contracted guard force (about 13,500 guards) to provide security to federal facilities under the custody and control of the General Services Administration. In 2010 and 2012, GAO reported that FPS faced challenges overseeing its contract guard program, specifically in ensuring guards' qualifications. GAO was asked to update the status of FPS's contract guard oversight. This report examines (1) how FPS's requirements for contract guards compare to those of selected federal agencies and challenges, if any, that FPS faces in ensuring its requirements are met; (2) the extent to which guard companies have documented compliance with FPS's guard requirements; and (3) the management controls FPS uses to ensure compliance with its guard requirements. GAO reviewed 31 FPS guard contracts, and analyzed guard files from 11 contracts, selected based on geographic diversity; interviewed officials from guard companies, FPS headquarters, and 4 of 11 FPS regions; and reviewed the contract guard requirements and processes at six federal agencies, selected for their comparability to FPS. Several of the Department of Homeland Security's (DHS) Federal Protective Service's (FPS) guard requirements are generally comparable to those of the six selected agencies GAO reviewed, but FPS faces challenges in some aspects of guards' training. FPS and the six selected agencies GAO reviewed require basic, firearms, and screener (x-ray and magnetometer equipment) training for their armed guards. However, GAO found that providing screener training remains a challenge for FPS. For example, officials from one of FPS's contract guard companies stated that 133 (about 38 percent) of its approximately 350 guards have never received this training. Similarly, according to officials at five guard companies, some of their contract guards have not received training on how to respond during incidents involving an active shooter. Additionally, while contract guard industry guidance states that all training should be done with a certified instructor, GAO found that FPS does not require guard instructors to be certified to provide basic and refresher training, which represents the majority of guards' training. According to six guard companies, the lack of a requirement has led to having to retrain some guards, potentially increasing costs to FPS. Twenty-three percent of contract guard files GAO reviewed did not have required training and certification documentation. GAO reviewed 276 randomly selected (non-generalizable) guard files maintained by 11 of the 31 guard companies GAO interviewed and found that 212 files (77 percent) contained the required training and certification documentation, but 64 files (23 percent) were missing one or more required documents. For example, the 64 files were missing items such as documentation of initial weapons and screener training and firearms qualifications. Although FPS has taken steps to address its challenges in this area, GAO's previous recommendations concerning monitoring guard companies' performance are a guide to furthering FPS's efforts. According to FPS officials, it plans to address GAO's recommendations in the near future. FPS continues to lack effective management controls to ensure its guards have met its training and certification requirements. For instance, although FPS agreed with GAO's 2010 and 2012 recommendations that it develop a comprehensive and reliable system for managing information on guards' training, certifications, and qualifications, it still does not have such a system. According to FPS officials, it plans to address this recommendation in the near future. FPS also lacks sufficient management controls to ensure consistency in its monthly guard file review process (its primary management control for ensuring that guards are trained and certified), raising questions about the utility of this process. In the absence of specific guidance regarding how files are to be selected, FPS's 11 regions varied in how they conducted the monthly file reviews. For example, FPS officials from three regions stated that they randomly select their files for review, while officials from one guard company in another region stated that FPS asks the guard company to select the files for review. Allowing contract guard company officials to select files for review by FPS could result in selection bias and affect the results of FPS's review. FPS also lacks guidance on reviewing and verifying the results of its guard-file reviews. Without such guidance, FPS may not be able to determine the accuracy of its monthly file review results or if its contract guard companies are complying with the guard training and certification requirements. GAO recommends that the Secretary of DHS direct FPS to take immediate steps to determine which guards have not had screener or active-shooter scenario training and provide it to them; require that guard instructors be certified to teach basic and refresher training; and develop and implement guidance for selecting guard files and verifying the results. DHS concurred with GAO's recommendations.

Foreign military sales are made on a case by case basis. The cases are initiated by a foreign country sending a letter of request to DOD asking for various information, such as precise price data. After the country obtains and reviews this information and decides that it wants to do business with the U.S. government, DOD prepares a Letter of Offer and Acceptance (LOA) stating the terms of the sale for the goods and services being provided. If accepted by the country, the LOA becomes the formal sales agreement by which the U.S. government contracts with the country to sell it defense articles or services. Once the LOA is accepted, the foreign country is generally required to pay, in advance, amounts necessary to cover costs associated with the sales agreement. DOD then uses these funds, held in trust by the Department of the Treasury, to pay private contractors and to reimburse DOD activities for the cost of executing and administering the FMS agreement. As payments are made, the military services report detailed disbursing and accounting data to a central activity--the Defense Finance and Accounting Service, Denver Center--which maintains the records of each country's trust fund balance and issues quarterly statements to foreign customers summarizing amounts charged to their cases. In October 1991, DOD established DBOF, which consolidated into one revolving fund, nine existing industrial and stock funds that had operated within DOD for about 45 years, as well as the Defense Finance and Accounting Service, Defense Industrial Plant Equipment Service, Defense Commissary Agency, Defense Reutilization and Marketing Service, and Defense Technical Information Service. In establishing DBOF, one of DOD's primary goals was to identify the total cost of operations and to highlight the cost implications of management decisions. DOD's Financial Management Regulation 7000.14-R, Volumes 11B and 15 prescribe the financial management requirements, systems, and functions that WCF activities are to follow when establishing prices and billing FMS customers.Generally, billings to these customers shall reimburse the WCF for the full cost incurred by the U.S. government for providing the goods or services. According to the regulation, full cost is determined by the application of the stabilized rates or unit prices which are set to achieve a break-even operating result in the budget year--that is, neither to make a profit nor incur a loss. Since the concept of DBOF was first put forth in February 1991, we have monitored and evaluated its implementation and operation. We have issued numerous reports discussing various problems with fragmented cost accounting systems and inaccurate financial reporting. More specifically, one problem we found was that not all costs were being captured in the price-setting process, thus, resulting in less than full cost recovery. However, in our May 1997 testimony before the Subcommittee on Defense, Senate Committee on Appropriations, we noted that DOD has progressed significantly in identifying the cost of doing business and including those costs in the prices DBOF charged its customers. To determine regulatory requirements for billing FMS customers using stabilized rates and prices, we obtained and analyzed laws, policies, procedures, regulations, and guidance from DOD, Army, Navy, and Air Force officials. During our visits to DOD locations, we gathered and analyzed budget and accounting reports to identify cost elements in the prices of goods and services sold to FMS customers. We compared these cost elements with other cost data in various databases and met with responsible agency officials to discuss and clarify any differences in (1) cost elements used for FMS and DOD customers and (2) the amounts charged. To determine the amount of civilian pension and postretirement health benefit costs that should have been collected from FMS customers by WCF supply activities, we obtained and analyzed financial reports that showed sales and expense data for Army, Navy, Air Force, and Defense Logistics Agency supply activities for fiscal years 1992 through 1996. Because these activities generally did not maintain data to identify how much time personnel spent providing services to FMS customers, we estimated the amounts of civilian pension and postretirement health benefit costs related to FMS using certain assumptions. To do this, we first calculated the dollar value of FMS sales as a percentage of total dollar sales for each of the activities for each fiscal year. For example, if a supply activity showed that its annual sales were $1 billion of which $100 million were to FMS customers, we calculated sales to FMS customers to be 10 percent ($100 million divided by $1 billion). To calculate the pension benefit costs, we multiplied the percent of each year's FMS sales by the total amount of civilian personnel salaries reported as paid during the year to determine a pro rata dollar amount for FMS civilian personnel salaries. Finally, to determine the estimated amount of civilian pension benefit costs to be collected from FMS customers, we multiplied the pro rata dollar amount of FMS personnel salaries times the civilian pension benefit cost factor of 14.7 percent for each activity for fiscal years 1992 through 1996. According to the Office of Management and Budget (OMB) and DOD officials, the 14.7 percent rate represents the "unfunded" portion of the pension benefit cost which is derived by subtracting DOD's 7 percent contribution to the pension costs of its employees (21.7 percent less 7 percent). The 7 percent DOD contribution is already included in the stabilized rate as a funded fringe benefit cost. To determine the amount of civilian postretirement health benefit cost, we multiplied the percentage of FMS sales to total sales times the civilian end strength for each supply activity for fiscal years 1992 through 1996. For example, if the pro rata amount of FMS sales to total sales was 10 percent for fiscal year 1996 and an activity reported civilian end strength at 5,000 employees for the same period, our calculated FMS civilian end strength would be 500 full time employees involved with FMS activities (10 percent times 5,000 employees). Using these numbers, we multiplied the pro rata amount by $2,166 which was the Office of Personnel Management (OPM) calculated amount of average postretirement health benefit cost per employee for fiscal year 1996. To determine the postretirement health benefit cost per employee for fiscal year 1995 and earlier, we contacted officials in OPM's Office of Actuaries, including the Deputy Director of the Office of Actuaries. According to the OPM officials, prior to fiscal year 1996, OPM had not published any formal amounts for agencies to use in calculating pension or postretirement health benefit costs. However, OPM officials told us that postretirement health benefit costs have increased by about 7 percent each fiscal year. Therefore, according to OPM officials, we could determine the fiscal year 1995 postretirement health benefit cost by dividing the fiscal year 1996 cost of $2,166 by 107 percent. Fiscal year 1994 could then be determined by dividing the fiscal year 1995 postretirement health benefit cost by 107 percent and so on for each preceding fiscal year. The OPM officials generally agreed with our methodologies for calculating estimated pension and postretirement health benefit costs. We did not calculate pension benefit cost for nonsupply activities because the nonsupply activities were generally including these costs in their prices for FMS customers. They did not, however, include the postretirement health benefit cost in their prices. Since they were recovering the largest segment of the retirement benefit cost, we did not attempt to estimate undercharges for postretirement health benefit cost for the nonsupply activities. To do so would have required us to analyze numerous detailed accounting and budget reports of over 100 additional WCF activities. Over the years, both we and the DOD Inspector General have reported that the DOD's financial systems used to collect and report data are not capable of producing accurate and reliable information. Our estimates were based on financial information provided by DOD which we did not independently verify. We performed our work at the headquarters, Departments of the Army, Navy, Air Force; Defense Security Assistance Agency; and Office of the Under Secretary of Defense (Comptroller) in Washington, D.C. We also performed audit work at the Army Materiel Command, Alexandria, Virginia; Air Force Materiel Command, Wright Patterson Air Force Base, Dayton, Ohio; Naval Inventory Control Point, Mechanicsburg, Pennsylvania; Naval Air Warfare Center, Patuxent River, Maryland; Naval Surface Warfare Center, Indian Head, Maryland; Defense Logistics Agency, Fort Belvoir, Virginia; and Letterkenney Army Depot, Chambersburg, Pennsylvania. We conducted our review from November 1996 through July 1997 in accordance with generally accepted government auditing standards. We requested written comments on a draft of the report from the Secretary of Defense or his designee. The Acting Under Secretary of Defense (Comptroller) provided written comments, which are discussed in the "Agency Comments" section and reprinted in appendix I. The concept of a stabilized rate is a viable method to use for pricing goods and services sold to FMS customers. If this rate is applied consistently and contains all known cost elements, it should recover the full cost of operations over the long term. In analyzing the cost elements in the stabilized rate, we identified additional elements--pension and postretirement health benefit costs which are part of the civilian labor costs--that should have been included in developing the stabilized rate and charged to FMS customers. Omission of these costs resulted in estimated underbillings of more than $40.5 million since fiscal year 1992. Present DOD policy requires the WCF activities to establish prices that allow them to recover from their customers the expected costs, including any prior years' losses. WCF activities are to establish prices prior to the start of each fiscal year and apply these predetermined (stabilized or standard) prices to most orders and requisitions received during the year. Because sales prices are based on expected costs and workload, higher-than-expected costs or lower-than-expected customer demand for goods and services can cause the WCF activities to incur losses. Conversely, lower-than-expected costs or higher-than-expected customer demand for goods and services can result in profits. The process for establishing stabilized prices for WCFs generally begins about 2 years before the prices go into effect, with managers from each WCF developing workload projections for the budget year. After WCF managers estimate their workloads based on customer input, they (1) use productivity projections to estimate how many people they will need to accomplish the work, (2) prepare a budget that identifies the labor, material, and other expected costs, and (3) develop prices that, when applied to the projected workload, should allow them to recover operating costs from their customers. Not all cost elements are applicable to all WCF activities. For example, the cost element of inventory losses/obsolescence generally applies only to WCF supply activities that maintain inventories. Below is a list of major cost elements used to develop stabilized rates: direct and indirect labor, direct material, general and administrative expenses, inventory losses/obsolescence, inventory maintenance, condemnation of inventory items, accumulated operating results gains or losses, depreciation, and joint logistics systems center (JLSC) surcharge. Major commands responsible for the overall management of the WCFs review the budget estimates and consolidate individual business area activities' budget estimates. The military services' and DOD components' headquarters and the Office of the Secretary of Defense also review the budget estimates before they are submitted to the Congress as part of the annual budget. Any changes made during the DOD budget review process are incorporated into the WCFs' prices before the beginning of the fiscal year. With the exception of retirement benefit costs for civilian employees, which is discussed below, we found that all of the key cost elements to recover full cost from FMS customers are now included in the stabilized price. The costs not charged by the WCF supply activities, which were responsible for about $1.5 billion (75 percent) of the WCFs annual sales to FMS customers, consisted of a portion of the government's share of the full cost for pension and postretirement health benefit costs for civilian personnel who worked on FMS cases. The employee and the employing agency both contribute annually toward the cost of the future pension benefits. While the contributions made by DOD are now part of the stabilized rate, the employee and agency contributions are less than the full cost of providing the pension benefits. Therefore, the federal government must, in effect, make up the funding shortfall. In addition, neither the agency nor the employee pays the federal government's portion of postretirement health benefit costs. Both the pension and postretirement health benefit costs will eventually be paid out of the general funds in the Treasury--not by DOD. Since the pension and postretirement health benefits are costs to the government, they should be added to the stabilized rate and recovered from FMS customers. In this regard, we found that the nonsupply activities we visited recognized this and modified the stabilized rate to include the full pension costs in the prices they charged FMS customers. However, they did not include the postretirement health benefit cost. As noted earlier, we did not attempt to estimate the postretirement health benefit cost for nonsupply activities. Including retirement benefit costs is consistent with the Statement of Federal Financial Accounting Standards Number 4, which states that federal agencies should measure and report direct and indirect costs that contribute to output, regardless of funding sources. It is also consistent with OMB Circular No. A-25, which established the guidelines for federal agencies to assess fees for government services. The guidance notes that user charges will be sufficient to recover the full cost to the federal government of providing the service, resource, or goods. The circular points out that "full cost" is to include all direct and indirect costs to any part of the federal government of providing a good, resource, or service. Under the circular, these costs include, but are not limited to, an appropriate share of direct and indirect personnel costs, such as accrued retirement cost not covered by employee contributions. Because WCF supply activities did not maintain data to identify the time personnel spent providing services to FMS customers, our estimates for civilian pension and postretirement health benefit costs were calculated based on assumptions discussed in our scope and methodology. Table 1 shows the results of our calculations for each of the WCF supply activities for fiscal years 1992 through 1996. In discussing this matter with DOD Comptroller officials, they acknowledged that civilian retirement benefits were a cost to the government which should be included in the stabilized rate and charged to FMS customers. They told us they are planning to revise their policy so that this cost will be included in the prices charged FMS customers beginning no later than fiscal year 1998. With regard to the $40.5 million of undercharges shown in table 1 and any additional undercharges that were made during fiscal year 1997, DOD policy requires that all proper charges be recorded against the applicable FMS case. According to the policy, case closure does not stop the billing process. Further, the standard FMS sales contract provides that the FMS customer is to pay the U. S. government the total cost of the items even if that cost exceeds the amounts estimated in the LOA. Also, we have issued numerous reports over the years that have (1) identified tens of millions of dollars of undercharges related to the costs for goods and services provided to FMS customers and (2) recommended that DOD retroactively collect the underbillings. Generally, DOD agreed with our earlier findings and recommendations and has rebilled and collected undercharges in the past. Therefore, since DOD policy and the contractual terms provide for adjustments to an FMS case, even if it has been closed, and DOD has collected undercharges in the past, DOD should make every reasonable attempt to recover the past undercharges for civilian pension and postretirement health benefit costs. In this regard, DOD should first consider the cost effectiveness of determining how much each FMS customer was undercharged. DOD's stabilized rate policy, if applied properly, should allow WCF activities to recover the full cost of their operations over the long term. However, the stabilized rate should be adjusted to include all pension and postretirement health benefit costs to the U.S. government for items sold or services provided to FMS customers. DOD recognizes that these additional retirement benefit costs, whose omission has resulted in millions of dollars of undercharges, should be charged to FMS customers, and is in the process of revising its policy to require that these costs be included in future rates. We recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to implement the stabilized rate policies and procedures as soon as possible to require WCF activities to include pension and postretirement health benefit costs in the prices they charge FMS customers, and make every reasonable attempt to bill for and collect the undercharges for pension and postretirement health benefit costs identified in this report. Such action should be taken only if cost effective to do so. DOD concurred with our findings and recommendations. The Acting Under Secretary of Defense (Comptroller) agreed that DOD should have been charging FMS customers for civilian retirement and postretirement health benefits and issued guidance on August 27, 1997, instructing that these charges be added to DOD's prices effective immediately. The Acting Under Secretary also requested that DSAA and the military services review FMS cases, going back through fiscal year 1992, and bill the FMS customers for the costs of civilian retirement and postretirement health benefits where cost effective. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services, the Senate Committee on Governmental Affairs, the House Committee on National Security, the House Committee on Government Reform and Oversight, and the House and Senate Committees on Appropriations; the Secretary of Defense; the Director of the Office of Management and Budget; and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-6240 if you or your staff have any questions concerning this report. Other major contributors to this report are listed in appendix II. Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses (GAO/AIMD/NSIAD-97-74, March 14, 1997). Defense Business Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79, March 1, 1995). Defense Budget: Capital Asset Projects Undergo Significant Change Between Approval and Execution (GAO/NSIAD-95-20, December 28, 1994). Letter to the Principal Deputy Comptroller on the proposed DBOF 1307 Management Report (GAO/AIMD-94-159R, July 26, 1994). Defense Business Operations Fund: Improved Pricing Practices and Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132, June 22, 1994). Financial Management: DOD's Efforts to Improve Operations of the Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-170, April 28, 1994). Defense Management Initiatives: Limited Progress in Implementing Management Improvement Initiatives (GAO/T-AIMD-94-105, April 14, 1994). Financial Management: DOD's Efforts to Improve Operations of the Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, March 25, 1994). Financial Management: Status of the Defense Business Operations Fund (GAO/AIMD-94-80, March 9, 1994). Letter to the Deputy Secretary of Defense on the results of the DOD-wide review and suggestions for improving the implementation of DBOF (GAO/AIMD-94-7R, October 12, 1993). Financial Management: Opportunities to Strengthen Management of the Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993). Financial Management: Opportunities to Strengthen Management of the Defense Business Operations Fund (GAO/T-AFMD-93-4, May 13, 1993). Letter to Congressional Committees on DOD's progress in implementing DBOF and GAO suggestions for improvement (GAO/AFMD-93-52R, March 1, 1993). Financial Management: Status of the Defense Business Operations Fund (GAO/AFMD-92-79, June 15, 1992). Financial Management: Defense Business Operations Fund Implementation Status (GAO/T-AFMD-92-8, April 30, 1992). Defense's Planned Implementation of the $77 Billion Defense Business Operations Fund (GAO/T-AFMD-91-5, April 30, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) use of stabilized rates for charging foreign military sales (FMS) customers for goods and services sold through DOD's Defense Business Operations Fund (DBOF), focusing on whether: (1) there is a dollar difference in pricing goods and services at full cost compared to the stabilized rate; and (2) DOD's current practice of billing foreign customers at the stabilized rate is consistent with the full cost requirements of the Arms Export Control Act of 1976. GAO noted that: (1) DOD's stabilized rate generally is designed to recover full costs from DOD and FMS customers over the long term; (2) the concept of applying the stabilized rate is a viable method to recover the cost of goods and services from these customers; (3) GAO's analysis of cost elements in the stabilized rates showed that generally, the stabilized rate included the cost elements necessary to recover full cost; (4) however, GAO did identify two cost elements--pension and postretirement health benefits--related to retirement benefit costs of civilian personnel working on FMS cases, that were not included in the stabilized rates; (5) GAO estimates that Working Capital Fund (WCF) supply activities undercharged FMS customers at least $40.5 million during fiscal years (FY) 1992 through 1996 and will undercharge millions more in FY 1997; (5) GAO discussed this matter with DOD officials and they agreed that not all civilian retirement benefit labor costs were included in the rates that activities were charging FMS customers; and (6) they now plan to revise their policy to require that this cost be included in the prices charged FMS customers.

The SSI program is authorized by title XVI of the Social Security Act. To qualify for SSI, an individual must meet financial eligibility and age or disability criteria. Generally, SSA determines an applicant's age and financial eligibility; the state's Disability Determination Service determines an applicant's initial medical eligibility. The maximum monthly benefit in 1995 was $458 per month for an individual, increased to $470 in 1996. An individual is ineligible for SSI in any given month if throughout that month he or she is an inmate of a public institution (42 U.S.C. 1382 (e)(1)(A)). The title XVI regulation defines an inmate of a public institution as a person who can receive substantially all of his or her food and shelter while living in a public institution. SSA operating instructions provide that a prison is a public institution. SSI recipients may receive their payments in one of several ways: (1) SSI checks can be mailed to them at their residences or, in some cases, to post office boxes; (2) SSI checks can be direct-deposited into recipients' checking or savings accounts; or (3) SSI checks can be sent to recipients' representative payees--individuals or organizations that receive checks on behalf of SSI recipients who are unable to manage their own affairs (including legally incompetent people, alcoholics, drug addicts, and children). A representative payee is responsible for dispensing the SSI payment in a manner that is in the best interest of the recipient. Many events can affect a recipient's eligibility or payment amount. SSA requires that recipients voluntarily report these events and also monitors and periodically reviews recipients' financial eligibility. SSI recipients are responsible for reporting information that may affect their eligibility or payment amounts. If the recipient has a representative payee, the payee is responsible for reporting such information to SSA. Significant events to be reported include a change in income, resources, marital status, or living arrangements, such as admission to or discharge from a public institution. A redetermination is a review of financial eligibility factors to ensure that recipients are still eligible for SSI and receiving the correct payment. A redetermination addresses financial eligibility factors that can change frequently, such as income, resources, and living arrangements. Redeterminations are either scheduled or unscheduled. They are conducted--by mail, telephone, or face-to-face interview--at least every 6 years, but may be conducted more frequently if SSA determines that changes in eligibility or erroneous payments are likely. The redetermination process includes a question about whether the recipient spent a full calendar month in a hospital, nursing home, other institution, or any place other than the recipient's normal residence. Since the SSI program was established, SSA has recognized the potential for erroneous payments if SSI recipients become residents of public institutions, including state and federal prisons and county and local jails. SSA headquarters has established computer-matching agreements with state prison systems and the federal Bureau of Prisons. Under these agreements, the participating states and the Bureau can regularly provide automated prisoner information to SSA. SSA matches the information against its payment records to identify SSI recipients incarcerated in state and federal prisons. According to information provided by SSA, the process of matching prisoner information against the SSI payment records is a cost-effective way to identify SSI recipients who are in prison. However, to succeed, SSA determined it is essential that field offices work closely with public institutions, both county and local, to facilitate the flow of information concerning the SSI population. Accordingly, SSA has, for years, instructed its field offices to (1) maintain regular contact (for example, regular visits) with prisons in their areas and (2) establish procedures for promptly obtaining information on events, such as admissions and discharges, that affect SSI eligibility and payment determinations. On May 24, 1996, the Commissioner of Social Security sent draft legislation to the Congress. This proposed legislation is designed to promote timely carrying out of SSI provisions requiring cessation of payments to prisoners. The legislation would authorize the Commissioner to enter into agreements with willing state and local "correctional facilities." Under these agreements, the Commissioner would pay the facility for each report of a newly admitted inmate who has been a Social Security or SSI beneficiary but is not, as a prisoner, entitled to payments. In August, the Congress passed The Personal Responsibility and Work Opportunity Reconciliation Act of 1996. The act authorizes the Commissioner of SSA to enter into agreements with interested institutions. Under these agreements, the institutions would provide SSA with the names, SSNs, and other information about their inmates. SSA, subject to the terms of the agreements, would pay an institution for each inmate who SSA subsequently determines is ineligible for SSI. The act specifies, however, that the institution's primary purpose must be to confine individuals for offenses punishable by confinement for more than 1 year. This 1-year requirement would seem to preclude SSA from entering into agreements with, as well as making payments to, county and local jails, which generally incarcerate prisoners for shorter periods. Overall, in the jail systems we reviewed, we detected a total of $5 million in erroneous SSI payments to prisoners. This includes $3.9 million to 2,343 current prisoners in 12 jail systems and $1.1 million to 615 former prisoners in 2 jail systems. Typically, an erroneous payment continued for 6 months or less and totalled about $1,700. SSA was unaware that many of these payments had occurred. SSA had made erroneous payments to 2,343 prisoners, who were incarcerated in the 12 jail systems at the time of our work. These 2,343 prisoners represent about 4 percent of the prisoners with verified SSNs in these jail systems. As shown in table 1, SSA made payments to some prisoners in each of the 12 jail systems. The percentage of prisoners who received SSI payments differed somewhat among these jail systems, ranging from 2 to about 7.7 percent. In addition, there were 926 SSI recipients in jail at the time of our review who had not yet been there for 1 full calendar month. Collectively, these 926 prisoners were being paid about $387,000 a month. To the extent these prisoners remain in jail for at least 1 calendar month and SSA remains unaware of their incarceration, SSI payments made after a full month of incarceration would be erroneous. In the 12 systems we reviewed, as of the date we reviewed each system, we estimate that SSA paid $3,888,471 to the 2,343 current prisoners (see table 2). The average amount paid to an individual prisoner varies among the jail systems, but the overall average is approximately $1,700. Some payments are much larger. Erroneous payments to individual prisoners ranged from less than $100 to over $17,000. We determined that 136 prisoners received in excess of $5,000, including 19 who received more than $10,000. The percentage of current prisoners by range is shown in figure 1. Large erroneous payments to prisoners occurred because SSA paid some of them for long periods of time. For example, one SSI recipient was arrested on June 27, 1993, and was still in jail on November 30, 1995. SSA paid this prisoner monthly for this entire period. The erroneous monthly payments totaled about $13,000. As of November 30, 1995, this SSI recipient was still in jail and SSA was continuing to pay him. We determined that 85 percent of the 2,343 current prisoners had received erroneous payments for a period of 6 months or less, at the time of our review. However, some were paid for longer periods. We found a total of 94 prisoners that had been paid for more than 1 year, including 13 who were paid for more than 2 years. The range of months during which payments continued is shown in table 3. The erroneous payments to current prisoners are likely to increase. Based on a review of SSA's records, we estimate that at the time of our review, SSA was unaware that 1,570 of the 2,343 recipients were in jail. SSA therefore continued to erroneously pay them. But SSA had stopped paying the remaining 773 and, for some of them, established an overpayment. We obtained information, from two jail systems, for 15,998 former prisoners who were released from jail between January 1 and June 30, 1995. We determined that of these former prisoners, 615 (3.8 percent) received SSI while incarcerated. In total, these former prisoners received about $1.1 million in payments. The number of former prisoners, total erroneous payments, and average amount to individual prisoner by jail system are shown in table 4. Included in the count of 419 former prisoners in Cook County are 17 who were also in our population of current prisoners. This indicates that these 17 were in prison and received SSI payments on at least two occasions. In Cook County, where we had data for both current and former prisoners, erroneous payments to former prisoners were higher. In that county, about 73 percent of the former prisoners were erroneously paid $1,000 or more, compared with 48 percent of the current prisoners. The difference is predictable because former prisoners have completed their time in the county or local jail and current prisoners have not. In Wayne County, where we only had data on former prisoners, 38 percent of the former prisoners were erroneously paid $1,000 or more. Based on a review of SSA's records, we estimate that SSA is unaware that it erroneously paid 454 (74 percent) of the 615 former prisoners (see table 5). As of December 1995, SSA was making SSI payments to 340 of the 454 former prisoners. However, SSA was not recovering these payments by withholding a portion of the current payments. Our review suggests that many of the erroneous payments to prisoners stem from the fact that SSA field offices were not following existing instructions. These indicate that field offices should contact county and local jails to detect incarcerated SSI recipients. Other reasons for such payments include SSI recipients (or their representative payees) not reporting incarcerations and redeterminations not identifying some incarcerated SSI recipients. At the start of our review, we contacted 23 county and local jail systems to determine if they were regularly providing prisoner information to SSA. Only 1 county was, although a few said SSA contacted them occasionally to determine if specific people were incarcerated. In addition, 1 other county indicated that it initiated contact with SSA, but had not provided data. SSA had contacted 6 additional systems about regularly obtaining information on prisoners, but these had not yet provided any data. The remaining 15 systems reported that they had not been contacted by SSA about regularly providing information on prisoners. For example, according to an SSA branch office manager, no one from SSA had visited the jails in the office's service area in more than 20 years. Our review of SSA records indicates that although some SSI recipients or their representative payees report incarceration to SSA as required, many do not. We determined that of the 615 former prisoners who were erroneously paid, 217 had representative payees while in prison. We also determined that of these representative payees, 164 did not report the SSI recipient's incarceration. About 87 percent of the representative payees who did not report were relatives; 1 percent were social agencies or other types of public and private organizations; and 12 percent were "other" types. Similar reporting problems were noted for current prisoners. In the redetermination process, SSA attempts to verify that recipients remain financially eligible for SSI and receive the correct payment. SSA records indicate that while in jail, 88 prisoners each had one redetermination and 4 prisoners each had two or more. We found that 32 of these 92 prisoners continued to be incarcerated and receive SSI payments after the redeterminations. According to SSA records, 22 of these redeterminations involved face-to-face contact between an SSA employee and the recipient or the representative payee. According to SSA officials, it is possible for inmates who are temporarily free, on work release or some other similar arrangement, to appear for a redetermination and subsequently return to jail. In addition, representative payees may complete the redeterminations, including face-to-face, on behalf of the SSI recipient. The identity of the actual individual who appeared at the face-to-face redetermination is not included in SSA's computerized record, and a detailed review to determine who appeared at the interview was beyond the scope of our work. SSA's operating instructions contain provisions for field offices to contact local jails in order to obtain prisoner data from them. However, SSA only recently began implementing this program systematically. According to agency officials and internal documents, most of the jails nationwide had been contacted by April 1996 to obtain information on current prisoners and future admissions, but not on former prisoners. According to agency officials, in March 1995, SSA field offices were instructed to contact local jails in their service areas and report to their regional offices concerning which jails would agree to provide SSA with prisoner data. However, the field offices did not consistently comply with these instructions, these SSA officials stated. In October 1995, after the start of our review, SSA headquarters issued a follow-up memo to the regional offices, directing them to instruct their field offices to (1) complete a detailed census of all jails in their jurisdictions and (2) report to headquarters by November 30, 1995. It was during this period of time that the agency initiated a concerted effort to contact all county and local jails nationwide. According to agency officials, prisons and jails are being contacted in the following order: (1) all state prisons, (2) the 25 largest county and local jails nationwide, and (3) all other county and local jails. According to SSA documents, as of March 1996, SSA had identified 3,878 county and local jails: SSA had obtained written agreements covering 2,647 of these and had agreements pending with 235. In addition, 843 jails were already reporting to SSA or held prisoners for less than 30 days; 153 jails had not responded or had refused to cooperate. SSA has requested that facilities it has contacted provide lists of their inmates to the local field offices. The agency has offered flexible reporting guidelines for frequency and format of the lists (computerized or on paper). In general, SSA has requested that facilities that have provided data to it previously or on a trial basis continue providing data. In addition, SSA has requested that facilities that have not provided any lists in the past provide (1) a current census of their inmates and (2) continuing lists of new admissions to the facility. Specifically, we found that SSA has contacted the 25 largest jail systems in the country and requested prisoner data from them. Most of these systems had agreed to supply SSA with prisoner data beginning in early to mid-1996. One system (Orange County, Calif.) began providing data in April 1995, and another system (New York City) has agreed to a pilot project including data beginning with January 1995. For many years, SSA has lacked an effective program to detect SSI recipients in county and local jails. It has relied primarily on (1) the recipients or their representative payees to voluntarily report incarceration and (2) redeterminations. Neither of these mechanisms has been completely effective; as a result, SSA has erroneously paid millions of dollars to thousands of prisoners in county and local jails. SSA was unaware of most of these payments. The number of SSI recipients who received SSI while in jail, including those with representative payees and those with redeterminations, raises numerous questions, including whether payments were obtained fraudulently. SSA's recent initiative--to obtain better information on SSI recipients currently in county and local jails--is a positive step. However, the effort is not comprehensive enough. In general, SSA has begun to obtain information on current prisoners and new admissions. But SSA has not attempted to develop information, when available, on SSI recipients who may have been incarcerated and received payments in prior years. We found that this information is available and can provide SSA the means to identify and initiate recovery of many more erroneous payments. In order to identify SSI recipients who have been erroneously paid in prior years, we recommend that the Commissioner of SSA direct SSA field offices to obtain information from county and local jails on former prisoners. SSA should then process this information to (1) determine if it made erroneous payments to any of these former prisoners, (2) establish overpayments for the ones it paid, and (3) attempt to recover all erroneous payments. SSA commented on a draft of our report in a letter, dated July 16, 1996, and acknowledged that investigation of the productivity of securing information on former prisoners appears desirable and worthy of further examination. However, SSA expressed concerns about the availability of data, the potential negative effect of requests for more data on existing reporting arrangements with county and local jail officials, the cost-effectiveness of processing data on former prisoners who may no longer be receiving SSI payments, and other matters. SSA believes these concerns need to be resolved before implementing our recommendations. (The full text of SSA's comments is included in app. III.) During its recent initiative to identify current prisoners, SSA identified local officials who know what data are available and can be provided. It should not be difficult or time-consuming, therefore, for SSA to contact these officials and determine if information on former prisoners is available. In addition, to identify information on former prisoners, SSA need not establish that "the majority" of county and local jail systems have such information, given that the largest jail systems account for the majority of prisoners. During the course of its initiative, SSA expanded the number of agreements with local correctional facilities to report prisoner information. According to SSA, some of these facilities were initially reluctant to enter into these agreements because SSA does not have the authority to pay for this information. However, unlike information on current prisoners, which requires monthly or quarterly reporting, information on former prisoners only requires a onetime effort by the local jail systems. Therefore, SSA need not assume that requesting such data will jeopardize existing agreements. If county and local jail systems are initially reluctant to provide data on former prisoners, SSA could emphasize the potential benefit to state programs (such as the recovery of erroneously paid state supplements) that such data exchanges may provide. We agree that SSA stands a better chance of recovering erroneous payments if the former prisoner is still receiving SSI. However, the fact that he or she is not currently receiving SSI should not prevent the implementation of our recommendation. To ensure program integrity, SSA has a responsibility to identify erroneous payments and collect overpayments. Once established, overpayments made to former prisoners remain in the record and could be recovered if the person again begins to receive SSI. Furthermore, SSA has the authority to recover SSI debts through a tax refund offset. SSA also took issue with the fact that we reported that until recently, identifying prisoners was not a priority at SSA. According to SSA, however, policies and operating procedures call for field offices to (1) maintain contacts with local institutions and (2) determine prisoner eligibility for payments. In our review, we found that field offices had not been following this guidance. We made minor changes to the text of the report to clarify this point. SSA also expressed concern about a statement in the report that erroneous payments to prisoners may be partially due to the vulnerability of redeterminations to abuse. Although we do not discuss the redetermination process in great detail, our review of SSA records indicates that 32 of 92 prisoners in our sample continued to receive benefits after a redetermination. If this process had been working as intended, SSA would have determined that these prisoners were no longer eligible to receive benefits. We made minor changes to the text of the report to clarify this point. We are sending copies of this report to interested congressional Committees and Subcommittees; the Director, Office of Management and Budget; and other interested parties. This report was prepared under the direction of Christopher C. Crissman, Assistant Director. Other GAO contacts and staff acknowledgments are listed in appendix IV. To determine if jail systems provide information on prisoners to SSA, we contacted 23 large county and local jail systems that met the following criteria: (1) a minimum average daily prisoner population of at least 1,000, with emphasis on the largest U.S. metropolitan areas, (2) geographic dispersion, and (3) populous SSA regions. Of the 23 systems we contacted, we subsequently requested data from the 13 that met the following additional criteria: (1) an ability to provide us with automated data tapes suitable for matching, (2) willingness to provide the data at no cost, and (3) not currently providing SSA with prisoner data. Based on the above criteria, between September 1995 and January 1996, we obtained automated data on current prisoners from 12 county and local jail systems. They collectively represent about 20 percent of the county and local prisoner population nationwide. The jail systems that provided data to us are in 10 states, in 6 of SSA's 10 regions. The jail systems that provided current prisoner data to us were: Broward County (Fla.); Cook County (Ill.); Dade County (Fla.); Hamilton County (Ohio); Harris County (Tex.); King County (Wash.); Los Angeles County (Calif.); Maricopa County (Ariz.); New York City; Orange County (Fla.); Santa Clara County (Calif.); and Shelby County (Tenn.). In addition, during February and March 1996, we obtained data on former prisoners from Cook County and from Wayne County (Mich.). From 12 of the county and local jail systems, we obtained data for prisoners who were under their jurisdiction on specific dates. The dates were selected by the jail systems, based on their available resources. Jail systems also supplied available personal identifiers, including name, Social Security number (SSN), date of birth, place of birth, mother's maiden name (or next of kin), ethnicity or race, home address, and date of incarceration. We received information on a total of 97,813 current prisoners and eliminated duplicate records. This reduced the initial universe to 79,595 prisoners. We processed the information on these prisoners through SSA's Enumeration Verification System (EVS), which uses key variables (name and date of birth) to verify the SSNs provided or determine an SSN if none is provided. We obtained verified SSNs for 53,420 of the 79,595 prisoners. We could not verify SSNs for the remaining 26,175 prisoners. To determine which prisoners had SSI records, we matched the verified SSNs against the Supplemental Security Record. We identified 12,951 prisoners with SSI records. We analyzed these 12,951 records to determine if any of the prisoners received benefits while they were incarcerated; we then extracted and analyzed the records of these prisoners. To test the accuracy of the current prisoner data provided by the counties, we selected a random sample of 240 current prisoners we had identified as having been paid SSI benefits while incarcerated (20 prisoners from each of 12 counties). We supplemented the random sample with 100 judgmentally selected cases (considering large payments to prisoners, long periods of incarceration, SSI eligibility date versus incarceration date, and other such factors). We requested that the jail systems verify (1) the booking date (the first day the prisoner was incarcerated) and (2) whether the prisoner was continuously incarcerated between the booking date and the date on which the jail created the list of inmates in its system. We requested that the jails verify the information from a source other than that used to produce the original data. The results of our random sample indicate that overall, our data were reliable. For five counties, no errors were found for the sample cases. For three counties, one case that could not be verified was found for each. For three other counties, minor errors were found in the data. For the final county, some of the information we had originally been provided was incorrect. At that time, the county had not yet entered the release dates for some prisoners into its computer system. As a result, the original information showed 123 SSI recipients in jail on November 16, 1995 (the date on which the county produced the original data), when they actually had been released before that date. We eliminated these cases from our review. Of the original 20 randomly selected cases in this county, 10 were unaffected, with the original information being correct. To obtain information on former prisoners, we asked two county systems (Wayne and Cook) to provide us with automated lists of all the prisoners released from their systems in the first 6 months of 1995. We received information on 16,821 prisoners, with no duplicate records. We processed these data through EVS, and obtained 15,998 verified SSNs. We matched the verified SSNs against the Supplemental Security Record to detect former prisoners who received SSI, and extracted and analyzed their records. The 10 SSA regions are shown in figure II.1. As discussed in appendix I, we obtained our data from county and local jail systems in 10 states--New York, Florida, Tennessee, Ohio, Illinois, Texas, Arizona, California, Washington, and Michigan--in 6 regions--II, IV, V, VI, IX, and X. In addition to those named above, the following also made important contributions to this report: Jeremy Cox, Evaluator; Mary Ellen Fleischman, Evaluator; James P. Wright, Assistant Director (Study Design and Data Analysis); and Jay Smale, Social Science Analyst (Study Design and Data Analysis). 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 determined whether the Social Security Administration (SSA) is making erroneous supplemental security income (SSI) payments to prisoners in county and local jail systems. GAO found that: (1) a total of $5 million has been erroneously paid to prisoners in local and county jail systems; (2) these erroneous payments are the result of SSA field offices' inability to obtain prisoner information on a regular basis, SSI recipients' failure to report their incarceration, and SSA inability to verify recipients' eligibility for SSI; (3) the Commissioner of Social Security has sent draft legislation to Congress that would authorize payment to each correctional facility reporting newly admitted SSI beneficiaries; (4) erroneous payments to individual prisoners range from $100 to more than $17,000; (5) 136 prisoners have received more than $5,000 in erroneous SSI payments and 19 prisoners have received more than $10,000 in erroneous SSI payments; and (6) SSA is requesting its field offices to obtain prisoner information from both county and local jail systems and emphasizing the importance of monitoring field offices' compliance with this procedure.

The South Florida ecosystem extends from the Chain of Lakes south of Orlando to the reefs southwest of the Florida Keys. This vast region, which is home to more than 6 million Americans, a huge tourism industry, and a large agricultural economy, also encompasses one of the world's unique environmental resources--the Everglades. Before human intervention, freshwater moved south from Lake Okeechobee to Florida Bay in a broad, slow-moving sheet. The quantity and timing of the water's flow depended on rainfall patterns and natural processes that slowly released stored water. Water stored throughout the vast area of the Everglades supplied water to wetlands and coastal bays and estuaries even during dry seasons. For centuries, the Everglades provided habitat for many species of wading birds and other native wildlife, including the American alligator, which depended on the water flow patterns that existed before human intervention. The vast Everglades wetlands were generally viewed as an unproductive swamp to be drained for more productive uses. By 1927, the Everglades Drainage District had constructed 440 miles of canals, levees, locks, and dams. However, these water management projects were not sufficient to protect over 2,000 people from drowning and many more from being injured when the waters of Lake Okeechobee overflowed during a devastating hurricane in 1928. In 1930, the Army Corps of Engineers began constructing the Herbert Hoover Dike around the lake. A major drought from the early 1930s through the mid-1940s left the booming population of South Florida short of water and threatened by uncontrollable fires in the Everglades. In 1947, torrential rains, coupled with unusually high seasonal water levels and an abnormally wet summer followed by hurricanes in September and October, flooded nearly 2.5 million acres and left 90 percent of southeastern Florida underwater. Floodwaters stood in some areas for 6 months. As a result, in 1948, the Congress authorized the Central and Southern Florida Project--an extensive system of over 1,700 miles of canals and levees and 16 major pump stations--to prevent flooding and saltwater intrusion into the aquifer, as well as to provide drainage and supply water to the residents of South Florida. Areas immediately south of Lake Okeechobee in the Everglades Agricultural Area, which was drained by the project, are now farmed--primarily by sugar growers--while the eastern part of the region has become heavily urbanized. Canals carry water away from the Everglades Agricultural Area into levied water conservation areas or directly into the Atlantic Ocean, bypassing much of the former Everglades and dramatically altering the timing, quantity, and quality of the water delivered to coastal estuaries. As figure 1 shows, these engineering changes, coupled with agricultural and industrial activities and urbanization, have reduced the Everglades to about half its original size. These changes have also had a detrimental effect on the environment. Wildlife populations have declined significantly, and some scientists believe that the reduced flow of freshwater into Florida Bay may be hastening its environmental decline. To address the deterioration of the ecosystem, the administration, in 1993, made the restoration of the Everglades and the South Florida ecosystem one of its highest environmental priorities. The South Florida Ecosystem Task Force was established by an interagency agreement to promote and facilitate the development of consistent policies, strategies, priorities, and plans for addressing the environmental concerns of the South Florida ecosystem. The Task Force consisted of assistant secretaries from the Departments of Agriculture, the Army, Commerce, and the Interior; an assistant attorney general from the Department of Justice; and an assistant administrator from the Environmental Protection Agency. The Water Resources Development Act of 1996 formalized the Task Force; expanded its membership to include state, local, and tribal representatives; and designated the Secretary of the Interior as the group's Chairperson. To accomplish the restoration of the South Florida ecosystem, the Task Force has established the following goals: Get the water right. This means restoring more natural hydrologic functions while providing adequate water supplies and flood control. This goal will be accomplished primarily by modifying the Central and Southern Florida Project to enlarge the region's freshwater supply and to improve how water is delivered to natural areas using a variety of technologies. More than 500 miles of canals and levees will be removed to reestablish the natural sheet flow of water through the Everglades and restore more natural water flows to South Florida's coastal bays and estuaries. Restore and enhance the natural system. Restoring lost and altered habitats will involve acquiring land and changing current land uses as well as halting the spread of invasive, exotic species and recovering threatened and endangered species. Transform the built environment. Balancing human needs with those of the natural environment will require developing lifestyles and economies that do not have a negative impact on the natural environment and do not degrade the quality of life. This will involve ensuring that traditional industries, such as agriculture, tourism, development, fishing, and manufacturing, continue to be supported while making sure that these industries are compatible with the goals of the restoration effort and that the quality of life in urban areas is maintained or enhanced. Participants in the restoration effort include 13 federal agencies, 7 Florida agencies and commissions, 2 American Indian tribes, 16 counties, and scores of municipal governments. Representatives from the state's major industries, the commercial and private sectors, and environmental and other special interest groups also participate in the restoration effort. Appendix II lists the federal, state, tribal, and county participants. Appendix III contains additional details on the South Florida ecosystem and the efforts undertaken to restore it. Federal funding for the South Florida Ecosystem Restoration Initiative does not come from a single source. In addition to funds appropriated directly by the Congress for projects managed by the U.S. Army Corps of Engineers and restoration activities designated in the 1996 Federal Agriculture Improvement and Reform Act (Farm Bill), the federal agencies participating in the initiative determine and allocate funds from their own appropriations. Because the agencies account for these funds independently, no complete and consolidated financial data on the initiative are available. We asked each agency to provide data on the funds provided for the initiative--appropriations from fiscal year 1993 through fiscal year 1999 and obligations and expenditures from fiscal year 1993 through fiscal year 1998 (the latest year for which complete data are available). However, many of the agencies had difficulty providing these data because although they track appropriated dollars allocated for the initiative, they do not separately track the funds obligated and expended for it. On the basis of the financial data provided by the federal agencies, we estimate that from fiscal year 1993 through fiscal year 1999, over $1.2 billion in appropriated funds has been provided to the South Florida Ecosystem Restoration Initiative. As figure 2 indicates, the funding for the initiative has increased from about $85 million for fiscal year 1993 to about $238 million for fiscal year 1999. As figure 2 also shows, 1996 was an unusual funding year because the Farm Bill included a specific appropriation of $200 million for restoration activities. Through fiscal year 1998, federal departments and agencies obligated$883 million for various restoration activities. The restoration activities can be grouped into six major categories: (1) land acquisition; (2) the management of federally owned facilities or natural resources, such as national parks, wildlife refuges, and a national marine sanctuary, which may affect or be affected by the restoration initiative; (3) science-related activities, such as mercury contaminant studies; (4) infrastructure, such as the construction of water control structures; (5) water quality and habitat protection, such as the Corps' wetlands permitting program; and (6) information management and assessment, such as coastal mapping. As figure 3 shows, the major activities being conducted are in area/natural resources management (32 percent), land acquisition (31 percent), science (15 percent), and infrastructure (11 percent). Some of these categories, particularly area/natural resources management and science, include activities that may be considered normal agency operations and would take place with or without the South Florida Ecosystem Restoration Initiative. Area/natural resources management ($291 million) Land acquisition ($274 million) Science ($128 million) Of the $883 million obligated, $684 million was spent by the agencies or distributed to the state and other nonfederal entities for restoration activities in South Florida. As figure 4 shows, the Department of the Interior and the Corps of Engineers account for the bulk of the total federal expenditures (75 percent) during this 6-year period. The federal funding provided to date represents only a down payment. While an official cost estimate for the total restoration effort has not been made, the implementation of the Central and Southern Florida Project Comprehensive Review Study, a major component of the restoration initiative referred to as the Restudy, is estimated to cost $7.8 billion. This cost will be shared equally by the federal and state governments. The Restudy, which will propose modifications to the existing Central and Southern Florida Project, is designed to substantially increase the amount of water that is delivered to natural areas while enhancing agricultural and urban water supplies. Additional efforts will be needed to complete the restoration initiative. According to the executive director of the Task Force, at least $2 billion more will be needed to acquire additional lands, construct other infrastructure projects, and eradicate exotic plant species. Consequently, the restoration effort, which is expected to take at least 20 years to complete, could cost at least $11 billion. Appendix IV contains additional details on the federal funds appropriated, obligated, and expended for the restoration of the South Florida ecosystem. Critical to guiding an endeavor as complex as the South Florida Ecosystem Restoration Initiative is a strategic plan that outlines how the restoration will occur, identifies the resources needed to achieve it, assigns accountability for accomplishing actions, and links the strategic goals of the initiative to outcome-oriented annual goals. Such a plan for the South Florida Ecosystem Restoration Initiative has not yet been developed. In addition, although the South Florida Ecosystem Restoration Task Force is responsible for facilitating and coordinating the initiative, it is not a decision-making body. However, as our review of two integral projects indicates, the coordination efforts of the Task Force and the other groups are not always sufficient to prevent schedule delays and cost overruns. Unless these issues are resolved, there is little assurance that the initiative will stay on track and be accomplished in a timely and efficient manner. While the Task Force has published several documents and is in the process of developing other strategies and plans to address specific restoration issues, it has not yet developed an overall strategic plan to guide the restoration effort. The benefits of having a strategic plan are many. A strategic plan contains goals and a strategy for achieving these goals, providing focus and direction and a benchmark for measuring performance. Such a plan also triggers a reassessment if progress in achieving the goals is not satisfactory. In addition, a strategic plan establishes priorities and time frames for accomplishing results by identifying the steps and resources necessary to achieve the goals, appropriate milestones, and ways to track or measure progress annually. Measurable goals also provide the Congress, the state of Florida, and the other participants with a sense of what can be achieved with the level of resources committed. The Task Force has published several documents --An Integrated Plan for South Florida Ecosystem Restoration and Sustainability: Success in the Making, The Annual Interagency Cross-Cut Budget, the Integrated Financial Plan, and annual reports--that provide information on the restoration activities of the participating agencies. These documents contain some of the components of a strategic plan; however, none, taken either separately or together, contains all the components needed. This document, published in April 1998, is intended to be an integrated plan for restoring and sustaining the South Florida ecosystem. Success in the Making identifies three restoration goals. The first goal is to restore more natural hydrologic functions while providing adequate water and flood control. The goal is to deliver the right amount of water, of the right quality, to the right places, at the right times. The second goal--to restore and enhance the natural system--centers on restoring habitats and recovering threatened and endangered species. The third goal--to transform the built environment--requires the development of sustainable lifestyles and economies that do not negatively affect the natural environment. Success in the Making also describes the strategies--adaptive management and innovative management--that the Task Force and its partners have adopted to achieve these long-term goals. However, the goals are not expressed in quantitative or measurable terms that would allow the Task Force to assess whether they have been achieved or how they need to be revised. The strategies presented do not outline how the goals are to be achieved or identify the resources required. In addition, Success in the Making does not describe how annual goals will be used to gauge progress. This document packages under one cover the justifications for participating organizations' funding requests for restoring the South Florida ecosystem. The document includes a brief narrative describing the intended uses of the funds being requested. However, the document does not link the requests for resources to specific strategic or annual goals. While it includes a budget matrix showing the dollars appropriated to the participating agencies by functional area and fiscal year, this information is not always consistent with the appropriations data provided by the individual agencies. Under the Water Resources Development Act of 1996, the Task Force is required to prepare an integrated financial plan and recommendations for a coordinated budget request. This plan, which is prepared annually and is designed to facilitate budget development and eliminate duplication of effort, compiles descriptions of restoration projects. The plan is intended to provide information on each project's total estimated costs, starting and ending date, and appropriations to date and to identify the agencies involved in the project. However, the plan does not include all of the projects being undertaken by the participating agencies and does not provide consistent information on the total costs of the projects, the agencies responsible for funding the projects, or the sources and amounts appropriated to date. In addition, the information provided on the appropriations to date does not always match the appropriation data contained in the Cross-Cut Budget. Furthermore, although the plan provides information on the starting dates of projects, the plan is organized on a subregional basis and the identification numbers assigned to specific projects have changed from year to year, making it difficult to determine which projects are scheduled to begin in a particular year. Finally, the plan does not link the projects to the strategic goals outlined in Success in the Making. While the Task Force is not required to publish these reports, its Florida-based working group has published an annual report since 1994. These reports summarize the previous years' accomplishments and set goals for the next year. However, because the format and organization of the reports vary from year to year, it is not possible to match the goals set in one year with the accomplishments reported in the following year. Furthermore, the accomplishments cited are not tied to the strategic goals presented in Success in the Making or to specific projects listed in the Integrated Financial Plan, making it difficult to use these reports to evaluate or track the progress made in the restoration initiative. According to federal and state officials we spoke with, these documents provide general information on the initiative and are good reference documents. However, none of the officials thought that the documents were useful as management or tracking tools. In addition to these documents, various strategies or plans are being developed to address specific issues facing the initiative. For example, the Corps has developed the Restudy, which determines the modifications to the Central and Southern Florida Project needed to restore the ecosystem while still providing water and flood control to urban and agricultural sectors. At the same time, the U.S. Fish and Wildlife Service has drafted a multispecies recovery plan to address the recovery of the 68 federally listed threatened or endangered species located in South Florida. In addition, the Environmental Protection Agency and Florida's Department of Environmental Protection recently began to develop a comprehensive water quality protection plan for the South Florida ecosystem. The working group is also developing an Integrated Strategic Plan, which will include a common vision for all the participants and strategies to measure their success in achieving this vision. However, according to our conversations with the project leader, this plan, which will not be complete until 2001, will not include all the components of an overall strategic plan. Several agency officials and others whom we spoke with during our review agreed that a strategic plan that integrated these plans and other activities proposed by the participating agencies into a "blueprint" for accomplishing the initiative would be very helpful and useful. Such a plan would also allow the agencies and the Congress to evaluate the progress being made and to assess whether the goals of the initiative are being achieved. Coordination Has Not Prevented Schedule Delays and Cost Overruns Restoring an ecosystem as vast and complex as the South Florida ecosystem will require extraordinary cooperation. The South Florida Ecosystem Restoration Task Force, established to coordinate the development of consistent policies, strategies, plans, programs, and priorities, is the first partnership of its kind and coordinates restoration activities with federal, state, and local agencies, affected tribes, and the general public. Coordination among these parties is achieved, in large part, through the Task Force's Florida-based working group, composed of top-level managers in Florida from the organizations represented on the Task Force. The working group holds monthly meetings that are open to the public to discuss issues affecting the restoration of the ecosystem. The Task Force also uses various advisory boards, such as the Governor's Commission for a Sustainable South Florida, which represents a wide variety of public and private interests, and technical working groups, such as the Science Coordination team, to increase the agencies' sharing of information on restoration projects and programs. In addition, several other outside groups have been established to coordinate and address project-specific issues. Several officials cited the development of the Restudy and its proposed implementation plan by a multidisciplinary team composed of 160 specialists from 30 state, federal, regional, local, and tribal governments as an example of increased coordination. However, the Task Force is a coordination body, not a decision-making body. Our review indicates that even with the coordination efforts of the Task Force and the other groups, two ongoing infrastructure projects that are integral to the restoration effort are taking longer and costing more than planned. Both the Modified Water Deliveries project and the Everglades National Park-South Dade Conveyance Canals (C-111) project are more than 2 years behind schedule and together could cost about $80 million more to complete than originally estimated, in part because the agencies involved have not been able to agree on components of the projects. These projects are intended to restore the natural hydrologic conditions in Everglades National Park. Our review of these projects indicates that the federal and state agencies involved are unable to agree on components of these projects, such as the lands to be acquired and the schedules for operating water pump stations. The Modified Water Deliveries project, authorized by the Everglades National Park Protection and Expansion Act of 1989, is intended to restore the natural hydrologic conditions in Shark River Slough and Everglades National Park. One of the problems associated with this project has been the inability of the participating agencies to reach agreement and make a decision on acquiring the 8.5 Square Mile Area, a residential area in the East Everglades. Originally, the Corps of Engineers, in consultation with Everglades National Park, completed a plan to protect the residents within the 8.5 Square Mile Area, a section in the East Everglades, from further flooding as a result of the project. The Superintendent of Everglades National Park, however, concluded that the plan did not represent a workable solution, and the Corps of Engineers suspended further planning and design of the plan in 1994. A decision on how to resolve the 8.5 Square Mile Area issue was not made until 1998. With the support of the National Park Service, the local project sponsor recommended the complete acquisition of the area, rather than the original flood protection plan, at an additional federal cost of about $22 million. This decision, however, faces a number of challenges before it can be implemented, including the completion of a supplemental environmental impact statement by the Corps of Engineers, congressional approval, and opposition from an affected Indian tribe. These challenges may delay the acquisition of the area and, ultimately, the completion of the project. The C-111 project is intended to restore freshwater flows to Taylor Slough and Everglades National Park and provide flood protection and other benefits to South Dade County. Problems with this project have been the inability to resolve disagreements among agencies and private interests and to acquire needed land in a timely manner. One of the project's water pump stations was constructed on an expedited schedule to provide immediate environmental benefits to the national park. In December 1997, the Corps of Engineers completed the pump's construction. However, as of March 1999, or 15 months after its completion, this pump has not been operated because Everglades National Park and agricultural interests have not been able to agree on an operating schedule. In addition, the National Park Service has not yet acquired lands needed for the operation of the pump. As early as May 1996, the Corps of Engineers notified the National Park Service that these lands were necessary to operate the pump. In 1999, almost 3 years later, the National Park Service made funds available for the condemnation of these lands. Federal officials attributed the delay in acquiring these lands to insufficient funds and staff needed to complete the land acquisition process. Federal and state officials told us that the agencies involved in the restoration effort have multipurpose missions that differ and sometimes conflict. For example, both the Corps of Engineers and the South Florida Water Management District are responsible for supplying water, controlling flooding, and restoring natural resources. The mission of the Department of the Interior's National Park Service, however, is to preserve unimpaired the natural and cultural resources of the national parks. The inability to resolve disagreements and acquire land in a timely manner has kept Everglades National Park from achieving the anticipated environmental benefits of the C-111 project. Agency officials noted that the C-111 and the Modified Water Deliveries projects are at critical junctures. If the participating agencies cannot resolve their disagreements, the success of these projects may be jeopardized. In addition, agency officials have commented that without some entity or group with overall management responsibility and authority to resolve differences, problems such as those encountered in implementing these two projects could continue to hinder the initiative. Appendix V contains a more detailed description of these two projects and the issues that the agencies cannot agree upon. Restoring the South Florida ecosystem is a complex, long-term effort involving federal, state, local, and tribal entities, as well as public and private interests. The South Florida Ecosystem Task Force, a multiagency group with federal, state, local and tribal representatives, was created to coordinate and facilitate the overall restoration effort. However, a strategic plan has not yet been developed that clearly lays out how the initiative will be accomplished and includes quantifiable goals and performance measures that can be used to track the initiative's progress. In addition, although the Task Force and other groups have improved coordination, our review of two integral projects indicates that coordination does not always achieve consensus and there are times when management decisions are necessary to prevent schedule delays and cost overruns. However, because the Task Force is a coordinating body, not a decision-making body, it is limited in its ability to manage and be accountable for the overall restoration effort. Given the scope and complexity of the initiative and the difficulties already being encountered, unless a strategic or master plan is developed to guide the restoration effort and a mechanism is developed to provide the authority needed to make management decisions, the ability to accomplish the initiative in a timely and efficient manner is at risk. To ensure that the South Florida ecosystem is restored in a timely and efficient manner, we recommend that the Secretary of the Interior, as the Chairperson of the South Florida Ecosystem Restoration Task Force, in conjunction with the other members of the Task Force, develop a strategic plan that will (1) outline how the restoration of the South Florida ecosystem will occur, (2) identify the resources needed to achieve the restoration, (3) assign accountability for accomplishing actions, and (4) link the strategic goals established by the Task Force to outcome-oriented annual goals and work with the organizations and entities participating in the restoration effort to develop and agree upon a decision-making process to resolve conflicts in order to accomplish the initiative in a timely and efficient manner. We provided a copy of this report to the departments of Agriculture, the Army, Commerce, and the Interior; the Environmental Protection Agency; and the South Florida Water Management District for review and comment. The Department of the Interior provided written comments on behalf of the departments of Agriculture, the Army, Commerce, and the Interior and of the Environmental Protection Agency. The agencies agreed with the importance of strategic planning but stated that our report fails to adequately acknowledge the substantial planning efforts that have already taken place and are ongoing. The agencies pointed out that the Task Force is in the process of developing a plan much like the one called for in our recommendation. The agencies believe that our recommendation--to work with the organizations and entities participating in the restoration effort to develop and agree upon a decision-making process to resolve conflicts--is unrealistic, given the large number of federal, state, tribal, and local governments and agencies involved, and may be of questionable legality, given each agency's statutory responsibilities and authorities. In addition, the agencies noted that the report focuses only on the federal efforts and ignores the state's substantial efforts. The agencies also strongly disagreed with our conclusion that additional delays and cost overruns are likely to occur in the future and that the ability to accomplish the initiative's overall goals is at risk. The agencies further believe that we oversimplified the causes of the delays for the two projects discussed in the report. Finally, the agencies provided some technical clarifications to the report, which we incorporated where appropriate. We are encouraged that the agencies recognize the value of and need to have a strategic plan. Our report discusses and describes in some detail the documents published by the Task Force that provide information on the restoration effort, including the goals, activities, and accomplishments of the agencies. In addition, while we do not list--nor did we intend to list-- all of the various plans and strategies developed by the agencies involved in the restoration effort, we do specifically mention key planning efforts undertaken. However, as we point out in our report, an overall strategic plan that integrates all of the Task Force's various documents and planning efforts has not yet been developed. Although the Task Force has begun to develop an Integrated Strategic Plan, which the agencies say will be much like the one our report recommends, this plan is not expected to be complete until 2001. Furthermore, on the basis of our conversations with the project leader responsible for developing the plan, we do not believe that it will include all the necessary components of an overall strategic plan called for in the report. The agencies disagreed with our recommendation to develop a decision-making process to resolve conflicts because they believe that the creation of an entity to resolve conflicts would infringe upon the sovereign responsibilities of the governments and agencies involved in the effort and would, therefore, be of questionable legality and impractical. Our recommendation does not envision the creation of another body to decide conflicts or issues among the participants in the restoration of the South Florida ecosystem. Rather, we believe that a process for resolving conflicts needs to be established within the existing legal authorities and structures. Because we recognized that the restoration effort involves federal, state, tribal, and local governments and entities that have various missions and authorities, our recommendation was that the Task Force's members work with the organizations and entities involved in the restoration effort to develop and agree upon a decision-making process to resolve conflicts in order to accomplish the initiative in a timely and efficient manner. Furthermore, in its written comments, the South Florida Water Management District, a key player and member of the Task Force, stated that the development and implementation of a conflict resolution process is very workable and would benefit the restoration effort, provided that it did not conflict with the sovereign rights of the entities involved and the decision-making authorities of the agencies. Without some means to resolve agencies' disagreements and conflicts in a timely manner, problems such as those encountered in implementing the projects we reviewed could continue to hinder the initiative. While the agencies commented that our report focuses only on federal restoration efforts, appendix III includes information on key legislative and administrative actions taken by both the federal government and the state of Florida to restore the South Florida ecosystem. For example, the report cites the state's establishment of the "Save Our Everglades" program in 1983, passage of the Everglades Forever Act in 1994, and establishment of the Governor's Commission for a Sustainable South Florida in 1994. Although the agencies strongly disagreed with our conclusion that additional delays and cost overruns are likely in the future, we believe that the two projects we reviewed are similar to those that will be conducted in the future and that similar disagreements may occur. As stated in the report, without some means to resolve these disagreements in a timely manner, problems such as those encountered in implementing the two projects could continue to hinder the initiative. In addition, we believe that the report accurately presents areas of disagreement or conflicts that are affecting these two projects. Furthermore, the South Florida Water Management District, the local sponsor for both of these projects, described our characterization of the issues relating to these projects as accurate. The District agreed with the report that these two projects are at critical junctures requiring the expeditious resolution of the outstanding issues. The consolidated response of the federal agencies is presented in its entirety, together with our responses, in appendix VI. In written comments on a draft of this report, the South Florida Water Management District agreed with our recommendation to develop a decision-making process to resolve conflicts. The District stated that the development and implementation of a conflict resolution process was very workable and would benefit the restoration effort as long as it did not conflict with the sovereign rights of the entities involved and did not relinquish the decision-making authority of the entity that is responsible for making the final decision. The District also described our characterization of the issues relating to the two projects discussed in the report as accurate. Without commenting specifically on our recommendation to develop an overall strategic plan, the District stated that it would be helpful if our report contained specific recommendations on how to improve the Task Force's ongoing strategic planning process. In addition, the District believed that readers of our report would benefit if we included information on (1) the key restoration accomplishments of the state agencies and the Florida legislature in protecting the natural system, (2) some of the positive outcomes of coordination and collaboration by the participants in the restoration effort, and (3) the financial contributions of the state of Florida to the restoration effort. We believe that our recommendation sufficiently addresses the major elements that should be included in an overall strategic plan for the restoration effort. These include (1) outlining how the restoration will occur, (2) identifying the resources needed to achieve the restoration, (3) assigning accountability for accomplishing actions, and (4) linking the strategic goals established by the Task Force to outcome-oriented annual goals. We do not believe that we should prescribe more than is contained in our recommendation. Rather, the Secretary of the Interior as Chair of the Task Force, in conjunction with the other Task Force members, should have the flexibility needed to successfully develop the strategic plan. Because appendix III of the report contains information on the key legislative and administrative actions taken by both the federal government and the state of Florida to restore the ecosystem, we did not include additional information on the state's accomplishments. However, we added a statement to the report highlighting some of the positive outcomes of increased coordination among the stakeholders. We also agree that it is important to recognize the state's financial contributions to the restoration effort and have included this information in our report. In addition, our report points out that the costs of one of the major components of the effort--the $7.8 billion Restudy--will be shared equally by the federal and state governments. The report also states that the federal and state governments have entered into several agreements to share the cost of land acquisition. The South Florida Water Management District's comments are presented in their entirety, together with our responses, in appendix VII. To determine how much and for what purposes federal funding was appropriated, obligated and expended for the restoration of the South Florida ecosystem from fiscal year 1993 through fiscal year 1999, we contacted officials from the South Florida Ecosystem Restoration Task Force's Office of the Executive Director. We also reviewed various budgetary documents, such as the Task Force's Annual Interagency Cross-Cut Budget for 1999 and Integrated Financial Plan for 1998. However, because the Task Force does not track obligations and expenditures and no consolidated financial information exists, we contacted both headquarters and field officials from the U.S. Army's Corps of Engineers; the departments of Agriculture, Commerce, and the Interior; and the Environmental Protection Agency to obtain this information. We contacted these agencies because they were the primary federal agencies participating in the restoration initiative. We reviewed the information provided by these agencies but did not independently verify its reliability or trace it to the systems from which it came. We did not verify the completeness or accuracy of the data because such an effort would have required a significant investment of time and resources. However, we did attempt to reconcile inconsistencies in the data provided by the agencies. To determine how the initiative is being coordinated and managed and what other issues may impede its progress, we interviewed officials from the South Florida Ecosystem Restoration Task Force's Florida-based working group, including representatives of the federal agencies involved in the restoration initiative, the South Florida Water Management District, and the Miami-Dade County Department of Environmental Resources Management. We also met with the chair of the South Florida Ecosystem Task Force, the executive director of the South Florida Ecosystem Task Force, the chair of the working group, the executive director of the Southern Everglades Restoration Alliance, the executive director of the South Florida Water Management District, and the counselor to the Assistant Secretary for Fish and Wildlife and Parks. In addition, we met with representatives of the Miccosukee Tribe, the National Audubon Society, and the Tropical Audubon Society, as well as the director of the Southeast Environmental Research Program at Florida International University. Because the initiative is just beginning, we reviewed two ongoing infrastructure projects integral to the restoration effort to assess how well the effort was being coordinated and managed. In addition, we reviewed applicable laws and regulations, reports, plans, and other documents relevant to the restoration effort. We conducted our review from September 1998 through April 1999 in accordance with generally accepted government auditing standards. We are providing copies of this report to the Honorable Dan Glickman, Secretary of Agriculture; the Honorable William M. Daley, Secretary of Commerce; the Honorable William S. Cohen, Secretary of Defense; the Honorable Bruce Babbitt, Secretary of the Interior; the Honorable Carol Browner, Administrator of the Environmental Protection Agency; and other interested parties. We will also make copies available to others upon request. If you or your staff have any questions, please call me at (202) 512-3841. Major contributors to this report are listed in appendix VIII.

Pursuant to a congressional request, GAO reviewed the South Florida Ecosystem Restoration Initiative, focusing on: (1) how much and for what purposes federal funding was provided for the restoration of the South Florida ecosystem from fiscal year (FY) 1993 through FY 1999; and (2) how well the restoration effort is being coordinated and managed. GAO noted that: (1) on the basis of the data GAO obtained from the 5 primary federal departments and agencies participating in the initiative, GAO estimates that over $1.2 billion in federal funds was provided from FY 1993 through FY 1999; (2) the key restoration activities undertaken by the federal agencies were: (a) land acquisition; (b) the management of federally-owned facilities or natural resources, and a national marine sanctuary; (c) infrastructure projects; and (d) science-related activities; (3) over 75 percent of the federal expenditures during this 6-year period have been made by agencies within the Department of the Interior and by the U.S. Army Corps of Engineers; (4) the federal funding provided to date represents only a down payment; (5) while no official cost projection for the total restoration effort has been made, a major component, the implementation of the Central and Southern Florida Project Comprehensive Review Study, referred to as the Restudy, is estimated to cost an additional $7.8 billion; (6) the Restudy is designed to substantially increase the amount of water that is delivered to natural areas while enhancing agricultural and urban water supplies; (7) according to the South Florida Ecosystem Restoration Task Force's executive director, at least $2 billion beyond the $7.8 billion will be needed to complete the restoration effort; (8) this money will be used to acquire additional lands, construct other infrastructure projects, and eradicate exotic plant species; (9) the Task Force is responsible for coordinating the participating entities' implementation of the initiative; (10) however, a strategic plan that clearly lays out how the initiative will be accomplished and includes quantifiable goals and performance measures has not yet been developed; (11) the Task Force is a coordinating body, not a decisionmaking body, and thus is limited in its ability to manage and make decisions for the overall restoration effort; (12) as GAO's review of two projects integral to the restoration effort indicates, even with coordination, the federal and state agencies involved are unable to agree on components of these projects; (13) their inability to agree has contributed to delays and cost overruns; and (14) given the scope and complexity of the initiative and the difficulties that have already been encountered, additional delays and cost overruns are likely to occur, and the participants' ability to accomplish the initiative's overall goals is at risk.

Over the past 20 years, DOD has been engaged in an effort to modernize its aging tactical aircraft force. The F-22A and JSF, along with the F/A-18E/F, are the central elements of DOD's overall recapitalization strategy for its tactical air forces. The F-22A was developed to replace the F-15 air superiority aircraft. The continued need for the F-22A, the quantities required, and modification costs to perform its mission have been the subject of a continuing debate within DOD and the Congress. Supporters cite its advanced features--stealth, supercruise speed, maneuverability, and integrated avionics--as integral to the Air Force's Global Strike initiative and for maintaining air superiority over potential future adversaries. Critics argue that the Soviet threat it was originally designed to counter no longer exists and that its remaining budget dollars could be better invested in enhancing current air assets and acquiring new and more transformational capabilities that will allow DOD to meet evolving threats. Its fiscal year 2007 request includes $800 million for continuing development and modifications for aircraft enhancements such as equipping the F-22A with an improved ground attack capability and improving aircraft reliability. The request also includes about $2.0 billion for advance procurement of parts and funding of subassembly activities for the initial 20 aircraft of a 60-aircraft multiyear procurement. JSF is a replacement for a substantial number of aging fighter and attack aircraft currently in the DOD inventory. For the Air Force, it is intended to replace the F-16 and A-10 while complementing the F-22A. For the Marine Corps, the JSF is intended to replace the AV-8B and F/A-18 A/C/D; for the Navy, the JSF is intended to complement the F/A-18E/F. DOD estimates that as currently planned, it will cost $257 billion to develop and procure about 2,443 aircraft and related support equipment, with total costs to maintain and operate JSF aircraft adding $347 billion over the program's life cycle. After 9 years in development, the program plans to deliver its first flight test aircraft later this year. The fiscal year 2007 budget request includes $4 billion for continuing development and $1.4 billion for the purchase of the first 5 procurement aircraft, initial spares, and advance procurement for 16 more aircraft to be purchased in 2008. We have frequently reported on the importance of using a sound, executable business case before committing resources to a new product development. In its simplest form, such a business case is evidence that (1) the warfighter's needs are valid and can best be met with the chosen concept and quantities, and (2) the chosen concept can be developed and produced within existing resources--that is, proven technologies, design knowledge, adequate funding, and adequate time to deliver the needed product. At the heart of a good business case is a knowledge-based strategy to product development that demonstrates high levels of knowledge before significant commitments of time and money are made. The future of DOD's tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs--which represent about $245 billion in investments to be made in the future. Yet achieving expected outcomes for both these programs continues to be fraught with risk. We have reported that the F-22A's original business case is unexecutable and does not reflect changing conditions over time. Currently, there is a significant mismatch between the Air Force's stated need for F-22A aircraft and the resources the Office of the Secretary of Defense (OSD) is willing to commit. The business case for the JSF program, which has 90 percent of its investments still in the future, significantly overlaps production with development and system testing--a strategy that often results in cost and schedule increases. Both programs are at critical junctures that require DOD to make important business decisions. According to the Air Force, a minimum of 381 modernized F-22A aircraft are needed to satisfy today's national strategic requirements--a buy that is roughly half the 750 aircraft originally planned, but more than double the 183 aircraft OSD states available funding can support. Since the Air Force began developing the F-22A in 1986, the business case for the program has changed radically-- threats have changed, requirements have been added, costs have increased, funds have been added, planned quantities have been reduced, and deliveries of the aircraft to the warfighter have been delayed. There is a 198-aircraft capability gap today. Decisions in the last 2 years have worsened the mismatch between Air Force requirements and available resources, further weakening the F-22A program's business case. Without a new business case, an agreement on an appropriate number of F-22As for our national defense, it is uncertain as to whether additional investments in the program are advisable. The original business case for the F-22A program was to develop air superiority fighters to counter a projected threat of significant quantities of advanced Soviet fighters. During the 19-year F-22A development program, that threat did not materialize to the degree expected. Today, the requirements for the F-22A have evolved to include what the Air Force has defined as a more robust ground attack capability to destroy expected air defense systems and other ground targets and an intelligence-gathering capability. However, the currently configured F-22A is not equipped to carry out these roles without further investments in its development. The F-22As modernization program is currently being planned for three basic blocks, or spirals, of increasing capability to be developed and delivered over time. Current Air Force estimates of modernization costs, from 2007 through 2016, are about $4.3 billion. Additional modernization is expected, but the content and costs have not been determined or included in the budget. OSD has restructured the acquisition program twice in the last 2 years to free up funds for other priorities. In December 2004, DOD reduced the program to 179 F-22As to save about $10.5 billion. This decision also terminated procurement in 2008. In December 2005, DOD changed the F- 22A program again, adding $1 billion to extend production for 2 years to ensure a next-generation fighter aircraft production line would remain in operation in case JSF experienced delays or problems. It also added 4 aircraft for a total planned procurement of 183 F-22As. As part of the 2005 change, aircraft previously scheduled in 2007 will not be fully funded until 2008 or later. OSD and the Air Force plan to buy the remaining 60 F-22As in a multiyear procurement that would buy 20 aircraft a year for 3 years--2008 through 2010. The Air Force plans to fund these aircraft in four increments--an economic order quantity to buy things cheaper; advanced procurement for titanium and other materials and parts to protect the schedule; subassembly; and final assembly. The Air Force plans to provide Congress a justification for multiyear procurement in May 2006 and the fiscal year 2007 President's Budget includes funds for multiyear procurement. The following table shows the Air Force's plan for funding the multiyear procurement. Air Force officials have told us that an additional $400 million in funds are needed to complete the multiyear procurement and that the accelerated schedule to obtain approval and start the effort adds risk to the program, creating more weaknesses in the current F-22A business case. A 198-aircraft gap between what the Air Force needs and what is affordable raises questions about what additional capabilities need to be included in the F-22A program. In March 2005, we recommended that the Air Force develop a new business case that justified additional investments in modernizing the aircraft to include greater ground attack and intelligence-gathering capabilities before moving forward. DOD responded to our report that business case decisions were handled annually in the budget decisions and that the QDR would analyze requirements for the F-22A and make program decisions. However, it is not clear from the QDR report, issued last month, what analyses were conducted to determine the gaps in capability, the alternatives considered, the quantities needed, or the costs and benefits of the F-22A program. Therefore, questions about the F-22A program remain: What capability gaps exist today and will exist in the future (air superiority, ground attack, electronic attack, intelligence gathering)? What alternatives besides the F-22A can meet these needs? What are the costs and benefits of each alternative? How many F-22As are needed? What capabilities should be included? Until these questions are answered and differences are reconciled, further investments in the program--for either the procurement of new aircraft or modernization--cannot be justified. The JSF program appears to be on the same path as the F-22A program. After being in development for 9 years, the JSF program has not produced the first test aircraft, has experienced substantial cost growth, has reduced the number of planned aircraft, and has delayed delivery of the aircraft to the warfighter. Moreover, the JSF program remains committed to a business case that invests heavily in production before testing has demonstrated acceptable performance of the aircraft. At the same time, the JSF program has contracted to develop and deliver the aircraft's full capability in a single-step, 12-year development program--a daunting task given the need to incorporate the technological advances that, according to DOD, represent a quantum leap in capability. The business case is a clear departure from the DOD policy preference that calls for adopting an evolutionary approach to acquisitions. Furthermore, the length and cost of the remaining development are exceedingly difficult to accurately estimate, thereby increasing DOD's risks in contracting for production. With this risky approach, it is likely that the program will continue to experience significant cost and schedule overruns. The JSF program expects to begin low-rate initial procurement in 2007 with less than 1 percent of the flight test program completed and no production representative prototypes built for the three JSF variants. Technologies and features critical to JSF's operational success, such as a low observable and highly common airframe, advanced mission systems, and maintenance prognostics systems, will not have been demonstrated in a flight test environment when production begins. Other key demonstrations that will have not been either started or only in the initial stages before production begins include testing with a fully integrated aircraft--mission systems and full software, structural and fatigue testing of the airframe, and shipboard testing of Navy and Marine Corps aircraft. When the first fully integrated and capable development JSF is expected to fly in 2011, DOD will already have committed to buy 190 aircraft at an estimated cost of $26 billion. According to JSF program plans, DOD's low- rate initial production quantities will increase from 5 aircraft a year in 2007 to 133 a year in 2013, when development and initial operational testing are completed. By then, DOD will have procured more than double that amount--424 aircraft at an estimated cost of about $49 billion, and spending for monthly production activities is expected to be about $1 billion, an increase from $100 million a month when production is scheduled to begin in 2007. Figure 1 shows the significant overlap in development and testing and the major investments in production. The overlap in testing and production is the result of a business case and acquisition strategy that has proven to be risky in past programs like F-22A, Comanche, and B-2A, which far exceeded the cost and delivery goals set at the start of their development programs. JSF has already increased its cost estimate and delayed deliveries despite a lengthy replanning effort that added over $7 billion and 18 months to the development program. JSF officials have stated that the restructured program has little or no flexibility for future changes or unanticipated risks. The program has planned about 8 years to complete significant remaining activities of the system development and demonstration phase, including fully maturing 7 of the 8 critical technologies; completing the designs and releasing the engineering drawings for all manufacturing and delivering 15 flight test aircraft and 7 ground test developing 19 million lines of software code; and completing a 7-year, 12,000-hour flight test program. The JSF program's latest planned funding profile for development and procurement, produced in December 2004 by the JSF program office, assumes annual funding rates to hover close to $13 billion between 2012 and 2022, peaking at $13.8 billion in 2013. If the program fails to achieve its current estimated costs, funding challenges could be even greater than that. The Office of Secretary of Defense Cost Analysis Improvement Group was to update its formal independent cost estimate in the spring of 2005. The group now does not expect to formally complete its estimate until spring 2006, but its preliminary estimate was substantially higher than the program office's. A modest cost increase would have dramatic impacts on funding. For example, a 10 percent increase in production costs would amount to over $21 billion (see fig. 2). DOD has recently made decisions to reduce near-term funding requirements that could cause future JSF costs to increase. It had begun to invest in the program to develop an alternative engine for the aircraft, but now plans to cancel further investments in order to make the remaining funds available for other priorities. According to DOD, it believes that there is no cost benefit or savings with an engine competition for the JSF and there is low operational risk with going solely with a single engine supplier. DOD has already invested $1.2 billion in funding for this development effort through fiscal year 2006. By canceling the program, it expects to save $1.8 billion through fiscal year 2011. Developing alternative engines is a practice that has been used in past fighter aircraft development programs like the F-16 and F-15 programs. An alternative engine program may help maintain the industrial base for fighter engine technology, result in price competition in the future for engine acquisition and spare parts, instill incentives to develop a more reliable engine, and ensure an operational alternative should the current engine develop a problem that would ground the entire fleet of JSF aircraft. As result, the JSF decision should be supported by a sound business case analysis. To date, we have not seen such an analysis. Finally, the uncertainties inherent in concurrently developing, testing, and producing the JSF aircraft prevent the pricing of initial production orders on a fixed price basis. Consequently, the program office plans to place initial procurement orders on cost reimbursement contracts. These contracts will provide for payment of allowable incurred costs, to the extent prescribed in the contract. With cost reimbursement contracts a greater cost risk is placed on the buyer--in this case, DOD. For the JSF, procurement should start when risk is low enough to enter into a fixed price agreement with the contractor based on demonstrations of the fully configured aircraft and manufacturing processes. DOD has not been able to achieve its recapitalization goals for its tactical aircraft forces. Originally, DOD had planned to buy a total of 4,500 tactical aircraft to replace the aging legacy force. Today, because of delays in the acquisition programs, increased development and procurement costs, and affordability pressures, it plans to buy almost one-third fewer tactical aircraft (see fig. 3). The delivery of these new aircraft has also been delayed past original plans. DOD has spent nearly $75 billion on the F-22A and JSF programs since they began, but this accounts for only 122 new operational aircraft. Because DOD's recapitalization efforts have not materialized as planned, many aircraft acquired in the 1980s will have to remain in the inventory longer than originally expected, incurring higher investment costs to keep them operational. According to DOD officials, these aging aircraft are approaching the end of their service lives and are costly to maintain at a high readiness level. While Air Force officials assert that aircraft readiness rates are steady, they agree that the costs to operate and maintain its aircraft over the last decade have risen substantially. Regardless, the military utility of the aging aircraft is decreasing. The funds used to operate, support, and upgrade the current inventory of legacy aircraft represent opportunity costs that could be used to develop and buy new aircraft. From fiscal years 2006 to 2011, DOD plans to spend about $57 billion for operations and maintenance and military personnel for legacy tactical fighter aircraft. Some of these funds could be invested in newer aircraft that would be more capable and less costly to operate. For example, the Air Force Independent Cost Estimate Summary shows that the F-22A will be less expensive to operate than the F-15. The F-22A will require fewer maintenance personnel for each squadron, and one squadron of F-22As can replace two squadrons of F-15. This saves about 780 maintenance personnel as well as about $148 million in annual operating and support cost according to the independent cost estimate. Over the same time frame, DOD also plans to spend an average of $1.5 billion each year---or $8.8 billion total--to modernize or improve legacy tactical fighter aircraft (see fig. 4). Further delays or changes in the F-22A or JSF programs could require additional funding to keep legacy aircraft in the inventory and relevant to the warfighter's needs. In testimony last year, we suggested that the QDR would provide an opportunity for DOD to assess its tactical aircraft recapitalization plans and weigh options for accomplishing its specific and overarching goals. In February 2006, the Secretary of Defense testified that recapitalization of DOD's tactical aircraft is important to maintain America's air dominance. Despite this continued declaration about recapitalizing tactical aircraft, DOD's 2006 QDR report did not present a detailed investment strategy that addressed needs and gaps, identified alternatives, and assessed costs and benefits. With limited information contained in the QDR report, many questions are still unanswered about the future of DOD's tactical aircraft modernization efforts. As DOD moves forward with its efforts to recapitalize its tactical aircraft force, it has the opportunity to reduce operating costs and deliver needed capabilities to the warfighter more quickly. To take advantage of this opportunity, however, DOD must fundamentally change the way it buys weapon systems. Specifically, the department must change how it selects weapon systems to buy, and how it establishes and executes the business case. Although the F-22A program has progressed further in the acquisition process than the JSF program, both programs are at critical decision-making junctures, and the time for DOD to implement change is now. Before additional investments in the F-22A program are made, DOD and the Air Force must agree on the aircraft's capabilities and quantities and the resources that can be made available to meet these requirements. A cost and benefit analysis of F-22A capabilities and alternative solutions weighed against current and expected threats is needed to determine whether a sound business case for the F-22A is possible and whether investing an additional $13.8 billion over the next 5 years to procure or modernize these aircraft is justified. With more than 90 percent of investment decisions to develop, test, and buy JSF aircraft remaining, DOD could implement significant changes in its business case before investing further in the JSF program. The JSF program should delay production and investments in production capability until the aircraft design qualities and integrated mission capabilities of the fully configured and integrated JSF aircraft variants have been proven to work in flight testing. Also, an evolutionary acquisition strategy to limit requirements for the aircraft's first increment of capabilities that can be achieved with proven technologies and available resources could significantly reduce the JSF program's cost and schedule risks. Such a strategy would allow the program to begin testing and low-rate production sooner and, ultimately, to deliver a useful product in sufficient quantities to the warfighter sooner. Once the JSF is delivered, DOD could begin retiring its aging and costly tactical aircraft. Capabilities that demand as yet undemonstrated technologies would be included as requirements in future JSF aircraft increments that would be separately managed. An evolutionary, knowledge-based acquisition approach would not only help significantly minimize risk and deliver capabilities to the warfighter sooner, it would be in line with current DOD policy preferences. DOD's use of an evolutionary, knowledge-based approach is not unprecedented. The F-16 program successfully evolved capabilities over the span of 30 years, with an initial F-16 capability delivered to the warfighter about 4 years after development started. Figure 5 illustrates the F-16 incremental development approach. The F-16 program provides a good acquisition model for the JSF program. For JSF, an evolutionary approach could entail delivering a first increment aircraft with at least as much capability as legacy aircraft with sufficient quantities to allow DOD to retire its aging tactical aircraft sooner and reduce operating inefficiencies. Limiting development to 5-year increments or less, as suggested in DOD's acquisition policy, would force smaller, more manageable commitments in capabilities and make costs and schedules more predictable. Some of the more challenging JSF capabilities, such as advanced mission systems or prognostics technologies, would be deferred and added to follow-on efforts once they are demonstrated in the technology development environment--a more conducive environment to maturing and proving new technologies. A shorter system development phase would have other important benefits. It would allow DOD to align a program manager's tenure to the completion of the phase, which would enable program managers to be held accountable for decisions. It also would allow DOD to use fixed-price-type contracts for production, and thereby reduce the government's cost risk. Additionally, DOD should do a more comprehensive business case analysis of the costs, benefits and risks before terminating the alternative engine effort. A competitive engine program may (1) incentivize contractors' to minimize life cycle costs; (2) improve engine reliability and quality in the future; (3) provide operational options; and (4) maintain the industrial base. At a broader level, DOD needs to make more substantive changes to its requirements, funding, and acquisition processes to improve weapon system program outcomes. We have recommended these changes in past reports and DOD has agreed with them. The January 2006 Defense Acquisition Performance Assessment report, based on a study directed by the Deputy Secretary of Defense, made some important observations regarding DOD acquisitions. The report concluded that the current acquisition process is slow, overly complex, and incompatible with meeting the needs of DOD in a diverse marketplace. Notably, the report confirmed that a successful acquisition process must be based on requirements that are relevant, timely, informed by the combatant commanders, and supported by mature technologies and resources necessary to realize development. The report also pointed out that DOD's acquisition process currently operates under a "conspiracy of hope," striving to achieve full capability in a single step and consistently underestimating what it would cost to attain this capability. The report makes a number of key recommendations for changing DOD's acquisition process including the following: develop a new requirements process that has greater combatant commander involvement and is time-phased, fiscally informed, and jointly prioritized; change the current acquisition policy to ensure a time-constrained development program is strictly followed; keep program managers from the start of development through delivery of the "Beyond Low-Rate Initial Production Report"; and move the start of a development program to the point in time that a successful preliminary design review is completed. Our work in weapons acquisition and best practices over the past several years has drawn similar conclusions. We have made numerous recommendations on DOD's acquisition processes and policy--as well as recommendations on specific major weapon system programs--to improve cost, schedule, and performance outcomes and to increase accountability for investment decisions. In 2000, DOD revised its acquisition policy to address some of our recommendations. Specifically, DOD has written into its policy an approach that emphasizes the importance of knowledge at critical junctures before managers agree to invest more money in the next phase of weapon system development. Theoretically, a knowledge-based approach results in evolutionary--that is, incremental, manageable, predictable--development and uses controls to help managers gauge progress in meeting cost, schedule, and performance goals. However, DOD policy lacks the controls needed to ensure effective implementation of this approach. Furthermore, decision makers have not consistently applied the necessary discipline to implement its acquisition policy and assign much-needed accountability for decisions and outcomes. Some of key elements of acquisition that we believe DOD needs to focus on include the following: constraining individual program requirements by working within available resources and by leveraging systems engineering; establishing clear business cases for each individual investment; enabling science and technology organizations to shoulder the ensuring that the workforce is capable of managing requirements trades, source selection, and knowledge-based acquisition strategies; establishing and enforcing controls to ensure appropriate knowledge is captured and used at critical junctures before moving programs forward and investing more money; and aligning tenure for program managers that matches the program's acquisition time to ensure greater accountability for outcomes. In conclusion, despite DOD's repeated declaration that recapitalizing its aging tactical aircraft fleet is a top priority, the department continues to follow an acquisition strategy that consistently results in escalating costs that undercut DOD's buying power, forces DOD to reduce aircraft purchases, and delays delivering needed capabilities to the warfighter. Continuing to follow a strategy that results in disappointing outcomes cannot be encouraged--particularly given our current fiscal and national security realities. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other members of the subcommittee may have. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance, GAO-06-356 (Washington D.C.: March 15, 2006). Defense Acquisitions: Business Case and Business Arrangements Key for Future Combat System's Success, GAO-06-478T (Washington D.C.: March 1, 2006). Defense Acquisitions: DOD Management Approach and Processes Not Well-Suited to Support Development of Global Information Grid, GAO-06- 211, (Washington D.C.: January 30, 2006). Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66, (Washington D.C.: December 19, 2005). Unmanned Aircraft Systems: Global Hawk Cost Increase Understated in Nunn-McCurdy Report, GAO-06-222R, (Washington D.C.: December 15, 2005) DOD Acquisition Outcomes: A Case for Change, GAO-06-257T, (Washington D.C.: November 15, 2005). Defense Acquisitions: Progress and Challenges Facing the DD(X) Surface Combatant Program GAO-05-924T. (Washington D.C.: 07/19/2005). Defense Acquisitions: Incentives and Pressures That Drive Problems Affecting Satellite and Related Acquisitions. GAO-05-570R. (Washington D.C.: 06/23/2005). Defense Acquisitions: Resolving Development Risks in the Army's Networked Communications Capabilities is Key Fielding Future Force. GAO-05-669 (Washington D.C.: 06/15/2005). Progress of the DD(X) Destroyer Program. GAO-05-752R. (Washington D.C.: 06/14/2005) Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for Tactical Aircraft Modernization. GAO-05-519T. (Washington D.C.: 04/06/2005). Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-05-301 (Washington D.C.: 03/31/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-428T. (Washington D.C.: 03/16/2005). Defense Acquisitions: Changes in E-10A Acquisition Strategy Needed Before Development Starts. GAO-05-273 (Washington D.C.: 03/15/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-442T (Washington D.C.: 03/15/2005). Tactical Aircraft: Air Force Still Needs Business Case to Support F/A-22 Quantities and Increased Capabilities. GAO-05-304. (Washington D.C.: 03/15/2005). Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter Program with Different Acquisition Strategy. GAO-05-271. (Washington D.C.: 03/15/2005). Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs and Implications for Tactical Aircraft Modernization. GAO-05-390T (Washington D.C.: 03/03/2005). Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255 (Washington D.C.: 03/01/2005). Defense Acquisitions: Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183 (Washington D.C.: 02/28/2005). Unmanned Aerial Vehicles: Changes in Global Hawk's Acquisition Strategy Are Needed to Reduce Program Risks. GAO-05-06 (Washington D.C.: 11/05/2004). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Defense's (DOD) F-22A and Joint Strike Fighter (JSF) programs aim to replace many of the Department's aging tactical fighter aircraft--many of which have been in DOD's inventory for more than 20 years. Together, the F-22A and JSF programs represent a significant investment for DOD--currently estimated at almost $320 billion. GAO has reported on the poor outcomes in DOD's acquisitions of tactical aircraft and other major weapon systems. Cost and schedule overruns have diminished DOD's buying power and delayed the delivery of needed capabilities to the warfighter. Last year, GAO testified that weaknesses in the F-22A and JSF programs raised questions as to whether DOD's overarching tactical aircraft recapitalization goals were achievable. At the request of this Subcommittee, GAO is providing updated testimony on (1) the extent to which the current F-22A and JSF business cases are executable, (2) the current status of DOD's tactical aircraft recapitalization efforts, and (3) potential options for recapitalizing the air forces as DOD moves forward with its tactical aircraft recapitalization efforts. The future of DOD's tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs--which represent about $245 billion in investments to be made in the future. Both programs continue to be burdened with risk. The F-22A business case is unexecutable in part because of a 198 aircraft gap between the Air Force requirement and what DOD estimates it can afford. The JSF program, which has 90 percent of its investments still in the future, plans to concurrently test and produce aircraft thus weakening DOD's business case and jeopardizing its recapitalization efforts. It plans to begin producing aircraft in 2007 with less than 1 percent of the flight test program completed. DOD's current plan to buy about 3,100 new major tactical systems to replace its legacy aircraft represents a 33-percent reduction in quantities from original plans. With reduced buys and delays in delivery of the new systems, costs to keep legacy aircraft operational and relevant have increased. While the Secretary of Defense maintains that continued U.S. air dominance depends on a recapitalized force, DOD has not presented an investment strategy for tactical aircraft systems that measures needs, capability gaps, alternatives, and affordability. Without such a strategy, DOD cannot reasonably ensure it will recapitalize the force and deliver needed capabilities to the warfighter within cost and schedule targets. As DOD moves forward with its efforts to recapitalize its tactical aircraft, it needs to rethink the current business cases for the F-22A and JSF programs. This means matching needs and resources before more F-22A aircraft are procured and ensuring the JSF program demonstrates acceptable aircraft performance before it enters initial production.

The United Nations comprises six principal bodies, including the General Assembly and the Secretariat, as well as funds and programs, such as UNDP, and specialized agencies, such as UNESCO. These funds, programs, and specialized agencies have their own governing bodies and budgets, but follow the guidelines of the UN Charter. Article 101 of the UN Charter calls for staff to be recruited on the basis of "the highest standards of efficiency, competence, and integrity" as well as from "as wide a geographical basis as possible." Each UN agency has developed its own human resource policies and practices, and staff rules. Of the five agencies we reviewed, three--the Secretariat, IAEA, and UNESCO--had quantitative formulas that establish targets for equitable geographical representation in designated professional positions. UNHCR had not established a quantitative formula or positions subject to geographic representation, but had agreed to an informal target for equitable U.S. representation. UNDP generally followed the principle of equitable geographic representation, but had not adopted formal or informal targets. Agencies with formal quantitative targets for equitable representation do not apply these targets to all professional positions. Instead, these organizations set aside positions that are subject to geographic representation from among the professional and senior positions performing core agency functions, funded from regular budget resources. Positions that are exempt from being counted geographically include linguist and peacekeeping positions, positions funded by extra- budgetary resources, and short-term positions. In addition, these organizations utilize various nonstaff positions, such as contractors and consultants. The Department of State is the U.S. agency primarily responsible for leading U.S. efforts toward achieving equitable U.S. employment representation in UN organizations. While State is responsible for promoting and seeking to increase U.S. representation in the UN, the UN entities themselves are ultimately responsible for hiring their employees and achieving equitable representation. U.S. citizens were underrepresented at three of the five UN agencies we reviewed: IAEA, UNESCO, and UNHCR. Given projected staff levels, retirements and separations for 2006-2010, these agencies need to hire more Americans than they have in recent years to meet their minimum targets for equitable U.S. representation in 2010. Relative to UN agencies' formal or informal targets for equitable geographic representation, U.S. citizens were underrepresented at three of the five agencies we reviewed-IAEA, UNESCO, and UNHCR. U.S. citizens were equitably represented at the UN Secretariat, though at the lower end of its target range, while the fifth agency-UNDP-had not established a target for U.S. representation. U.S. citizens filled about 11 percent of UNDP's professional positions. Table 1 provides information on U.S. representation at the five UN agencies as of 2005. Table 1 also shows that the percentage of U.S. citizens employed in nongeographic positions (or nonregular positions in the case of UNHCR and UNDP) was higher at IAEA, UNHCR, and UNDP and lower at the Secretariat and UNESCO compared to the percentage of geographic (or regular) positions held by U.S. citizens. As shown in table 2, U.S. citizen representation in geographic positions in "all grades" between 2001 and 2005 had been declining at UNHCR and displayed no clear trend at the other four UN agencies. U.S. representation in policy-making and senior-level positions increased at two agencies --IAEA and UNDP--and displayed no overall trend at the Secretariat, UNESCO, and UNHCR over the full five years. At the Secretariat, although no trend was indicated, U.S. representation had been decreasing in policy-making and senior-level positions since 2002. At UNESCO, the data for 2001 to 2004 did not reflect a trend, but the overall percentage of Americans increased in 2005, reflecting increased recruiting efforts after the United States rejoined UNESCO in 2003. At UNHCR, the representation of U.S. citizens in these positions grew steadily from 2001 to 2004, but declined in 2005. We estimated that each of the four agencies with geographic targets-the Secretariat, IAEA, UNESCO, and UNHCR-would need to hire U.S. citizens in greater numbers than they had in recent years to achieve their minimum targets by 2010, given projected staff levels, retirements, and separations; otherwise, with the exception of UNESCO, U.S. geographic representation will decline further. As shown in table 3, IAEA and UNHCR would need to more than double their current average hiring rate to achieve targets for U.S. representation. The Secretariat could continue to meet its minimum geographic target for U.S. citizens if it increased its annual hiring of U.S. citizens from 20 to 23. UNESCO could achieve its minimum geographic target by increasing its current hiring average of 4.5 Americans to 6 Americans. Although the fifth agency, UNDP, did not have a target, it would have to increase its annual hiring average of U.S. citizens from 17.5 to 26 in order to maintain its current ratio of U.S. regular professional staff to total agency regular professional staff. If current hiring levels are maintained through 2010, two of the five agencies-IAEA and UNHCR-would fall substantially below their minimum targets. In only one agency-UNESCO-would the percentage of geographic positions filled by U.S. citizens increase under current hiring levels, due in part to the recent increased hiring of U.S. citizens. A combination of barriers, including some common factors as well as agency-specific factors, adversely affected recruitment and retention of professional staff, including Americans, at each of the five UN agencies. These barriers combined with distinct agency-specific factors to impede recruitment and retention. We identified the following six barriers that affected U.S. representation in the UN agencies we reviewed, though often to differing degrees: Nontransparent human resource practices. A key barrier to American representation across the five UN agencies was the lack of transparent human resource management practices, according to Americans employed at UN organizations. For example, some UN managers circumvented the competitive hiring process by employing individuals on short-term contracts--positions that were not vetted through the regular, competitive process--for long-term needs. Limited external opportunities. Recruiting U.S. candidates was difficult because agencies offered a limited number of posts to external candidates. Each of the organizations we reviewed, except IAEA, advertised professional vacancies to current employees before advertising them externally in order to provide career paths and motivation for their staff. We found that three of the five agencies--UNESCO, UNHCR, and UNDP--filled 50 percent or more of new appointments through promotions or with other internal candidates rather than by hiring external candidates. IAEA filled a large percentage of its positions with external candidates because, in addition to not giving internal candidates hiring preference, the agency employed the majority of its staff members for 7 years or less. Although the data indicated that the Secretariat hired a significant percentage of external candidates, the Secretariat's definition of "external candidates" included staff on temporary contracts and individuals who had previous experience working at the agency. Lengthy hiring process. The agencies' lengthy hiring processes can deter candidates from accepting UN employment. For example, a report from the Secretary General stated that the average hiring process was too slow, taking 174 days from the time a vacancy announcement was issued to the time a candidate was selected, causing some qualified applicants to accept jobs elsewhere. Many Americans that we interviewed concurred with the report, saying that it was difficult to plan a job move when there was a long delay between submitting an application and receiving an offer. In March 2006, the Secretary General proposed cutting the average recruitment time in half. Low or unclear compensation. Comparatively low salaries and benefits that were not clearly explained were among the most frequently mentioned deterrents to UN employment for Americans. American employees we interviewed noted that UN salaries, particularly for senior and technical posts, were not comparable with U.S. government and private sector salaries. When candidates consider UN salaries in tandem with UN employee benefits, such as possible reimbursement for U.S. taxes and school tuition allowances through college, UN compensation may be more attractive. However, U.S. citizens employed at IAEA and UNESCO said that their agency did not clearly explain the benefits, or explained them only after a candidate had accepted a position. Incomplete or late information hampered a candidate's ability to decide in a timely manner whether a UN position was in his or her best interests. In addition, difficulty securing spousal employment can decrease family income and may also affect American recruitment since many U.S. families have two wage earners. At many overseas UN duty stations, work permits can be difficult to obtain, the local economy may offer few employment opportunities, and knowledge of the local language may be required. Required mobility or rotation. UNHCR and UNDP required their staff to change posts at least every 3 to 6 years with the expectation that staff serve the larger portion of their career in the field; the UN Secretariat and UNESCO were implementing similar policies. While IAEA did not require its employees to change posts, it generally only hired employees for 7 years or less. Such policies dissuaded some Americans from accepting or staying in a UN position because of the disruptions to personal or family life such frequent moves can cause. Limited U.S. government support. At four of the five agencies we reviewed--all except IAEA--a number of American employees said that they did not receive U.S. government support during their efforts to obtain a UN job or to be promoted at the job they held. The U.S. government supported candidates applying for director-level, or higher, posts, and put less emphasis on supporting candidates seeking lower-level professional posts. Although UN employees are international civil servants directly hired by UN agencies, some countries facilitate the recruitment of their nationals by referring qualified candidates, conducting recruitment missions, and sponsoring JPOs or Associate Experts. Distinct agency-specific factors also impeded recruitment and retention. For example, Candidates serving in professional positions funded by their member governments were more likely to be hired by the Secretariat than those who took the Secretariat's entry-level exam; however, the United States had not funded such positions at the Secretariat. At the entry level, hiring for professional positions was limited to an average of 2 percent of individuals invited to take the Secretariat's National Competitive Recruitment Exam. In contrast, the Secretariat hired an average of 65 percent of Associate Experts sponsored by their national government. Continuing U.S. underrepresentation at the IAEA was described by U.S. government officials as a "supply-side issue," with the pool of American candidates with the necessary education and experience decreasing, as nuclear specialists are aging and few young people are entering the nuclear field. The United States' 19-year withdrawal from UNESCO contributed to its underrepresentation. When the United States left UNESCO in 1984, Americans comprised 9.6 percent of the organization's geographic professional staff. When it rejoined in 2003, Americans comprised only 2.9 percent. By 2005 that number had increased to 4.1 percent--the third largest group of nationals UNESCO employed, although still below the minimum geographic target. The difficult conditions that accompany much of UNHCR's work, coupled with the requirement to change duty stations every 4 years, contributed to attrition at the mid-career levels. UNHCR's requirement that employees change duty stations every 4 years was one of the most frequently cited barriers to retaining staff among the American employees we interviewed. UNHCR's mission to safeguard the rights and well-being of refugees necessitates work in hardship and high-risk locations. As such, UNHCR has twice as many hardship duty stations as any other UN agency. Several barriers to increasing U.S. representation were the leading factors at UNDP and were also present at other UN agencies, according to American employees and other officials. In addition, UNDP's Executive Board had traditionally managed the organization with the understanding that its staff be equally represented from northern (mostly developed) and southern (mostly developing) countries, and had recently focused on improving the north-south balance of staff at management levels by increasing the hiring of candidates from southern countries. State targeted its recruitment efforts for senior and policy-making UN positions, and, although it was difficult to directly link State's efforts to UN hiring decisions, U.S. representation in these positions either improved or displayed no trend in the five UN agencies we reviewed. State also increased its efforts to improve overall U.S. representation; however, despite these efforts, U.S. representation in entry-level positions declined or did not reflect a trend in four of the five UN agencies. Additional options exist to target potential pools of candidates for these positions. State focused its recruiting efforts for U.S. citizen employment at UN agencies on senior-level and policy-making positions because of the influence that these positions have within the organization. Although it is difficult to directly link State's efforts to UN hiring decisions, the percentage of U.S. representation in senior and policymaking positions either increased or did not display a trend at each of the five UN agencies we reviewed between 2001 and 2005. The U.S. share of senior and policymaking positions increased at IAEA and UNDP, whereas the U.S. share of these positions at the other three UN agencies displayed no trend over that period. Since 2001, State has devoted additional resources and undertaken several new initiatives in its role as the lead U.S. agency for supporting and promoting the employment of Americans in UN organizations. First, State increased resources for disseminating UN vacancy information. State increased the number of staff positions from two to five, and added a sixth person who worked part-time on UN employment issues. One of the new staff focused on recruiting Americans for senior-level positions at UN organizations. According to State, the other staff have been recruiting candidates for professional positions at career fairs and other venues; however, a large portion of their work has been focused on providing information to potential applicants and disseminating information on UN vacancies and opportunities. In addition, State has increased outreach for the Secretariat's annual National Competitive Recruitment Exam for entry- level candidates by advertising it in selected newspapers. The number of Americans invited to take the exam increased from 40 in 2001 to 277 in 2004. State reported that 178 Americans in 2007 were invited to take the exam. Second, U.S. missions have shared U.S. representation reports and discussed openings with UN officials. State prepares annual reports to Congress that provide data on U.S. employment at UN agencies as well as State's assessment of U.S. representation at selected UN organizations and these organizations' efforts to hire more Americans. State is providing these reports to UN agencies, as we recommended in 2001. U.S. mission officials told us that they periodically meet with UN officials to discuss U.S. representation and upcoming vacancies. Finally, State has increased coordination with U.S. agencies. In 2003, State established an interagency task force to address the low representation of Americans in international organizations. Since then, task members have met annually to discuss U.S. employment issues. Task force participants told us that at these meetings, State officials reported on their outreach activities and encouraged agencies to promote the employment of Americans at UN organizations. One of the topics discussed by task force members was how to increase support for details and transfers of U.S. agency employees to UN organizations. In May 2006, the Secretary of State sent letters to the heads of 23 federal agencies urging that they review their policies for transferring and detailing employees to international organizations to ensure that these mechanisms are positively and actively promoted. While the Secretary's letters may help to spur U.S. agencies to clarify their support for these initiatives, agency officials told us that their offices lacked the resources for staff details, which involve paying the salary of the detailed staff as well as "backfilling" that person's position by adding a replacement. State also has been periodically meeting one-on- one with U.S. agencies to discuss the employment situation and recruiting efforts at specific UN organizations. A State official told us that State's UN employment office meets with a few U.S. agencies per year to discuss UN agency staffing issues. Despite the new and continuing activities undertaken by State, U.S. representation in entry-level positions declined or displayed no trend in four of the five agencies we reviewed. U.S. representation in these positions declined at IAEA, UNHCR, and UNDP. The representation of Americans in entry-level positions at the Secretariat displayed no trend during the time period. At UNESCO, U.S. representation increased from 1.3 percent in 2003 to 2.7 percent in 2004, reflecting the time period when the United States rejoined the organization. We identified several options to target U.S. representation in professional positions, including the following: Maintaining a roster of qualified candidates. Prior to 2001, State had maintained a roster of qualified American candidates for professional and technical positions, but discontinued it. State officials told us that they have not maintained a professional roster, or the prescreening of candidates, despite the recent increase in staff resources, because maintaining such a roster had been resource intensive and because the office does not actively recruit for UN professional positions at the entry- and mid-levels. However, State acknowledged that utilizing new technologies, such as developing a Web-based roster, may reduce the time and cost of updating a roster. Other U.S. government and UN officials told us that some other countries maintained rosters of prescreened, qualified candidates for UN positions and that this practice was an effective strategy for promoting their nationals. In July 2007, State officials said that they began researching Internet-based options for compiling a roster of potential U.S. candidates. State estimated the cost to set up such a roster at about $100,000, but had not received funding for the roster. Expanding marketing and outreach activities. State had not taken steps that could further expand the audience for its outreach efforts. For example, while State had increased its coordination with other U.S. agencies on UN employment issues and distributed the biweekly vacancy announcements to agency contacts, U.S. agency officials that received these vacancy announcements told us that they lacked the authority to distribute the vacancies beyond their particular office or division. One official commented that State had not established the appropriate contacts to facilitate agency-wide distribution of UN vacancies, and that the limited dissemination had neutralized the impact of this effort. Several inter- agency task force participants also stated that no specific follow-up activities were discussed or planned between the annual meetings, and they could not point to any tangible results or outcomes resulting from the meetings. State also had not taken advantage of opportunities to expand the audience for its outreach activities. For example, State did not work with the Association of Professional Schools of International Affairs to reach potential candidates or advertise in some outlets that reach Peace Corps volunteers. In July 2007, State officials said they continue to outreach to new groups and attend new career fairs but have faced difficulty in identifying pools of candidates with the required skills and experience. Increasing and improving UN employment information on U.S. agency Web sites. State's UN vacancy list and its UN employment Web site had limitations. For example, the list of vacancies was not organized by occupation, or even organization, and readers had to search the entire list for openings in their areas of interest. Further, State's UN employment Web site had limited information on other UN employment programs and did not link to U.S. agencies that provide more specific information, such as the Department of Energy's Brookhaven National Laboratory Web site. In addition, the Web site provided limited information or tools to clarify common questions, such as those pertaining to compensation and benefits. For example, the Web site did not provide a means for applicants to obtain more specific information on their expected total compensation, including benefits and U.S. income tax. Since we issued our report, State has added a UN pamphlet on benefits and compensation to its Web site. In July 2007, State officials told us they are exploring ways to improve the information available on UN compensation and benefits. For our 2006 report, we reviewed 22 additional U.S. mission and U.S. agency Web sites, and they revealed varying, and in many cases limited, information on UN employment opportunities. Overall, 9 of the 22 U.S. mission and agency Web sites did not have links to UN employment opportunities. Nearly 60 percent of the missions and agencies provided some information or links to information on salaries and benefits. We updated our analysis in July 2007 and found the situation had worsened somewhat. Eleven of the 22 U.S. mission and agency Web sites did not have links to UN employment opportunities and only about 50 percent of these Web sites provided some information or links to information on salaries and benefits. Analyzing the costs and benefits of sponsoring JPOs. The U.S. government sponsored JPOs at two of the five UN agencies that we reviewed, but had not assessed the overall costs and benefits of supporting JPOs as a mechanism for increasing U.S. representation across UN agencies. Among the five agencies, State had funded a long-standing JPO program only at UNHCR, sponsoring an average of 15 JPOs per year between 2001 and 2005. The Department of Energy's Brookhaven National Laboratory also had supported two JPOs at IAEA since 2004. For four of the five agencies we reviewed, the percentage of individuals that were hired for regular positions upon completion of the JPO program ranged from 34 to 65 percent. In some cases, former JPOs were offered regular positions and did not accept them, or took positions in other UN organizations. The estimated annual cost for these positions to the sponsoring government ranged from $100,000 to $140,000 at the five UN agencies. State officials told us in July 2007 that they had not assessed the overall costs and benefits of supporting JPOs. Achieving equitable U.S. representation will be an increasingly difficult hurdle to overcome at UN organizations. Four of the five UN organizations we reviewed, all except UNESCO, will have to hire Americans in increasing numbers merely to maintain the current levels of U.S. representation. Failure to increase such hiring will lead the four UN organizations with geographic targets to fall below or stay below the minimum thresholds set for U.S. employment. As the lead department in charge of U.S. government efforts to promote equitable American representation at the UN, State will continue to face a number of barriers to increasing the employment of Americans at these organizations, most of which are outside the U.S. government's control. For example, lengthy hiring processes and mandatory rotation policies can deter qualified Americans from applying for or remaining in UN positions. Nonetheless, if increasing the number of U.S. citizens employed at UN organizations remains a high priority for State, it is important that the department facilitate a continuing supply of qualified applicants for UN professional positions at all levels. State focuses much of its recruiting efforts on senior and policy-making positions, and U.S. citizens hold over 10 percent of these positions at four of the five agencies we reviewed. While State has increased its resources and activities in recent years to support increased U.S. representation overall, additional actions to facilitate the employment of Americans in entry- and mid-level professional positions are needed to overcome declining U.S. employment in these positions and meet employment targets. Because equitable representation of Americans employed at UN organizations has been a high priority for U.S. interests, we recommended that the Secretary of State take the following actions: provide more consistent and comprehensive information about UN employment on the State and U.S. mission Web sites and work with U.S. agencies to expand the UN employment information on their Web sites. This could include identifying options for developing a benefits calculator that would enable applicants to better estimate their potential total compensation based on their individual circumstances; expand targeted recruiting and outreach to more strategically reach populations of Americans that may be qualified for and interested in entry- and mid-level UN positions; and conduct an evaluation of the costs, benefits, and trade-offs of: maintaining a roster of qualified candidates for professional and senior positions determined to be a high priority for U.S. interests; funding Junior Professional Officers, or other gratis personnel, where Americans are underrepresented or in danger of becoming underrepresented. In commenting on a draft of our 2006 report, State concurred with and agreed to implement all of our recommendations. In July 2007, State officials updated us on the actions they have taken in response to our 2006 report recommendations. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have. Should you have any questions about this testimony, please contact Thomas Melito, Director, at (202) 512-9601 or [email protected]. Other major contributors to this testimony were Cheryl Goodman, Assistant Director; Jeremy Latimer; Miriam Carroll; R.G. Steinman; Barbara Shields; Lyric Clark; Sarah Chankin-Gould; Joe Carney; and Debbie Chung. Martin De Alteriis, Bruce Kutnick, Anna Maria Ortiz, Mary Moutsos, Mark Speight, and George Taylor provided technical assistance. 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.

This testimony discusses ways to improve the representation of American professionals at United Nations (UN) organizations. The U.S. Congress continues to be concerned about the underrepresentation of American professionals employed by some UN organizations and that insufficient progress has been made to improve U.S. representation. The equitable representation of Americans at UN organizations is a priority to Congress in part because the United States is the largest financial contributor to most of these organizations. Moreover, according to the U.S. Department of State (State), Americans bring desirable skills, values, and experience that can have a significant impact on UN organizations' operational effectiveness. This testimony is based on a report that we issued on September 6, 2006. This testimoney will discuss (1) U.S. representation status and employment trends at five UN organizations, (2) factors affecting these organizations' ability to meet U.S. representation targets, and (3) State's efforts to improve U.S. representation and additional efforts that can be taken. The United States was underrepresented in three of the five UN agencies we reviewed, and increased hiring of U.S. citizens is needed to meet agreed-upon employment targets. Based on UN agencies' formal or informal targets for equitable geographic representation, U.S. citizens were underrepresented at IAEA, UNESCO, and UNHCR, and equitably represented at the UN Secretariat, though close to the lower end of its target range. UNDP had not established a target for U.S. representation, although U.S. citizens filled about 11 percent of the agency's professional positions. Given projected staff levels, retirements, and separations for 2006 to 2010, the Secretariat, IAEA, UNESCO, and UNHCR would need to hire more Americans than they have hired in recent years to meet their minimum targets for equitable U.S. representation in 2010. Summary While the UN agencies we reviewed faced some common barriers to recruiting and retaining professional staff, including Americans, they also faced distinct challenges. Most of these barriers and challenges were outside of the U.S. government's control. Six barriers common to UN agencies we reviewed included nontransparent human resource practices; a limited number of positions open to external candidates; lengthy hiring processes; comparatively low or unclear compensation; required staff mobility and rotation policies; and limited U.S. government support during Americans' efforts to obtain, or be promoted at, a UN job. These barriers combined with distinct agency-specific factors to impede recruitment and retention. For example, candidates serving in professional positions funded by their member governments were more likely to be hired by the Secretariat than those who took the Secretariat's entry-level exam; however, the United States had not funded such positions at the Secretariat. In addition, IAEA had difficulty attracting U.S. employees because the number of U.S. nuclear specialists was decreasing. State has increased its efforts to support the goal of achieving equitable U.S. representation at UN organizations, and additional options exist to target professional positions. State has targeted efforts to recruit U.S. candidates for senior and policymaking UN positions, and, although it was difficult to directly link State's efforts to UN hiring decisions, U.S. representation in senior and policymaking positions either improved or did not reflect a trend in each of the five UN agencies we reviewed. State also has undertaken several efforts to improve overall U.S. representation, including adding staff to its UN employment office and increasing coordination with other U.S. agencies that work with UN organizations. For positions below the senior level, State focused on "getting the word out" by, for example, disseminating information on UN vacancies through its Web site, attending career fairs and conferences, and other means. Despite these efforts, U.S. representation in entry-level positions declined or did not display a trend in four of the five UN agencies we reviewed. Additional options to target potential pools of candidates for professional positions include: maintaining a roster of qualified American candidates; expanding marketing and outreach activities; increasing UN employment information on U.S. agency Web sites; and conducting an assessment of the costs and benefits of sponsoring Junior Professional Officers (JPO), who are entry-level employees that are financially supported by their home government.

Internal control represents an organization's plans, methods, and procedures used to meet its missions, goals, and objectives and serves as the first line of defense in safeguarding assets and preventing and detecting errors, fraud, waste, abuse, and mismanagement. Internal control is to provide reasonable assurance that an organization's objectives are achieved through (1) effective and efficient operations, (2) reliable financial reporting, and (3) compliance with laws and regulations. Safeguarding of assets is a subset of all these objectives. The term "reasonable assurance" is important because no matter how well-designed and operated, internal control cannot provide absolute assurance that agency objectives will be met. Cost-benefit is an important concept to internal control considerations. Internal control is very broad and encompasses all controls within an organization, covering the entire mission and operations, not just financial operations. One need only to look at GAO's January 2005 High-Risk Series: An Update, in which we identify 25 areas of high risk for fraud, waste, abuse, and mismanagement, to see the breadth of internal control. While these areas are very diverse in nature, ranging from weapon systems acquisition to contract management to the enforcement of tax laws to the Medicare and Medicaid programs, all share the common denominator of having serious internal control weaknesses. In addition, as the Comptroller General testified before the House Committee on Government Reform last week, certain material weaknesses in internal control have contributed to our inability to provide an opinion on whether the consolidated financial statements of the U.S. government are fairly stated in conformity with U.S. generally accepted accounting principles. Internal control weaknesses are also at the heart of the over $45 billion in improper payments reported by the federal government in fiscal year 2004 across a range of programs. Further, internal control includes things such as screening of air passengers and baggage to help address the risks associated with terrorism, network firewalls to keep out computer hackers, and credit checks to determine the creditworthiness of potential borrowers. The Congress has long recognized the importance of internal control, beginning with the Budget and Accounting Procedures Act of 1950, over 50 years ago. The 1950 act placed primary responsibility for establishing and maintaining internal control squarely on the shoulders of agency management. As I will discuss later, the auditor can serve an important role by independently determining whether management's internal control is adequately designed and operating effectively and making recommendations to management to improve internal control where needed. However, the fundamental responsibility for establishing and maintaining effective internal control belongs to management. In 1982, when faced with a number of highly publicized internal control breakdowns, the Congress passed FMFIA with a goal of strengthening internal control and accounting systems. This two-page law, a copy of which is in appendix I, defined internal control broadly to include program, operational, and administrative controls as well as accounting and financial management, and reaffirmed that the primary responsibility for adequate systems of internal control rests with management. Under FMFIA, agency heads are required to establish a continuous process for assessment and improvement of their agency's internal control and to publicly report on the status of their efforts by signing annual statements of assurance as to whether internal control is designed adequately and operating effectively. Where there are material weaknesses, the agency heads are to disclose the nature of the problems and the status of corrective actions in an annual assurance statement. Today, agencies are generally meeting their FMFIA reporting requirement by including this information in their Performance and Accountability reports, which also include their audited financial statements. The act also required that the Comptroller General establish internal control standards and that OMB issue guidelines for agencies to follow in assessing their internal control against the Comptroller General's standards. OMB first issued Circular A-123, then entitled Internal Control Systems, in October 1981, in anticipation of FMFIA becoming law. In December 1982, following FMFIA enactment, OMB issued the assessment guidelines required by the act. OMB's Guidelines for the Evaluation and Improvement of and Reporting on Internal Control Systems in the Federal Government detailed a seven-step internal control assessment process targeted to an agency's mission and organizational structure. The Comptroller General issued Standards for Internal Control in the Federal Government in 1983. These standards apply equally to financial and nonfinancial controls. In August 1984, OMB issued a question and answer supplement to its assessment guidelines, intended to clarify the applicability of the Comptroller General's internal control standards and to assist agencies in assessing risk and correcting weaknesses. The 1990s brought additional legislation that reinforced the significance of effective internal control. The Chief Financial Officers (CFO) Act, which among other things provided for major transformation of financial management, including the establishment of CFOs, called for financial management systems to comply with the Comptroller General's internal control standards. The Government Performance and Results Act of 1993 required agencies to clarify missions, set strategic and performance goals, and measure performance toward those goals. Internal control plays a significant role in helping managers achieve their goals. The Government Management Reform Act of 1994 expanded the CFO Act by establishing requirements for the preparation and audit of agencywide financial statements and consolidated financial statements for the federal government as a whole. The 1996 Federal Financial Management Improvement Act identified internal control as an integral part of improving financial management systems. These are just a few of the legislative initiatives over the years aimed at improving government effectiveness and accountability. The Congress has been consistent over the years in demanding that agencies have effective internal control and accounting systems. From the outset, agencies faced major challenges in implementing FMFIA. The first annual assessment reports were due by December 31, 1983. This time frame gave agencies a little over a year to develop and implement an agencywide internal control assessment and reporting process to provide the information needed to support the first agency head assurance statement to the President and the Congress. OMB assembled an interagency task force called the Financial Integrity Task Force and visited all federal departments and the 10 largest agencies to foster implementation of its internal control assessment guidelines. Starting in 1983, GAO monitored and reported on FMFIA implementation efforts across the government in a series of four reports from 1984 through 1989 as well as in numerous reports targeting specific agencies and programs. In our first governmentwide report, issued in 1984, we noted that although early efforts were primarily learning experiences, agencies had demonstrated a commitment to implementing FMFIA with a good start at assessing their internal control and accounting systems. We found agencies had established systematic processes to assess, improve, and report on their internal control and accounting systems, and we observed that federal managers had become more aware of the need for good internal control and improved accounting systems. OMB played an active role, providing guidance and central direction to the program. Though the nature and extent of participation varied, most inspectors general also played a major role in the first year. Our 1984 report outlined key steps to improve implementation, including adequate training and guidance, the importance of a positive attitude and a mind-set to hold managers accountable for results, and the need for more internal control testing. Our second governmentwide report in 1985 noted that FMFIA had provided a significant impetus to the government's attempts to improve internal control and accounting systems by focusing attention on the problems. Agencies continued to identify material internal control and accounting system weaknesses with a number of major improvement initiatives under way. We identified needed improvements to FMFIA implementation similar to those in our 1984 report, but also identified the need to reduce the paperwork associated with agency assessment efforts. In particular, vulnerability assessments aimed at identifying the areas of highest risk in order to prioritize more detailed internal control reviews were widely criticized by agencies as paperwork exercises. It was widely thought that while agencies had devoted considerable resources assessing the vulnerability of thousands of operations and functions, these efforts did not provide management with a whole lot of reliable and useful information. Our third governmentwide report was issued in 1987. We noted that an important step in strengthening internal control is verifying that planned corrective actions have been implemented as envisioned and that the completed corrective actions have been effective. We found instances where (1) corrective measures taken had not completely corrected the identified weaknesses and (2) actions to resolve weaknesses had been delayed, in some cases for years. Our fourth governmentwide report, issued in 1989 for which the title, Ineffective Internal Controls Result in Ineffective Federal Programs and Billion in Losses, is still appropriate in today's environment, concluded that while internal control was improving, the efforts were clearly not producing the results intended. We noted continuing widespread internal control and accounting system problems and the need for greater top-level leadership. We reported that what started off as a well-intended program to foster the continual assessment and improvement of internal control unfortunately had become mired in extensive process and paperwork. Significant attention was focused on creating a paper trail to prove that agencies had adhered to the OMB assessment process and on crafting voluminous annual reports that could exceed several hundred pages. It seemed that the assessment and reporting processes had, at least to some, become the endgame. At the same time, there were some important accomplishments coming from FMFIA. Thousands of problems were identified and fixed along the way, especially at the lower levels where internal control assessments were performed and managers could take focused actions to fix relatively simple problems. Unfortunately, many of the more serious and complex internal control and accounting system weaknesses remained largely unchanged and agencies were drowning in paper. In March 1989, GAO, along with representatives of seven agencies, OMB, and the President's Council on Integrity and Efficiency (PCIE), reviewed aspects of FMFIA implementation as part of a subcommittee of the Internal Control Interagency Coordination Council. The subcommittee's report highlighted the following seven issues as requiring action: Link the internal control assessment and reporting process with the budget to assist the Congress and OMB in analyzing the impact of corrective actions on agency resources. Emphasize the early warning capabilities of the internal control process to ensure timely actions to correct weaknesses identified. Consolidate the review processes of various OMB circulars to eliminate overlapping assessment requirements, improve staff utilization, and reduce the paper being generated. Provide for and promote senior management involvement in the internal control process to ensure more effective and lasting oversight and accountability for FMFIA activities. Highlight the most critical internal control weaknesses in the FMFIA assurance statements to increase the usefulness of the report to the President and the Congress. Report on agency processes to validate actions taken to correct material weaknesses, ascertain that desired results were achieved, and reduce the likelihood of repeated occurrences of the same weaknesses. Improve management awareness and understanding of FMFIA to provide for more consistent program manager interpretation and acceptance of the act. Too much process and paper continued to be a problem, and in 1995 OMB made a major revision to Circular A-123 that relaxed the assessment and reporting requirements. The 1995 revision integrated many policy issuances on internal control into a single document and provided a framework for integrating internal control assessments with other reviews being performed by agency managers, auditors, and evaluators. In addition, it gave agencies the discretion to determine which tools to use in arriving at the annual assurance statement to the President and the Congress, with the stated aim of achieving a streamlined management control program that incorporated the then administration's reinvention principles. And this brings us to the present. The recent December 2004 update to Circular A-123 reflects policy recommendations developed by a joint committee of representatives from the CFO Council (CFOC) and PCIE. The changes are intended to strengthen the requirements for conducting management's assessment of internal control over financial reporting. The December 2004 revision to the Circular also emphasizes the need for agencies to integrate and coordinate internal control assessments with other internal control-related activities. We support OMB's efforts to revitalize FMFIA through the December 2004 revisions to Circular A-123. These revisions recognize that effective internal control is critical to improving federal agencies' effectiveness and accountability and to achieving the goals that the Congress established in 1950 and reaffirmed in 1982. The Circular correctly recognizes that instead of considering internal control an isolated management tool, agencies should integrate their efforts to meet the requirements of FMFIA with other efforts to improve effectiveness and accountability. Internal control should be an integral part of the entire cycle of planning, budgeting, management, accounting, and auditing. It should support the effectiveness and the integrity of every step of the process and provide continual feedback to management. In particular, we support the principles-based approach in the revised Circular for establishing and reporting on internal control that should increase accountability. This type of approach provides a floor for expected behavior, rather than a ceiling, and by its nature, greater judgment on the part of those applying these principles will be necessary. Accordingly, clear articulation of objectives, the criteria for measuring whether the objectives have been successfully achieved, and the rigor with which these criteria are applied will be critical. Providing agencies with supplemental guidance and implementation tools is particularly important, in light of the varying levels of internal control maturity that exist across government as well as the expected divergence in implementation that is typically found when a range of entities with varying capabilities apply a principles-based approach. I would now like to highlight what I think will be the six issues critical to effectively implementing the changes to Circular A-123 based on the lessons learned over the past 20 years under FMFIA. First, OMB indicated that it plans to work with the CFOC and PCIE to provide further implementation guidance. For the reasons I just highlighted, we support the development of supplemental guidance and implementation tools, which will be particularly important to help ensure that agency efforts are properly focused and meaningful. These materials should demand an appropriate rigor to whatever assessment and reporting process management adopts as well as set the bar at a level to ensure that the objectives of FMFIA are being met in substance, with a caution to guard against excessive focus on process and paperwork. Supplemental guidance and implementation tools should be aimed at helping agency management achieve the bottom-line goal of getting results from effective internal control. Second, while the revised Circular A-123 emphasizes internal control over financial reporting, it will be important that proper attention also be paid to the other two internal control objectives covered by FMFIA and discussed in the Circular, which are (1) achieving effective and efficient operations and (2) complying with laws and regulations. Also, as I mentioned earlier, safeguarding assets is a subset of all three objectives. Third, managers throughout an agency and at all levels will need to provide strong support for internal control. As I discussed earlier, the responsibility for internal control does not reside solely with the CFO. A case in point is internal control over improper payments, which is the responsibility of a range of agency officials outside of the CFO operation. Also, with respect to financial reporting, which the revised OMB Circular A- 123 specifically refers to as a priority area, the CFO generally does not control all of the needed information and often depends on other business systems for much of the financial data. For example, at the Department of Defense (DOD), about 80 percent of the information needed to prepare annual financial statements comes from other business systems, such as logistics, procurement, and personnel information systems, that are not under the CFO. Fourth, agencies must strike an appropriate balance between costs and benefits, while at the same time achieving an appropriate level of internal control. Internal controls need to be designed and implemented only after properly identifying and analyzing the risks associated with achieving control objectives. Agencies need to have the right controls, in the right place, at the right time, with an appropriate balance between related costs and benefits. In this regard, the revisions to Circular A-123 outline the concept of risk assessment for internal control over financial reporting by laying out an assessment approach at the process, transaction, and application levels. A similar approach needs to be applied as well to the other business areas and the range of programs and operations as envisioned in FMFIA. Fifth, management testing of controls in operation to determine their soundness and whether they are being adhered to and to assist in the formulation of corrective actions where problems arise will be essential. This is another area covered by the revised Circular A-123. Testing can show whether internal controls are in place and operating effectively to minimize the risk of fraud, waste, abuse, and mismanagement and whether accounting systems are producing accurate, timely, and useful information. Through adequate testing, agency managers should know what is working well and what is not. Management will then be able to focus on corrective actions as needed and on streamlining controls if testing shows that existing controls are not cost-effective. Sixth, personal accountability for results will be essential, starting with top agency management and cascading down through the organization. Regular oversight hearings, such as this one, will be critical to keeping agencies accountable and expressing the continual interest and expectations of the Congress. Independent verification and validation through the audit process, which I will talk about next, is another means of providing additional accountability. There should be clear rewards (incentives) for doing the right things and consequences (disincentives) for doing the wrong things. If a serious problem occurs because of a breakdown in internal control and it is found that management did not do its part to establish a proper internal control environment, or did not act expeditiously to fix a known problem, those responsible need to be held accountable and face the consequences of inaction. The revised Circular A-123 encourages the involvement of senior management councils in internal control assessment and monitoring, which can be an excellent means of establishing accountability and ownership for the program. In initiating the revisions to Circular A-123, OMB cited the new internal control requirements for publicly traded companies that are contained in the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley was born out of the corporate accountability failures of the past several years. Sarbanes-Oxley is similar in concept to the long-standing requirements for federal agencies in FMFIA and Circular A-123. Under Sarbanes-Oxley, management of a publicly-traded company is required to (1) annually assess the internal control over financial reporting at the company and (2) issue an annual statement on the effectiveness of internal control over financial reporting. The company's auditors are then required to attest to and report on management's assessment as to the effectiveness of its internal control. This is where Sarbanes-Oxley differs from FMFIA. FMFIA does not call for an auditor opinion on management's assessment of internal control over financial reporting nor does it call for an auditor opinion on the effectiveness of internal control. Likewise, Circular A-123 does not adopt these requirements, although the Circular does recognize that some agencies are voluntarily getting an audit opinion on internal control over financial reporting. Our position is that an auditor's opinion on internal control over financial reporting is similarly important in the government environment. We view auditor opinions on internal control over financial reporting as an important component of monitoring the effectiveness of an entity's risk management and accountability systems. In practicing what we preach, we not only issue an opinion on internal control over financial reporting at the federal entities where we perform the financial statement audit, including the consolidated financial statements of the U.S. government, but we also obtain an auditor's opinion on internal control on our own annual financial statements. On their own initiative, the Social Security Administration (SSA) and Nuclear Regulatory Commission also received opinions on internal control over financial reporting for fiscal year 2004 from their respective independent auditors. In considering when to require an auditor opinion on internal control, the following four questions can be used to frame the issue. 1. Is this a major federal entity, such as the 24 departments and agencies covered by the CFO Act? There would be different consideration for small simple entities versus large complex entities. 2. What is the maturity level of internal control over financial reporting? 3. Is the agency currently in a position to attest to the effectiveness of internal control over financial reporting and subject that conclusion to independent audit? 4. What are the benefits and costs of obtaining an opinion? What underlies these questions is whether management has done its job of assessing its internal control and has a firm basis for its assertion statement before the auditor is tasked with performing work to support an opinion on internal control over financial reporting. As I have stressed throughout my testimony today, internal control is a fundamental responsibility of management, including ongoing oversight. The auditor's role, similar to its opinion on the financial statements issued by management, would be to state whether the auditor agrees with management's assertion that its internal control is adequate so that the reader has an independent view. As an example, consider DOD which has many known material internal control weaknesses. Of the 25 areas on GAO's high-risk list, 14 relate to DOD, including DOD financial management. Given that DOD management is clearly not in a position to state that the department has effective internal control over financial reporting, there would be no need for the auditor to do additional audit work to render an opinion that internal control was not effective. On the other hand, as I just mentioned for fiscal year 2004, SSA management reported that it does not have any material internal control weaknesses over financial reporting. The auditor's unqualified opinion over financial reporting at SSA provided an independent assessment of management's assertion about internal control, which we believe by its nature adds value and creditability similar to the auditor's opinion on the financial statements. As you know, Mr. Chairman, recent legislation making the Department of Homeland Security (DHS) subject to the provisions of the CFO Act, which this Subcommittee spearheaded, requires DHS management to provide an assertion on the effectiveness of internal control over financial reporting for fiscal year 2005 and to obtain an auditor's opinion on its internal control over financial reporting for fiscal year 2006. In addition, the CFO Council and PCIE are required by the DHS legislation to jointly study the potential costs and benefits of requiring CFO Act agencies to obtain audit opinions on their internal control over financial reporting, and GAO is to perform an analysis of the information provided in the report and provide any findings to the House Committee on Government Reform and the Senate Committee on Homeland Security and Governmental Affairs. We believe that the study and related analysis are important steps in resolving the issues associated with the current reporting on the adequacy of internal control. In addition, this issue is being discussed by the Principals of the Joint Financial Management Improvement Program--the Comptroller General, the Director of OMB, the Secretary of the Treasury, and the Director of the Office of Personnel Management. In closing, as the Congress and the American public have increased demands for accountability, the federal government must respond by having a high standard of accountability for its programs and activities. Areas vulnerable to fraud, waste, abuse, and mismanagement must be continually evaluated to ensure that scarce resources reach their intended beneficiaries; are used properly; and are not diverted for inappropriate, illegal, inefficient, or ineffective purposes. I want to emphasize our commitment to continuing our work with the Congress, the administration, the federal agencies, and the audit community to continually improve the quality of internal control governmentwide, and to help ensure that action is taken to address the internal control vulnerabilities that exist today. To that end, as I said earlier, the leadership of this Subcommittee will continue to be an important catalyst for change, and I again thank you for the opportunity to participate in this hearing. 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 information about this statement, please contact Jeffrey C. Steinhoff at (202) 512-2600 or McCoy Williams, Director, Financial Management and Assurance, at (202) 512-6906 or at [email protected]. Individuals who made key contributions to this testimony include Mary Arnold Mohiyuddin, Abe Dymond, and Paul Caban. Numerous other individuals made contributions to the GAO reports cited in this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Internal control is at the heart of accountability for our nation's resources and how effectively government uses them. This testimony outlines the importance of internal control, summarizes the Congress's long-standing interest in internal control and the related statutory framework, discusses GAO's experiences and lessons learned from agency assessments since the early 1980s, and provides GAO's views on the Office of Management and Budget's (OMB) recent revisions to its Circular A- 123. GAO highlights six issues important to successful implementation of the revised Circular, specifically, the need for supplemental guidance and implementation tools; vigilance over the broader range of controls covering program objectives; strong support from managers throughout the agency, and at all levels; risk-based assessments and an appropriate balance between the costs and benefits of controls; management testing of controls in operation to assess if they are designed adequately and operating effectively; and management accountability for control breakdowns. Finally, GAO discusses its views on the importance of auditor opinions on internal control over financial reporting. Internal control represents an organization's plans, methods, and procedures used to meet its missions, goals, and objectives and serves as the first line of defense in safeguarding assets and preventing and detecting errors, fraud, waste, abuse, and mismanagement. Internal control provides reasonable assurance that an organizations' objectives are achieved through (1) effective and efficient operations, (2) reliable financial reporting, and (3) compliance with laws and regulations. The Congress has long recognized the importance of internal control, beginning with the Budget and Accounting Procedures Act of 1950, which placed primary responsibility for establishing and maintaining internal control squarely on the shoulders of management. In 1982, when faced with a number of highly publicized internal control breakdowns, the Congress passed the Federal Managers' Financial Integrity Act (FMFIA). FMFIA required agency heads to establish a continuous process for assessment and improvement of their agency's internal control and to annually report on the status of their efforts. In addition the act required the Comptroller General to issue internal control standards and OMB to issue guidelines for agencies to follow in assessing their internal controls. GAO monitored and reported on FMFIA implementation efforts across the government in a series of four reports from 1984 through 1989 as well as in numerous reports targeting specific agencies and programs. With each report, GAO noted the efforts under way, but also that more needed to be done. In 1989, GAO concluded that while internal control was improving, the efforts were clearly not producing the results intended. The assessment and reporting process itself appeared to have become the endgame, and many serious internal control and accounting systems weaknesses remain unresolved as evidenced by GAO's high risk report which highlights serious long-standing internal control problems. In 1995, OMB made a major revision to its guidance that provided a framework for integrating internal control assessments with other work performed and relaxed the assessment and reporting requirements, giving the agencies discretion to determine the tools to use in arriving at their annual FMFIA assurance statements. OMB's recent 2004 revisions to the internal control guidance are intended to strengthen the requirements for conducting management's assessment of control over financial reporting. GAO supports OMB's recent changes to Circular A-123 and in particular the principles-based approach for establishing and reporting on internal control. GAO also noted six specific issues that are important to successful implementation of OMB's revised guidance and discusses its views on the importance of auditor opinions on internal control over financial reporting.

In 1975, a new federal law, now called IDEA, established a federal commitment to identify children with disabilities and provide special education and related services such as speech and language services, psychological services, physical and occupational therapy, and transportation. The cornerstone principle of IDEA is the right of children with disabilities to have a free appropriate public education. Under the law, school districts must provide special education and related services without charge to parents and the services must meet the standards of the SEA. The services for and placement of each child must be based on the child's unique needs, not on his/her disability. IDEA also stipulates that children with disabilities are to be educated in the "least restrictive environment," that is, the law requires that children with disabilities are educated with children who are nondisabled to the maximum extent appropriate. About 13 percent of students in federally supported programs, or about 6.5 million children, receive special education services under IDEA. These students have a wide variety of needs that range from mild to severe. Children with speech or language impairments, specific learning disabilities, emotional disturbance, hearing impairments (including deafness), visual impairments (including blindness), orthopedic impairments, autism, traumatic brain injury, other health impairments, or mental retardation, and who need special education and related services are eligible under IDEA. School districts are responsible for identifying students who may have a disability and evaluating them in all areas related to the suspected disability. The evaluation process is intended to provide information needed to determine if the student is eligible as defined under IDEA. The IEP team decides on, among other things, special education and related services that will be provided for the child and on the frequency, location, and duration of the services to be provided. The law requires two steps for an IEP: (1) a meeting by the IEP team to agree about an educational program for a child with a disability and (2) preparing a written record of the decisions reached at the meeting. Development of the IEP is designed to facilitate communication between parents and school personnel and provide an opportunity for resolving any differences concerning the special education needs of a child. The IEP also documents a commitment of resources for providing special education and related services, and schools are responsible for ensuring that the child's IEP is carried out as it was written. Disagreements over eligibility determinations about a child and over an IEP can be contentious and occasionally result in disputes. Many disagreements between families and local schools are resolved informally, during initial or follow-up IEP meetings at the local schools, or in other venues such as conferences with principals or other administrators. On occasion, however, parties have been unable to resolve their differences. In these instances, under IDEA, procedural safeguards afford parents recourse when they disagree with school district decisions about their children. Disagreements can be formally resolved through state complaint procedures, through a due process hearing, or through mediation. A state complaint is initiated through a signed written complaint that includes a statement that a public agency has violated a requirement of IDEA and the facts on which the statement is based. If the complaint is against a school district, the SEA typically informs the school district of the complaint by formal notification, requests documentation from the local education officials, and, when necessary, conducts an on-site investigation. The SEA must issue a written decision to the complainant that addresses each allegation in the complaint and contains findings of fact and conclusions, and the reason for the SEA's final decision. If violations are found, the decision specifies the corrective actions to achieve compliance. A due process hearing is an administrative agency process initiated by a written request by one of the aggrieved parties to either the SEA or the LEA, depending on the state's process. An impartial hearing officer listens to witnesses, examines evidence, and issues a written decision. In the decision, the hearing officer determines whether violations occurred and issues remedies. Mediation is a voluntary process whereby parents and school districts agree to meet with an impartial third party in an informal setting to reach a resolution that is mutually agreeable. Agreements are mutually designed, agreed to, and implemented by the parties. While the processes used for resolving disputes vary, other important key differences exist among these three mechanisms as well. Table 1 identifies some of the key differences in formal dispute resolution mechanisms offered by SEAs. Parents and other parties can generally choose which mechanism to use to resolve their dispute. Parents have the right to request a due process hearing at any time over any issue related to the identification, evaluation, or educational placement or the provision of a free appropriate public education to the student. They may also file both due process requests and written state complaints simultaneously, but the SEA must set aside any part of the state complaint that is addressed in the due process hearing until the conclusion of the hearing. Any issue in the complaint not addressed in the due process hearing must be resolved within the time frames and procedures consistent with the state complaint requirements. Finally, although either parents or school districts can file a request for a due process hearing, this mechanism is potentially very costly to both parties, in terms of financial expenses and relationships. While school districts and parents are responsible for their own attorney's fees and other associated expenses, the hearing officer is paid for by the state. According to the National Association of State Directors of Special Education (NASDSE), due process systems are structured similarly across the states with one major distinction--about two-thirds of the states use a one-tier system in which the hearing is held only at the state level. About one-third of the states use a two-tier system in which a hearing occurs at a local level, usually the school or district with the right to appeal to a state- level hearing officer or panel. Even though the 1997 amendments to IDEA required states to make mediation available as a voluntary alternative to parents or school districts when they request a due process hearing, most states had mediation systems in place much earlier. In September 1994, NASDSE reported that Connecticut and Massachusetts were the first states (in 1975) to implement formal mediation systems. By 1985, 15 more states had implemented mediation, and over the next decade 22 additional states had mediation systems. Education's Office of Special Education Programs (OSEP) is responsible for overall administration and allocation of federal funds for states' implementation of IDEA programs. In addition, OSEP is charged with assessing the impact and effectiveness of state and local efforts to provide a free appropriate public education to children and youth with disabilities. OSEP has contracted for two major research studies that focus, in part, on dispute resolution activities. One of these, conducted by Abt Associates, the Study of State and Local Implementation and Impact of the Individuals with Disabilities Education Act (SLIIDEA) will include nationwide data over a 5-year period (2000-04); a report on selected findings was published in January 2003. The second study, SEEP, is being conducted by the American Institutes for Research. In May 2003, this project reported on procedural safeguards and related expenditures for dispute resolution from survey data of a nationwide sample of LEAs. Since states are not required to collect or report data on dispute resolution activity, these studies, along with two studies by NASDSE, provide the most recently available information on the prevalence of formal dispute activity. However, each of these studies has limitations, which are discussed in appendix I. Under IDEA, Education also provides funds to grantees for parent centers. The parent training and information centers and community parent resource centers provide a variety of services, including helping families obtain appropriate education and services for their children with disabilities, training and information for parents and professionals, connecting children with disabilities to community resources that can address their needs, and resolving problems between families and schools or other agencies. Each state has at least 1 parent center and, currently, there are 105 parent centers in the United States. According to the Technical Assistance Alliance for Parent Centers, the national coordinating office, parent centers provided assistance to nearly 1 million parents and professionals during the 2001-02 school year. Formal disputes between schools and families in the 4 states we visited ranged from identifying a student's disabilities to developing and implementing the IEP and the student's placement. Officials in these states told us that disputes frequently arose between families and school districts over (1) identifications, that is, whether children were eligible for IDEA services and how their eligibility determinations were made; (2) the types of special education and related services, if any, they needed; (3) whether schools carried out the education programs as written; and (4) whether schools could provide an appropriate educational environment for certain students. SEA and LEA officials told us that schools and parents occasionally disagreed about whether or not a child needed special education services. On the one hand, a school may want to evaluate a child because it believes he or she may have a disability and, in this case, the school must evaluate the child at no cost to the family. A parent may also ask for the child to be evaluated, but if the school does not think the child has a disability it may refuse to evaluate him or her. Parents who disagree must take appropriate steps to challenge the school's decision. Conversely, for a variety of reasons, parents may not want the child to receive special education services. For example, the family may disagree with the school's decision about whether or not the child has a disability, or the parent may be concerned about the possibility of negative perceptions about special education identification. Officials in five of the eight school districts we visited mentioned that disputes occurred because parents wanted or did not want their children identified for special education. Another issue that existed in some school districts was over the availability of related services, such as speech and language services and occupational therapy. Disputes sometimes occurred as a result of problems in providing related services, including the types, amounts, methods, or the failure to provide services. Speech and language services, for example, were mentioned as a recurring problem in some areas because of the shortage of specialists available to provide these services. Officials in six of the eight school districts we visited identified having disagreements with parents regarding the provision of speech and language services. SEA and LEA officials also identified a number of issues related to the IEP that caused disagreements between parents and school districts. For example, we were told that disagreements had occurred because parents believed the school had not implemented the IEP as agreed upon. Moreover, parents and schools also disagreed about whether the school had chosen the appropriate instructional methods for a child. For example, parents may want a child with autism to receive an intensive behavioral interventions program that consists of one-on-one instruction with a trained therapist. Because this type of instruction could be very costly to the LEA, school officials told us they would like the flexibility to consider a less expensive but suitable alternative approach as part of the student's IEP. Officials in five of the eight school districts we visited mentioned that disputes with parents resulted from the instructional methods chosen or preferred by the school, particularly for students with autism. We also found that school officials and parents sometimes disagreed about whether a placement was the appropriate and least restrictive environment for a child. For instance, some educators have contended that a child should attend classes primarily for students with disabilities, while parents believed their children would perform better in a regular classroom. Some disputes about placement also resulted from the parents' desire to have their children taught outside the public school system. Because serving a child outside the school district can be very expensive, school districts preferred, whenever feasible, to keep a child within the district. Officials in six local school districts we visited mentioned that disputes had occurred over decisions about a child's educational setting. While national data on disputes are limited and inexact, the reported available information indicates that formal dispute resolution activity, as measured by the number of due process hearings, state complaints, and mediations, was generally low. According to a 2002 NASDSE report, the nationwide number of due process hearings held--the most expensive form of the three dispute resolution mechanisms--was generally low for a 5-year period that ended in 2000, with most hearings occurring in a few locations. Finally, based on national data from three studies, the rates of mediations and state complaints were also low, but somewhat higher than due process hearings. While the total number of due process hearings held nationally was low over a 5-year period from 1996-2000, most hearings were concentrated in a few locations. In April 2002, NASDSE reported that, over the 5-year period, requests for hearings steadily increased from 7,532 to 11,068. Because requests for due process hearings are frequently withdrawn or the parties resolve their issues through other means, most requests do not lead to formal hearings. NASDSE reported that the number of due process hearings held was low and had decreased from 3,555 to 3,020.' We calculated that due process hearings occurred at a low rate of about 5 per 10,000 students with disabilities in 2000. (See fig. 1 for the number of hearings requested and held nationwide from 1996 through 2000.) However, while the number of due process hearings held nationwide decreased over the 5-year period, much of the decline occurred in New York, which experienced a substantial reduction in due process hearings held. Over the 5-year period, the number of due process hearings held in New York declined from 1,600 to 1,052. In addition, according to the NASDSE study, most due process hearings were held in a few locations. Nearly 80 percent of all hearings were held in 5 states--California, Maryland, New Jersey, New York, and Pennsylvania--and the District of Columbia. The rates of due process hearings per 10,000 students in these states ranged from 3 in California to 24 in New York; in the District of Columbia the rate was 336 due process hearings per 10,000. See figure 2 for the total numbers of due process hearings held in the 5 states and the District of Columbia compared with the rest of the nation over a 5-year period. Using data from its nationwide sample survey of the 1998-99 school year, SEEP reported that the prevalence of dispute activity among school districts varied by certain demographic characteristics. For example, the percentage of urban school districts that reported having at least 1 due process case--request or hearing--for the year was significantly higher than either suburban or rural districts (an estimated 50 percent, 20 percent, and 9 percent, respectively). Similarly, large school districts reported significantly more due process cases, compared with smaller districts. However, when the study made adjustments for the number of students served by examining the rate of due process cases per 10,000 special education students, no statistically significant differences were found in rates for either urbanicity or size. SEEP also analyzed due process data by district income levels and found a significant difference-- an estimated 52 percent of the highest income school districts reported at least 1 due process case, 13 times the percentage of lowest income districts (4 percent). According to limited national data available from three studies, the rates of mediations and complaints per 10,000 students with disabilities were generally low, but somewhat higher than the rates of due process hearings. SLIIDEA reported that in the 1999-2000 school year more formal disputes between parents and schools were resolved through mediation than due process hearings. Based on survey results from all 50 states and the District of Columbia, this study reported that the median number of mediations for states was 4 for every 10,000 students with disabilities. The study also reported that 87 percent of the school districts surveyed said they did not have any mediation cases in the 1999-2000 school year. Two other studies also reported low numbers nationally of mediation cases and complaints. In May 2003, the SEEP study reported that 4,266 mediation cases were held during the 1998-99 school year, from which we calculated a rate of about 7 per 10,000 students. In February 2003, a NASDSE study reported that 6,094 complaints were filed nationwide during the 2000 school year or 2000 calendar year. Similar results were found in the SEEP study, which reported that 6,360 state complaints were filed during the 1998-99 school year. Given that roughly 6 million students with disabilities were served in these school years, we calculated that about 10 complaints were filed for every 10,000 students with disabilities. SEEP's survey also revealed that an estimated 62 percent of districts reported having no cases involving complaints, due process hearings requested or held, or mediations during the school year. (See app. II for information on the levels of formal dispute resolution activity in the urban and rural school districts we visited.) In the 4 states in our review, and in Iowa, where we examined alternative dispute resolution strategies, officials told us they emphasized mediation in resolving disputes, and some locations had developed additional strategies for early resolution of disagreements between families and school districts. Officials saw mediation as a major resource for achieving agreements, strengthening relationships, resolving disputes more quickly, and reducing cost. The states we visited had implemented formal mediation by 1990 and, in varying degrees, exceeded minimum federal requirements by not tying it to a request for a due process hearing. In addition, 3 states we visited had established additional early dispute resolution strategies that were less formal and less adversarial. All 4 of the states we visited encouraged mediation as the mechanism for resolving disputes between schools and parents. All 4 states reported that parents and school districts could request mediation at anytime for any issue related to the identification, IEP development and implementation, placement, or the free appropriate public education of a student; but the degree to which it was specifically offered and used varied. In 2 of the states we visited, California and Massachusetts, mediation was used more frequently in dispute resolution in fiscal year 2002 than complaints and due process hearings combined. Mediation was used less often than state complaint procedures in Ohio and Texas, but both states had taken steps to expand their mediation programs. Table 2 provides the numbers of mediation cases over a 3-year period compared with complaints and due process hearings in the 4 states we visited. While mediation was used less often in Ohio and Texas, SEA officials in both states expected the numbers of mediations to increase with recent changes in their mediation systems. In Ohio, a state education official told us and advocates confirmed that concerns about the objectivity of the mediation process in that state had made parents reluctant to use the state mediation system. As of June 2003, the Ohio SEA had contracted with four mediators and was in the process of adding four more across the state, and the state also expected to provide on-going evaluation of the mediation process. In Texas, state officials told us they expected an increased reliance on mediation because the SEA had expanded the use of voluntary mediation as a means to resolve disputes quickly by offering it to parties involved in state complaints, although states are not required to offer mediation in conjunction with state complaints. Officials in all 4 states we visited said mediation offered benefits to all parties. Three of the 4 states reported that a high percentage of mediations resulted in agreements. The University of the Pacific reported that 93 percent of mediations in California resulted in agreements between families and schools during the 2001-02 fiscal year. Similarly, Massachusetts and Ohio reported success rates of 85 percent and 89 percent, respectively, for the same time period. Further, state education officials told us that mediation helped to foster communications between schools and parents and strengthen relationships. They also told us that mediations generally resolved disputes more quickly than state complaints or due process hearings. According to SEA officials in Ohio, for example, most mediations occurred within 2 weeks of the request. Texas state education officials also reported that mediations typically took place within 30 days upon receipt of the complaint. On the other hand, an administrator and some advocates told us that mediation agreements were not always implemented or enforced. However, no data were available on the extent to which this occurred. Additionally, 3 of the states reported that mediations were less costly than due process hearings. The Texas SEA estimated that over the past decade it had saved about $50 million in attorney fees and related due process hearing expenses by using mediation rather than due process hearings. The state also reported that it spent an average of $1,000 for a mediator's services compared to $9,000 for a hearing officer's services. Similarly, the University of the Pacific reported in January 2003 that in California, the average cost to the state for mediation was $1,800, while the average cost of a due process hearing was $18,600. These data are consistent with SEEP's recent nationwide findings that of 4,312 districts reporting on cost- effectiveness, 96.3 percent of the respondents perceived mediation to be more cost-effective than due process hearings. All 4 of the states we visited had created additional opportunities for offering mediation as a means to resolve disputes. In Texas and Ohio, affected parties in a state complaint were immediately offered mediation to resolve their dispute. In Massachusetts, it was offered when parents and educators disagreed over a student's proposed IEP and failed to reach consensus. These cases were automatically referred to the Bureau of Special Education Appeals for resolution, where mediation and due process hearings were offered. In fiscal year 2002, Massachusetts state officials estimated that approximately 10 percent of these IEP-related disputes resulted in mediation; most of the remaining cases were resolved less formally. In California, parties can request "mediation only" without filing a request for due process hearings. In this option, California state law specifically excludes attorneys--for parents or school districts--from participating. Although state and local education officials and advocates viewed the option as a viable and less adversarial alternative for dispute resolution, it was used in California 208 times, compared with 1,774 mediations tied to due process hearings in fiscal year 2002. States and localities we visited also used a variety of additional dispute resolution strategies that showed potential to help resolve disputes early, but limited data were available to assess their effectiveness. Iowa developed and promoted several strategies as part of a continuum of options for resolving disputes between parents and schools. One of these options, the Parent-Educator Connection, was created to resolve differences between parents and schools at the earliest point. This effort was designed to provide each of the 15 area education agencies with staff who were trained in conflict resolution. These parent-educator coordinators attended meetings, including IEP meetings at either parent or educator request. According to an SEA official, parent-educator coordinators attended 896 meetings during the 2001-02 fiscal year. Another option focused on increasing the availability of individuals with mediation skills to resolve more serious conflicts between parents and schools. These individuals, called resolution facilitators, were often regional education staff who were trained to assist families and schools in resolving their differences by discussing the problems and helping the parties work toward an acceptable agreement before it resulted in a more formalized dispute that involved the SEA. According to these state officials, another goal of the program is to teach others, including administrators, educators, and parents, about mediation, negotiation, and conflict resolution. In 2001, 238 participants, including 65 parents, received training, but no data had been collected by the SEA about how often resolution facilitators were used or about the results of informal mediation processes that had occurred. Iowa also promoted the availability of a somewhat more formal mediation called a pre-appeal conference that was not tied to a request for a due process hearing. According to state officials, the rationale for establishing the pre-appeal conference was to allow the parties another opportunity to resolve their dispute early before it became acrimonious and a formal request for a due process hearing was filed. Officials told us that the pre- appeal conference was conducted in a similar manner to mediation, that is, in connection with a due process hearing. In 2002, the pre-appeal conference was used five times more often by families and educators than mediation and usually resulted in an agreement. Iowa advocated and actively promoted the availability of the pre-appeal conference and resolution facilitators to educators and parents. In Ohio, the state funded a pilot parent mentor program whereby parents of students with disabilities were hired to help school districts and other families by providing training, support, and information services. One of their most important duties was to attend IEP meetings and other meetings at parent or school staff request. While no data were available on the cost-effectiveness of this program in resolving disputes at the local level, the state increased funding for the program and expanded the number of parent mentors from 10 pilot sites in 1990 to 70 project sites that afford 96 parent mentors for approximately one-third of Ohio's school districts. During the 2001-02 school year, parent mentors attended 2,685 IEP meetings and had contact with 12,538 families of the 239,000 students with disabilities in Ohio. California has an alternative dispute resolution grant program that provided limited funding in 2001 to 18 of the 119 regional education agencies within the state to establish strategies to prevent or address disagreements. Each region, typically consisting of more than one school district, selected several strategies and developed its own program for dispute resolution. One of these strategies, called facilitated IEPs, was used by 12 regions and involved one school district borrowing an expert trained in mediation from another school district to facilitate the IEP meeting. To become facilitators, staff participated in 4-day training programs that emphasized facilitation skills within an IEP process. The training was intended to provide facilitators with the tools to conduct IEP meetings in a way that enabled the team to (1) focus the IEP content and process on students' needs, (2) use a collaborative process, (3) build and improve relationships, and (4) reach consensus. An overall goal of this alternative grant program was to reduce the numbers of due process hearings requested in certain areas of the state. While there were no impact data for this program or any of the other strategies, 12 of the regions that participated showed an overall decrease of 42 percent in requests for due process hearings from 2001 to 2002. In general, officials in the school districts we visited told us they had few problems with responding to state complaint notifications. The problems they encountered had little impact on the timeliness of the complaint process; state and local education officials appeared to be working together to overcome them. According to the local school district officials we interviewed, complaint notifications generally provided sufficient information to allow them to respond within the states' required time frames. Both the state and local officials told us the amount of time local school districts were given to respond to the notification letter ranged from 3 to 10 days. To allow them to respond to complaints, the notification letter typically (1) identifies the student, (2) identifies the student's school, (3) describes the nature of the complaint, and (4) specifies the relevant documents needed for the state to resolve a complaint and conduct an independent on-site investigation, if determined necessary. Los Angeles Unified School District officials said they experienced a few problems with notifications because on occasion, the state did not include the supporting documentation for the complaint, such as a copy of the relevant IEP or evaluation along with the notification letter. Also, these school district officials told us that the notification sometimes did not include the name of the school or the child's date of birth, which initially made it difficult to identify the student. While these problems may have resulted in several days' delay, Los Angeles Unified School District officials said that some of these administrative issues will be resolved once the district has implemented its Web based IEP system, which it expects to complete in January 2004. According to an SEA official, the state was generally flexible and allowed the school district additional time to provide the requested documents. In addition, officials of the Austin (Texas) Independent School District and Hamilton (Ohio) Local School District told us the state notification included a summary of the parents' allegations. However, they were sometimes unable to discern the nature of the parents' complaint from this account. To better understand the nature of the parents' complaint, Austin school district officials formally requested a copy of the parent's signed letter from the SEA. According to SEA officials, Texas had recently begun to include a copy of the parents' letter as part of the notification. Overall, the numbers of formal disputes between parents and school districts were generally low compared to the 6.5 million students between 3 and 21 years old served during the 2001-02 school year, but the thousands of disputes that occur threaten relationships and can result in great expense. The concentration of due process hearings in a few localities suggests that many factors may well be at play, including local attitudes about conflict, when parents or others dispute a school district's decisions. The states we visited viewed mediation as a valuable tool for parents and schools to resolve many disputes before they become acrimonious. The fact that the states we visited were emphasizing mediation and made it more widely available than IDEA requires--along with other options for early dispute resolution--may hold promise for reducing contentious and expensive forms of dispute resolution, such as due process hearings. We provided a copy of this report to Education for its review and comment. Agency comments are reprinted in appendix III. Education agreed with our findings and stated that the report would be of great interest and highly relevant to the present congressional consideration of IDEA. Education said that it will assess the administration of dispute resolution procedures in the six high incidence jurisdictions identified in our report through a combination of monitoring and technical assistance. Education also provided technical comments, which we incorporated as appropriate. Copies of this report are being sent to the Secretary of Education, appropriate congressional committees, and interested parties. Copies will be made available to others upon request. The report is also available on GAO's Web site at http://www.gao.gov. Please contact me on (202) 512-7215 if you have any questions about this report. Other GAO contacts and staff acknowledgments are listed in appendix IV. In conducting our review, we obtained and analyzed information from the Department of Education, state education agencies (SEA), local school districts, and the McGeorge School of Law at the University of the Pacific. We visited 5 states, and in 4 of these states we interviewed staff from SEAs and local education agencies (LEA), including one urban and one rural school district in each state--for a total of eight school districts. At the district level, we performed our fieldwork at the Los Angeles Unified and Salinas Union High School Districts in California, Boston Public and Southbridge School Districts in Massachusetts, Cleveland Municipal and Hamilton Local School Districts in Ohio, and Austin Independent and Goliad Independent School Districts in Texas. In selecting the states for our fieldwork, we considered states that (1) varied in volume of formal dispute resolution activity, (2) used one- or two-tier due process hearing systems, (3) had developed alternative dispute resolution strategies, (4) were visited by the Department of Education's Office of Special Education Programs over the past few years, (5) included large urban school districts, and (6) were geographically diverse. We met with SEA officials in Iowa because the state was identified by experts in the area for having innovative strategies in alternative dispute resolution. In addition, we met with representatives of other professional organizations, including the National Association of State Directors of Special Education and the Consortium for Appropriate Dispute Resolution in Special Education. We also interviewed members of parent resource and advocacy groups (federally funded and other nonprofits) in each of the states visited; these organizations employed parents of children with disabilities and we obtained their views. To identify what kinds of issues resulted in formal disputes between parents and school districts, we interviewed state and local education officials, parent resource and advocacy groups, and obtained data during our site visits to California, Massachusetts, Ohio, and Texas. To determine how much formal dispute resolution activity occurred, we collected and reported data from each of the 4 states and reviewed and reported the results of four nationwide surveys, each affected by different data and research limitations: Dispute Resolution Procedures, Data Collection, and Caseloads Study. This study was conducted by the National Association of State Directors of Special Education (NASDSE) of state dispute resolution activities between February and April 1999. All 50 SEAs responded and provided some information on their state dispute resolution systems, including data on complaints, mediations, and due process hearings for the 1999-2000 school year or 2000 calendar year. The study authors cautioned that the state data are variable and are gathered and recorded using different approaches. Also, to make the data more usable, when data were unavailable, the missing data were replaced by data from the previous year's experience or data were calculated and derived from the 30 states with complete information. Due Process Hearings: 2001 Update. Annually, Project FORUM at NASDSE surveyed special education directors to obtain nationwide data on the numbers of due process hearings requested and held over a 10-year period (1991 through 2000). The most recent survey also obtained information on the due process hearing systems used in all states and the District of Columbia to determine whether they were one- or two-tier hearing systems. The study authors noted that because state data vary in the way data are collected and maintained, the data were reported as a comparison of annual incidence even though the specific year of collection does not cover the same months. Further, short-term changes in the reporting of these data might be due to factors other than a change in a state's policy. But, multiyear changes in national totals could indicate trends in the due process system. Study of State and Local Implementation and Impact of the Individuals with Disabilities Education Act (SLIIDEA). This study, funded by the Office of Special Education Programs (OSEP), is collecting data over a 5-year period by means of mailed surveys at the state, district, and school levels, and through case studies of the implementation of the Individuals with Disabilities Education Act (IDEA) in selected school districts on selected topics. In January 2003, one report was issued from this study, Final Report on Selected Findings, and included data on due process hearings and mediations. This report provides data on dispute resolution activity obtained from state and district surveys that were administered during the 1999-2000 school year. The estimates of dispute activity in this study were based on a survey of school districts with a response rate of 31 percent. Abt Associates conducted a nonresponse survey with eight of the original survey items primarily by telephone to determine potential bias between survey respondents and nonrespondents. Because some differences were found, data from the nonresponse survey were used to adjust the estimates based on the originally interviewed districts. An assumption was made in this analysis that nonresponding districts are similar to responding districts in the way they would answer the survey items. What Are We Spending on Procedural Safeguards in Special Education, 1999-2000? This series of reports is based on descriptive information derived from the Special Education Expenditure Project (SEEP), a national study funded by OSEP and conducted by the American Institutes for Research. This report provides estimates of school district expenditures on special education mediation, due process, and litigation activities for the 1999-2000 school year; the prevalence of dispute activity (state complaints, mediations, due process hearings, and litigations) for the 1998-99 school year; demographic characteristics of school districts with and without dispute activity; and other related information. Data were collected from a sample of school districts to generalize to all districts in the 50 states and the District of Columbia. However, no overall response rate was cited in this study. Therefore, the level of nonresponse and its effect on data quality are unknown from this survey. Because of the survey design, the SEEP data on due process hearings did not distinguish between due process hearings requested and due process hearings held. Also, the SEEP data may include dispute resolution activity in addition to the procedural safeguards under IDEA, such as those provided for by Section 504 of the Rehabilitation Act of 1973, as well as other activities made available by states. Inconsistencies in the way states define and collect data on dispute resolution activities could affect the validity of the estimates, as well as make between-state comparisons difficult. No national reporting system exists to identify and quantify the various causes of special education disputes or the prevalence of dispute resolution activity among the states. States have developed their own database systems that have a wide variety of categories and definitions of disputes with many different allowable entries. For example, in cases that involved the simultaneous filing of a state complaint and a request for mediation, some SEAs only record the procedure that was used to resolve the dispute while other states record both the filed complaint and request for mediation. As a result, the data reported in national studies as well as that reported from our site visits are of varying quality, resulting in inexact numbers of dispute resolution activity. To determine what mechanisms (formal and informal) were used to resolve disagreements, we interviewed state education officials and local school district administrators and obtained and reviewed documents that described these mechanisms. To determine whether LEAs had problems responding to dispute notifications from states, we interviewed special education administrators in each of the eight school districts we visited and reviewed SEA procedures and related documents. We conducted our work between November 2002 and September 2003 in accordance with generally accepted government auditing standards. The school districts we visited varied in their use of the dispute resolution mechanisms, and generally reflected the national trends in that complaints and mediation were used more often than due process hearings to resolve disputes between families and schools. Table 3 summarizes the levels of formal dispute resolution activity over a 3-year period in the eight school districts we visited in California, Massachusetts, Ohio, and Texas. The following people also made important contributions to this report: Ellen Soltow, Susan Bernstein, Luann Moy, Kris Braaten, Roger Thomas, and Richard Burkard.

In the 2001-02 school year, about 6.5 million children aged 3 through 21 received special education services under the Individuals with Disabilities Education Act (IDEA). On occasion, parents and schools disagree about what kinds of special services, if any, are needed for children and how they should be provided. Conflicts between school officials and families sometimes become costly, both financially and in terms of the harm done to relationships. As requested, GAO determined the kinds of issues that result in formal disputes, the extent to which the three formal mechanisms (due process hearings, mediations, and state complaints) are employed for resolution, the role of mediation and other alternative dispute resolution strategies in selected locations, and whether local education agencies received adequate and timely complaint notifications from states. To address these objectives, GAO reviewed available national data and conducted site visits to state and local education agencies in four states--California, Massachusetts, Ohio, and Texas. Officials in four states told GAO that disagreements usually arose between parents and school districts over fundamental issues of identifying students' need for special education, developing and implementing their individualized education programs, and determining the appropriate education setting. While national data on disputes are limited and inexact, the available information showed that formal dispute resolution activity, as measured by the number of due process hearings, state complaints, and mediations, was generally low. According to the National Association of State Directors of Special Education, while requests for hearings increased from 7,532 to 11,068 over a 5-year period, the number of due process hearings held decreased from 3,555 to 3,020; much of the 5-year decline occurred in New York. Additionally, most due process hearings were concentrated in five states--California, Maryland, New Jersey, New York, and Pennsylvania--and the District of Columbia. Overall, dispute resolution activity was generally low relative to the number of students with disabilities. About 5 due process hearings were held per 10,000 students with disabilities. National studies also reported no more than an estimated 7 mediations per 10,000 students and about 10 state complaints per 10,000 students. States GAO visited emphasized mediation in resolving disputes and made it more available than federal law required. Some locations had developed additional strategies for early resolution of disagreements between parents and school districts. Finally, school district officials in the four states said they had few problems with state complaint notifications, and problems encountered had little impact on the timeliness of the complaint process: state and local education officials appeared to be working together to overcome them.

Joint STARS is a multiservice, multimode radar system that is to provide the capability to locate, track, and classify wheeled and track vehicles beyond ground line of sight, during day and night, under most weather conditions. It is to provide Army Corps and Division commanders an "electronic high-ground" from which to observe enemy forces across the forward line of their own troops into an enemy's first and second echelons. The Joint STARS radar is mounted on an Air Force E-8 aircraft, a Boeing 707 variant. It is to provide real-time information simultaneously to operators in the aircraft and operators in Army GSMs. These GSMs are to have the ability to supplement this radar data with unmanned aerial vehicle imagery and electronic intelligence reports. Through fiscal year 2001, the total cost of the Army's Joint STARS development and acquisition is estimated at $1.4 billion. Since the Joint STARS program inception, four versions of GSMs have been developed prior to the CGS. They are the Limited Procurement Urgent, the Interim GSM, the Medium GSM, and the Light GSM. Descriptions of the various GSMs are provided in appendix I. Production quantities by fiscal year and GSM variant are detailed in table 1. The Army recently issued a solicitation for the CGS system and selected a contractor to produce the system. It awarded an 8-year production contract on December 14, 1995, and made a fiscal year 1996 commitment to the production of 18 systems, the maximum production allowed by the solicitation. The CGS system is to provide the same functionality as the Light GSM with an initial enhancement of the integration of secondary imagery data, and planned additional enhancements provided by post-award contract modifications. The CGS acquisition strategy provides for 2 years of LRIP, during which the Army anticipated buying 22 CGS systems at an estimated cost of about $138 million, though it received approval from DOD to procure up to an additional 16 CGS systems to accommodate other service and allied requirements. The Army's first year commitment to 18 systems and current plan to acquire 16 systems in the second year raises the estimated 2-year LRIP cost to over $153 million. Regarding program cost, DOD stated that the CGS LRIP quantity includes not only the number needed for testing purposes, but considers production rate efficiencies and cost factors. It believes that producing only four prior to test would require the stop and restart of production, resulting in loss of skilled people, inefficient use of contractor resources, and higher costs. The CGS LRIP quantity does not, however, reflect consideration of production rate efficiencies and cost factors because under the CGS contract's pricing structure, the planned second LRIP year acquisitions can be purchased in later years at lower cost. In sum, under the CGS contract, the Army can save millions of dollars by lowering future CGS LRIP acquisitions to the minimum quantity necessary to maintain the contract and then contracting for those systems in the post-LRIP years. The Light GSM and the Medium GSM were scheduled to be operationally tested during a Joint STARS multiservice OT&E. That test was delayed and then altered because of the deployment of Joint STARS assets to the European theater to support Bosnian operations. The Army now plans to evaluate the Medium and Light GSMs during that deployment and follow-on tests, if needed. It also plans to conduct an initial OT&E of the CGS system in the first quarter of fiscal year 1998. The degree and length of that initial OT&E will depend on how similar the CGS system is to its predecessors, which will be a function of the approach that the CGS contractor follows. The CGS solicitation provided functional specifications such that the proposals received may or may not represent significant hardware and software differences from already procured GSMs. The degree of technological difference between the CGS system and its predecessor systems, the Light GSM and Medium GSM, depends on the approach taken by the contractor. That difference will, in turn, influence the degree to which the Light and Medium GSM's performance during any OT&E can and should be relied upon as an indicator of the CGS's maturity to continue production. Furthermore, the more similar the CGS system is to its predecessors, the less extensive its initial OT&E will need to be. The Army began procuring CGS systems prior to the completion of an OT&E by any GSM. However, the Army did not perform any risk analyses demonstrating that there was (1) an urgent need for the added capabilities of the CGS system or (2) any significant benefit to be derived from its accelerated procurement. According to DOD, the revised CGS development and production schedule fields ground stations in synch with E-8C aircraft deliveries. Under the prior development schedule, the Army planned to continue to buy pre-CGS model ground stations--presumably also in synch with E-8C aircraft deliveries. Furthermore, an Army official in the program executive office that has oversight of the Army's Joint STARS program stated that the Air Force is behind in its E-8C delivery schedule and that, as a result, GSM acquisition is currently scheduled ahead of aircraft fieldings. Over the years, we have reported on numerous instances in which production of both major and nonmajor systems were optimistically permitted to begin under LRIP and continue based on factors other than the systems' technical maturity. In our November 1994 report on the use of LRIP in the acquisition process, we detailed a number of examples of systems that entered LRIP before operational tests were conducted and that later experienced significant problems. For example, a year into the LRIP of the Navy T-45A aircraft, OT&E demonstrated that the T-45A was not effective in a carrier environment and was not operationally suitable because of safety deficiencies. Subsequent major design changes included a new engine, new wings, and a modified rudder. DOD believes that, unlike the Navy T-45A aircraft, the CGS is not a new, immature system. It has stated that the CGS system uses 100 percent of the Light GSM mechanical design, rack structure, power distribution, lighting, ventilation, and air conditioning. It has also stated that the Light GSM software baseline is the CGS baseline and that the CGS system represents the Light GSM functional baseline with the addition of product improvements. However, the CGS contractor may make configuration changes that could represent significant hardware and software differences from already procured GSMs. Furthermore, DOD's position is also contradicted by the 2-year delay of the GSM full-rate production decision to follow a CGS OT&E and by the Joint STARS integrated product team's call for an independent assessment of the CGS's testing risk, given the nature and extent of the configuration changes that the selected contractor may make. The risks of systems starting production before operational tests are conducted are numerous. They include reliability that is significantly less than expectations, systems that cannot meet current specifications, systems that are never fielded and/or retired after fielding because of poor performance, and systems that require significant and expensive post-fielding repairs for faults identified during OT&E. While there is an operational need for Joint STARS, and despite the desire of operational commanders to have more capable systems as soon as possible, the fact remains that the Army has not adequately justified the urgency or benefits to be derived from accelerated fielding of the CGS in 1998 versus the originally planned fielding in fiscal year 2002. The Army's CGS acquisition strategy seems to ignore the fact that to date the GSMs have undergone limited testing and demonstrated disappointing results in those tests. That acquisition strategy allowed the Army to begin procuring CGS systems without demonstrating resolution of issues raised as a result of prior tests and will allow it to continue procuring systems without demonstrating resolution of those issues. In December 1991, a decision was made that the Medium GSM would undergo a limited user test rather than a traditional initial OT&E. The absence of important functionality, including an unmanned aerial vehicle interface, a production representative data link, Defense Mapping Agency electronic map databases, and trained military operators, prompted this decision. Based on the results of this test, which occurred in early 1993, the Army Operational Test and Evaluation Command provided an overall assessment of the Medium GSM's performance. It stated that the Medium GSM "consistently demonstrated potential to be operationally effective" and that the Medium GSM "demonstrated potential to be operationally suitable" (emphasis added). However, this was not a finding that the Medium GSM was operationally effective or suitable. The Command also noted that the "current software lacks robustness and reliability, and limits mission performance." One of the Command's recommendations was that prior to LRIP fielding, the Medium GSM "must successfully complete an independently evaluated operational demonstration including simultaneous employment of all software, interface, and tactics, techniques, and procedures corrections." The Medium GSM has yet to successfully complete an independently evaluated operational test. Its initial OT&E was to be the multiservice OT&E. The Medium GSM follow-on system, the Light GSM, was also to participate in the multiservice OT&E. Like the Medium GSM, the Light GSM has yet to complete an OT&E. The Light GSM has, however, undergone other tests, including a Force Development Test and Evaluation (FDT&E) in September 1994; reliability confidence testing from October through December 1994; and a follow-on demonstration at Eglin Air Force Base in January 1995. In May 1995, we reported to the Secretary of Defense that based on a preliminary review of those test results, it was clear that the Light GSM had not met the DOD-set LRIP exit criteria and that our preliminary analysis indicated that, at best, the Light GSM had only passed 2 of the 12 Light GSM performance-related LRIP exit criteria. At the same time, the DOD Director of OT&E concluded that the Light GSM had only passed 1 of the 12 Light GSM performance-related LRIP exit criteria. The Director recommended a formal review of the program to identify the causes of problems, solutions, and appropriate tests to demonstrate the solutions. In a June 30, 1995, memorandum, the Director, commenting on efforts to resolve 55 specific problems identified in the Light GSM testing, stated that his goal "was to see that the Army had identified the key problems and was working effective fixes for those problems." He added that he wanted the Joint STARS multiservice OT&E "to have a reasonable chance of success." According to an OT&E official, the Director's assessment of the Light GSM's performance during those tests has not changed. The issue of the 55 specific problems was resolved based on the Director's satisfaction "that the Army has identified a process to fix the various problems that have been identified . . . ." In some instances, problems were attributed to shortfalls in operator training or another non-materiel cause. The majority of deficiencies involved software fixes, not major hardware redesign. The Army has also gained experience operating the GSMs assigned to the III Corps and XVIII Airborne Corps and in training and preparation for multi-service OT&E. In November 1995, the Program Executive Officer for Joint STARS certified the system ready for OT&E, which attests to the developer's confidence in system maturity. DOD believes that the GSMs' prior test results indicate only prudent program risk. It states that the series of tests used in development of the GSMs, including a limited user test, FDT&E, reliability confidence testing, and other demonstrations, have been a continuous fix-test-fix process, which has identified shortfalls, determined fixes, and verified or tested the results. It also notes that during the current deployment of Joint STARS to the European Theater (Bosnia-Herzegovina), members of the Army and the Air Force test commands will conduct an operational evaluation of Joint STARS performance. Although the Army and the Air Force plan to operationally evaluate Joint STARS during that deployment, how well the Army's process has worked remains to be demonstrated through the Light GSM's performance during an OT&E. The Army's commitment to its currently planned second year LRIP buy of 16 CGS systems prior to the completion of the CGS OT&E would raise not only the program's risk but also its cost. The CGS contract provides decreasing unit costs over its 8-year life. Furthermore, a program official stated and our review of the contract indicates that the Army needs to commit to only one CGS system in the second LRIP year to maintain the contract. If the Army buys one system in fiscal year 1997 and 37 systems in the third and fourth years of the contract, it could save over $5 million while obtaining the same 4-year buy of 56 systems currently anticipated given its fiscal year 1997 budget request and approved acquisition strategy. These savings can be seen in a comparison of tables 2 and 3. Table 2 details the first 4 years of the contract's variable CGS acquisition costs under the Army's anticipated future buy schedule. Table 3 details the first 4 years of those costs under a plan that minimizes the size of the second year LRIP commitment. The Army lacks an analysis justifying a need to accelerate the fielding of the CGS system and can save millions of dollars by minimizing production in its second year of CGS production. Furthermore, there are inherent risks in procuring systems prior to their successful completion of an OT&E and the benefits of the Army's acquisition strategy do not clearly outweigh the associated risks. We therefore recommend that the Secretary of Defense direct the Secretary of the Army to limit the future system procurement to the minimum quantity necessary to maintain the CGS contract (i.e. one system in each contract option year) until the CGS has successfully completed an OT&E. In commenting on a draft of this report, DOD disagreed with our conclusion that the Army's CGS acquisition strategy was unnecessarily risky and our recommendation to reduce that risk. DOD took the position that the acquisition strategy espouses prudent risk in balance with program cost, schedule, and technical requirements. DOD's comments are reprinted in their entirety in appendix II. In light of DOD's unwillingness to have the Army revise its acquisition strategy for the CGS, Congress may wish to take the actions necessary to limit the number of CGS systems to be procured under LRIP prior to the CGS successfully completing operational testing. During this review, we interviewed officials at and reviewed documents from the offices of the Under Secretary of Defense for Acquisition and Technology and the Director for Operational Test and Evaluation in Washington, D.C. We also visited officials and reviewed documents from the U.S. Army Materiel Systems Analysis Activity, Aberdeen, Maryland, and the U.S. Army Communications and Electronics Command, Office of the Program Manager for Joint STARS, Fort Monmouth, New Jersey. We conducted this review from August 1995 to April 1996 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; and the Secretaries of Defense, the Army, and the Air Force. We will also make copies available to other interested parties upon request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report were Thomas J. Schulz, Charles F. Rey, Bruce H. Thomas, and Gregory K. Harmon. Limited Procurement Urgent (LPU). The LPU GSMs were produced and deployed as replacements to the AN/UPD-7 Ground Station Terminal. They receive data from the Mohawk Side Looking Airborne Radar and do not receive/process data from Joint Surveillance Target Attack Radar System (Joint STARS) E8 aircraft. The Army acquired nine LPU GSMs. They are expected to be decommissioned no later than fiscal year 1997. Interim Ground Station Module (GSM). The Interim GSM receives and processes data from both the Joint STARS E8 aircraft and the Mohawk Side Looking Airborne Radar. Eight engineering and manufacturing development Interim GSMs were developed and fielded to the XVIII Airborne. These systems represent the current GSM contingency force. The Interim GSM was deployed to Operation Desert Storm/Desert Shield. No production is planned. Medium GSM. This module provides enhancements to the Interim GSM capability. Its development stemmed from a Department of Defense (DOD) decision that was made in fiscal year 1989 to restructure the Army Joint STARS GSM program. The Medium GSM enhancements include a downsized electronic suite, an enhanced man/machine interface with extensive Built In Test/Built In Test Equipment capabilities, and the ability to simultaneously display and analyze data from multiple sensors. The Army acquired 12 Medium GSMs. Light GSM. This module is housed in a light weight multipurpose shelter, a standard integrated command post shelter variant, mounted on a High Mobility Multi-Purpose Wheeled Vehicle. It is to provide the light/contingency forces a C130 Drive-on/Drive-off Joint STARS capability. The Light GSM has a prime and support vehicle, each with a trailer/generator in tow. It is supposed to be able to operate on the move, receive unmanned aerial vehicle imagery and intelligence reports, and incorporate electronic map backgrounds. The Army plans to acquire a total of 10 Light GSMs. Common Ground Station (CGS). The CGS system is to provide Light GSM functionality with the addition of the integration of secondary imagery data. Further enhancements are expected and are to be achieved through post-award modifications to the contract. Two versions of this ground station are being contemplated (i.e., a light and heavy CGS). The Light CGS will be patterned on the Light GSM two-vehicle configuration. The heavy CGS is to be a track-mounted system, intended to provide the heavy forces a high speed, cross-country/off-road GSM. It is to be integrated into a Bradley Fighting Vehicle variant. Integration of the CGS capability into a tracked vehicle is part of the preplanned product improvement initiatives and will not be included in the fiscal year 1996 CGS contract award. Initial CGS fielding is planned for fiscal year 1998. The Army currently anticipates the acquisition of 73 CGS systems. The following are GAO's comments on DOD's letter dated January 24, 1996. 1. While the CGS contractor has prior experience developing and producing ground stations, those ground stations have undergone limited testing and demonstrated disappointing results. Among its previous work, the CGS contractor developed and produced the two immediate predecessor GSMs to the CGS, the Medium and Light GSMs. As we stated in our report, based on the results of a limited user test of the Medium GSM, the Army Operational Test and Evaluation Command stated that the Medium GSM consistently demonstrated the potential to be operationally effective and the potential to be operationally suitable. It noted that the "current software lacks robustness and reliability, and limits mission performance." It recommended, among other things, that prior to LRIP fielding the Medium GSM "must successfully complete an independently evaluated operational demonstration including simultaneous employment of all software, interface, and tactics, techniques, and procedures corrections." Furthermore, the Light GSM passed only 1 of 12 performance-related criteria during developmental testing, and neither the Medium nor the Light GSM has yet successfully completed an OT&E. 2. We continue to believe that the CGS acquisition strategy risks millions of dollars on systems that have not yet been demonstrated operationally effective and suitable. We have, however, revised the report to reflect the Army's apparent commitment to evaluate the operation of the Joint STARS system during deployment to Bosnia-Herzegovina. 3. We have revised our recommendation to allow the Army to maintain its CGS contract in effect and thus avoid a break in production. Because the contract provides decreasing unit costs over its life, and since the Army has already committed to 18 first-year LRIP systems, we want to further limit LRIP pending successful completion of an OT&E. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO reviewed the Department of the Army's test and acquisition plans for the Common Ground Station (CGS), the fifth version of the Joint Surveillance Target Attack Radar System (Joint STARS) ground station modules (GSM). GAO found that: (1) the Army planned to purchase 22 CGS in two years of low-rate initial production (LRIP) at a cost of $138 million, but it now plans to procure 34 CGS systems; (2) the Army has neither demonstrated an urgent need for CGS nor proved that the expected benefits from accelerated procurement outweigh its risks; (3) by 1998, the Army will need at least four CGS to complete operational test and evaluation; (4) since earlier versions of CGS have not tested well or completed an operational test and evaluation, the Army's acceleration of CGS LRIP increases the risk of procuring a costly and ineffective system; and (5) because the Army is only required to purchase one CGS in the second year of LRIP, it could significantly reduce system costs by procuring fewer systems in the early stages of the contract.

The Davis-Bacon Act was enacted in 1931, in part, to protect communities and workers from the economic disruption caused by contractors hiring lower-wage workers from outside their local area, thus obtaining federal construction contracts by underbidding competitors who pay local wage rates. Labor administers the act through its Wage and Hour Division, which conducts voluntary surveys of construction contractors and interested third parties on both federal and nonfederal projects to obtain wages paid to workers in each construction job by locality. It then uses the data submitted on these survey forms to determine locally prevailing wage and fringe benefit rates for its four construction types: building, heavy, highway, and residential. To determine a prevailing wage for a specific job classification, Labor considers sufficient information to be the receipt of wage data on at least three workers from two different employers in its designated survey area. Then, in accordance with its regulations, Labor calculates the prevailing wage by determining if the same wage rate is paid to the majority (more than 50 percent) of workers employed in a specific job classification on similar projects in the area. If the same rate is not paid to the majority of workers in a job classification, the prevailing wage is the average wage rate weighted by the number of employees for which that rate was reported. In cases where the prevailing wage is also a collectively bargained, or union, rate, the rate is determined to be "union-prevailing." To issue a wage determination--a compilation of prevailing wage rates for multiple job classifications in a given area--Labor must, according to its procedures, also have sufficient data to determine prevailing wages for at least 50 percent of key job classifications. Key job classifications are those determined necessary for one or more of the four construction types. By statute, Labor must issue wage determinations based on similar projects in the "civil subdivision of the state" in which the federal work is to be performed. Labor's regulations state the civil subdivision will be the county, unless there are insufficient wage data. When data from a county are insufficient to issue a wage rate for a job classification, a group of counties is created. When data are still insufficient, Labor includes data from contiguous counties, combined in "groups" or "supergroups" of counties, until sufficient data are available to meet threshold guidelines to make a prevailing wage determination. Expansion to include other counties, if necessary, may continue until data from all counties in the state are combined. Counties are combined based on whether they are metropolitan or rural, and cannot be mixed. Labor has taken several steps over the last few years to address issues with its Davis-Bacon wage surveys. For example, it finished 22 open surveys that had accumulated since the agency started conducting statewide surveys in 2002. Officials said completing these surveys will allow them to focus on more recent surveys. Labor also changed how it collects and processes information for its four construction types by surveying some construction types separately rather than simultaneously, using other available sources of wage data, adjusting survey time frames, and processing survey data as it is received rather than waiting until a survey closes. For highway surveys, Labor officials said they began using certified payrolls as the primary data source because certified payrolls provide accurate and reliable wage information and eliminate the need for Labor to verify wage data reported in surveys. Labor officials estimated these changes will reduce the processing time for highway surveys by more than 80 percent, or from about 42 months to 8 months. For building and heavy surveys, Labor began a five-survey pilot in 2009, adjusting survey time frames--with shorter time frames for areas in which there are many active projects--to allow Labor to better manage the quantity of data received. In addition, Labor officials said their regional office staff have begun processing survey data as they are received rather than waiting until a survey closes, which, they said, will improve timeliness and accuracy because survey respondents will be better able to recall submitted information when contacted by regional office staff for clarification and verification. Labor expects these changes to reduce the time needed to process building and heavy surveys by approximately 54 percent, or from about 37 months to 17 months. However, while it is too early to fully assess the effects of Labor's 2009 actions, our review found that changes to data collection and processing may not achieve expected results. We were able to analyze the timeliness of 12 of the 16 surveys conducted under Labor's new processes at the time of our review. Of those 12 surveys--8 highway and 4 building and heavy--which we assessed against Labor's revised timelines, we found 10 behind schedule, 1 on schedule, and 1 not started as of September 10, 2010. A challenge to survey timeliness is the fact that Labor conducts a "universe" or "census" survey of all active construction projects within a designated time frame and geographic area. As a result, the number of returned survey forms and the time required for the regional offices to process the data can vary widely. For example, for 14 surveys conducted prior to Labor's 2009 changes, the number of forms returned per survey ranged from less than 2,000 to more than 8,000, and the average processing time per survey for data clarification and analysis ranged from 10 months to more than 40. Moreover, Labor cannot entirely control when it receives survey forms. Some regional office officials said the bulk of the forms are returned on the last day of a survey limiting officials' ability to gain time by processing forms while the survey is ongoing as planned under the 2009 changes. To address these challenges, OMB guidance suggests agencies consider the cost and benefits of conducting a sample survey (versus a census survey) because it can often ensure data quality in a more efficient and economical way. The fact that Labor is behind schedule on surveys begun under the new processes may affect its ability to update the many published nonunion- prevailing wage rates which are several years old. Labor's fiscal year 2010 performance goal was for 90 percent of published wage rates for building, heavy, and highway construction types to be no more than 3 years old. Our analysis found that 61 percent of published rates for these construction types were 3 years old or less. However, this figure can be somewhat misleading because of the difference in how union- and nonunion- prevailing wage rates are updated. Union-prevailing rates account for almost two-thirds of the more than 650,000 published building, heavy, and highway rates and, according to Labor's policy, can be updated when there is a new collective bargaining agreement without Labor conducting a new survey. We found almost 75 percent of those rates were 3 years old or less. However, 36 percent of the nonunion-prevailing wage rates were 3 years old or less and almost 46 percent were 10 or more years old. These rates are not updated until Labor conducts a new survey. Several of the union and contractor association representatives we interviewed said the age of the Davis-Bacon nonunion-prevailing rates means they often do not reflect actual prevailing wages, which can make it difficult for contractors to successfully bid on federal projects. Beyond concerns with processes and timelines, we also found that critical problems with Labor's wage survey methodology continue to hinder its survey quality. OMB guidance states that agencies need to consider the potential impact of response rate and nonresponse on the quality of information obtained through a survey. A low response rate may mean the results are misleading or inaccurate if those who respond differ substantially and systematically from those who do not respond. However, Labor cannot determine whether its Davis-Bacon survey results are representative of prevailing wages because it has not calculated survey response rates since 2002, and, other than a second letter automatically sent to nonrespondents, does not currently have a program to systematically follow up with or analyze nonrespondents. While a senior Labor official said the agency is taking steps to again calculate response rates, these changes have not been fully implemented and it is unclear if they will result in improved survey quality. The utility of issuing wage determinations at the county level is also questionable. Labor's regulations state the county will normally be the civil subdivision for which a prevailing wage is determined; however, Labor is often unable to issue wage rates for job classifications at the county level because it does not collect enough data to meet its current sufficiency standard of wage information on at least three workers from two employers. In the results from the four surveys we reviewed, Labor issued about 11 percent of wage rates for key job classifications using data from a single county (see fig. 1).24, 25 Moreover, in 1997, Labor's OIG reported that issuing rates by county may cause wage decisions to be based on an inadequate number of responses. In the four surveys we reviewed, more than one-quarter of the wage rates were based on data reported for six or fewer workers (see fig. 2). We analyzed wage rates for key job classifications because wage rates for nonkey job classifications can only be issued at the county or group level, but not at the supergroup or state level. Regional office officials said they may combine rates from counties with the exact same wage and fringe benefit data in their final wage compilation report, the WD-22. However, the rates being combined may have been calculated at different geographic levels--for example, one county's rates may have been calculated at the group level while another county's rates my have been calculated at the supergroup level. The geographic level at which rates for combined counties were calculated is not reported on the WD-22; therefore, we reported the percentage of these rates separately. In our interviews with stakeholders, concerns about the survey process and accuracy of the published wage determinations were cited as disincentives to participate. Contractors may lack the necessary resources, may not understand the purpose of the survey, or may not see the point in responding because they believe the prevailing wages issued by Labor are inaccurate, stakeholders told us. Officials we interviewed in Labor regional offices echoed many of these same concerns about contractor participation. While 19 of the 27 contractors and interested parties we interviewed said the survey form was generally easy to understand, some identified challenges with completing specific sections, such as how to apply the correct job classification. Labor officials said they did not pretest the current survey form with respondents, and our review of reports by Labor's contracted auditor for four published surveys found most survey forms, which are verified against payroll data, had errors in areas such as number of employees and hourly and fringe benefit rates. Labor officials said they have plans to address portions of the form that confuse respondents, but could not provide specifics on how they intend to solicit input from respondents--a step recommended by OMB to reduce error. Fifteen stakeholders we interviewed said there is a lack of transparency in wage determinations because key information is not available or hard to find. Both contractor associations and union officials said improving transparency in how the published wage rates are set could enhance understanding of the process and result in greater participation in the survey. A senior Labor official said the agency is considering posting information used to determine wage rates online. Finally, while the pre-survey briefing is one of Labor's primary outreach efforts to inform stakeholders about upcoming surveys, awareness of these briefings was mixed. In three states that were surveyed for building and heavy construction in 2009 or 2010--Arizona, North Carolina, and West Virginia--all the union representatives we interviewed said they were aware of the pre-survey briefing and representatives from four of the six state contractor associations we interviewed said they were aware a briefing had been conducted. However, in Florida and New York--last surveyed in 2005 and 2006 respectively--none of the 12 contractors we interviewed were aware that a briefing had been conducted prior to the survey. Seven of 27 stakeholders indicated that alternative approaches, such as webinars or audioconferences, might be helpful ways to reach additional contractors. While Labor has made some changes to improve the wage determination process, further steps are needed to address longstanding issues with the quality of wage determinations and enhance their transparency. In our report, we suggested that Congress consider amending its requirement that Labor issue wage rates by civil subdivision to provide the agency with more flexibility. To improve the quality and timeliness of the wage surveys, we recommended that Labor enlist an independent statistical organization to evaluate and provide objective advice on the survey, including its methods and design; the potential for conducting a sample survey instead of a census survey; the collection, processing, tracking and analysis of data; and the promotion of survey awareness. We also recommended that Labor take steps to improve the transparency of its wage determinations, which could encourage greater participation in its survey. After reviewing the draft report, Labor agreed with our recommendation to improve transparency, but said obtaining expert survey advice may be premature, given current and planned changes. We believe a time of change is exactly when the agency should obtain expert advice to ensure their efforts improve the quality of the wage determination process. A complete discussion of our recommendations, Labor's comments, and our response are provided in our report. Chairman Walberg, Ranking Member Woolsey, and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you may have. For further information regarding this statement, please contact Andrew Sherrill at (202) 512-7215 or [email protected]. Contact points for our Office 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 Gretta L. Goodwin (Assistant Director), Amy Anderson, Brenna Guarneros, Susan Aschoff, Walter Vance, Ronald Fecso (Chief Statistician), Melinda Cordero, Mimi Nguyen, and Alexander Galuten. 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 Department of Labor's (Labor) procedures for determining prevailing wage rates under the Davis-Bacon Act. Davis-Bacon wages must be paid to workers on certain federally funded construction projects, and their vulnerability to the use of inaccurate data has long been an issue for Congress, employers, and workers. More recently, the passage of the American Recovery and Reinvestment Act of 2009, focused attention on the need for accurate and timely wage determinations, with more than $300 billion estimated to provide substantial funding for, among other things, federally funded building and infrastructure work potentially subject to Davis-Bacon wage rates. In the 1990s, we issued two reports that found process changes were needed to increase confidence that wage rates were based on accurate data. A third report found that changes then planned by Labor, if successfully implemented, had the potential to improve the wage determination process. However, in 2004, Labor's Office of Inspector General (OIG) found that wage data errors and the timeliness of surveys used to gather wage information from contractors and others, continued to be issues. The testimony will discuss (1) the extent to which Labor has addressed concerns regarding the quality of the Davis-Bacon wage determination process and (2) additional issues identified by stakeholders regarding the wage determination process. This testimony is based on our recently issued report, titled "Davis-Bacon Act: Methodological Changes Needed to Improve Wage Survey." In summary, we found that recent efforts to improve the Davis-Bacon wage survey have not yet addressed key issues with survey quality, such as the representativeness and sufficiency of survey data collected. Labor has made some data collection and processing changes; however, we found some surveys initiated under these changes were behind Labor's processing schedule. Stakeholders said contractors may not participate in the survey because they do not understand its purpose or do not believe the resultant prevailing wages are fully accurate. In addition, they said addressing a lack of transparency in how the published wage rates are set could result in a better understanding of the process and greater participation in the survey. We suggest Congress consider amending its requirement that Labor issue wage rates by civil subdivision to allow more flexibility. To improve the quality and timeliness of the Davis-Bacon wage surveys, we recommend Labor obtain objective expert advice on its survey design and methodology. We also recommend Labor take steps to improve the transparency of its wage determinations.

Founded in 1863 by congressional charter, the National Academy of Sciences has a long history of serving as a scientific adviser. The Academy, which has a total membership of 4,800, also serves as an honorary institution to recognize distinguished members of the scientific community. Among other activities, the Academy also organizes symposiums, manages scientific databases, and serves as a clearinghouse for research. Throughout this report we use "Academy" to refer to the constituent members of the Academy complex: the National Academy of Sciences, the National Academy of Engineering, the Institute of Medicine, and the National Research Council. In 1916, the Academy formed the National Research Council to broaden its committee membership to include non-Academy members and to oversee the Academy's advisory activities. In a 1998 report, the Academy reported that committee membership consists of 55 percent from academia, 24 percent from industry, 9 percent from nonprofit institutions, and 12 percent from different levels of government. The National Academy of Engineering and the Institute of Medicine were established in 1964 and 1970, respectively, to recognize distinguished members in these fields and to provide more specialized advice in these areas. The Academy is organized by study units, which produce reports in the following topic areas: transportation, health and safety, science, commerce, natural resources, defense, space, education, and international affairs. (See table 1.) The Academy issued 1,331 committee reports from January 1993 to June 1997 and had an average annual budget of about $150 million. During those 5 years, most of its work was performed for the federal government, which provided the Academy with 87 percent of its revenue. (See fig. 1.) The Departments of Transportation, Energy, Health and Human Services, and the Army; the National Science Foundation; and the National Aeronautics and Space Administration have been its largest federal sponsors--amounting to 75 percent of the total revenues for 1993 to 1997. The Academy also advises state governments, private industry, and nonprofit institutions, but that work is limited by internal Academy guidelines. In addition, the Academy may use its endowment to fund self-initiated studies deemed critical by the Academy leadership. The Federal Advisory Committee Act Amendments of 1997 addressed concerns over the openness of the Academy's procedures. Prior to the amendments, the Academy's committee procedures included some openness. A 1975 policy document stated that committee meetings where data would be gathered were to be open to the public with advance notice given. Announcements of scheduled open meetings were published monthly in a newsletter by the Academy's Office of Information. However, the study unit heads determined which projects would have scheduled and announced open meetings. Executive meetings and working meetings, referred to as deliberative sessions, would "not normally be open to the public." A 1995 proposed change to the Academy's public access policy, among other things, further defined the types of meetings that could be closed and applied the policy uniformly across the Academy's major study units. This proposal was under consideration at the time the amendments were enacted. According to Academy officials, the Academy had three main concerns that caused it to seek relief from the Federal Advisory Committee Act: (1) the erosion of independence if the Academy was under the influence of sponsoring agencies, (2) the inability to recruit committee members if committee deliberations were open to the public, and (3) the burden of administrative requirements that would render the Academy unresponsive to the government. Paramount among these concerns was the Academy's independence from the influence of sponsoring agencies. Under the act, a federal government officer or employee would have to chair or be present at every advisory committee meeting. This individual would have the power to adjourn the meeting "whenever he determines it to be in the public's interest." According to Academy officials, the Academy could lose sole authority in appointing committee members, and the Academy and committee members could be under pressure from a sponsoring agency to change a report during the drafting process. Under the act and GSA regulations, advisory committee meetings, including deliberative meetings, would be open to the public. However, the Academy opposed opening its deliberative meetings to the public because it believed that such an action could stifle open debate and criticism of ideas in those meetings. The Academy was also concerned that the independence of the committees' deliberations and the Academy's review process would be jeopardized by attempts of sponsors and special interest groups to bring political pressure to bear. Academy officials said that closed committee deliberations are fundamental for ensuring the independence of their studies and the scientific quality of their reports. Moreover, they stated, if draft reports were available to the public, the first draft would become the enduring impressions of a report, regardless of any changes made later. In addition, the President of the Academy said that it could be more difficult to recruit potential committee members in the future if deliberations were open to the public. We surveyed 12 current and former Academy committee members to obtain their views on whether or not they would serve on Academy committees if the deliberative meetings were open to the public. Two members said that they would serve, six said that their decision to serve would depend on the topic of study, and three said that they probably would not serve on a committee whose deliberations were open to the public. One member did not respond directly to the question but said that closed deliberative sessions encourage greater candor among the members. In addition, these members generally echoed the Academy officials' views regarding the need for closed deliberative sessions. The three members who responded that they would probably not serve said that open deliberations could seriously jeopardize the quality of the reports. Two members said that Academy study committees might be difficult to staff if deliberations were open to the public. Eleven out of 12 respondents indicated that the Academy should retain the ability to close committee deliberations. Finally, the Academy was concerned that the amount of time and expense associated with implementing the act would render the Academy unresponsive to the government in general and to the Congress in particular. Of particular concern was the requirement under the act that each committee have a charter. Since the Academy is not a federal agency, the federal agency sponsoring the Academy study would prepare the charter and submit it for review by GSA. Academy officials estimated that the process would take between 6 and 12 months, on average, a length of time that an Academy official said would render the Academy unresponsive to the government's requests for information. In addition, most of the Academy's studies are funded by multiple agencies. Thus, the Academy was not certain which agency would be responsible for fulfilling the administrative requirements of the act. Academy officials also pointed out that applying the act to the Academy would more than double the number of committee charters that GSA would have to review each year. Prior to the enactment of the amendments of 1997, the Academy established a number of procedures for committee work that are intended to help ensure the integrity and the openness of committee activities. The procedures consist of the following phases: project formulation, committee selection, committee work, report review, and report release and dissemination. (See fig. 2.) According to Academy officials, the whole process can take anywhere from 4 months to 2 years (usually from 6 to 18 months). During the project formulation phase, the Academy assigns the project to a study unit. According to Academy guidance, the study unit is responsible for defining the scope of the project, leaving room for the committee to further define the study, and for developing the initial cost estimates. After the study unit approves the project, the Academy gives final approval for the project. Then a contract, grant, or cooperative agreement (depending on the sponsor) is drawn up and entered into with the agency. A permanent Academy staff member, referred to as the responsible staff officer, is assigned to organize and support the project. The staff officer is responsible for ensuring that institutional procedures and practices are followed throughout the study and that the study stays on schedule and within budget. According to the Academy's documents, each project is conducted by a committee of subject matter experts who serve without compensation. Committee selection starts with suggestions from the sponsoring organization, members of the Academy, outside professional colleagues, and Academy staff. After review of the suggestions, the President of the Academy selects committee candidates. The Academy's procedures require that each committee candidate fill out a form on his or her potential conflicts of interest. The form consists of five questions asking for the member's relevant organizational affiliations, financial interests, research support, government service, and public statements and positions concerning the committee's topic. We reviewed a sample (about 10 percent) of the 331 current committees to determine whether the forms had been filed and found that the Academy's procedures were generally being followed. Under Academy procedures, 5 of the 30 committees selected were not required to file the conflict-of-interest forms because they were not subject to section 15 for various reasons. Of the remaining 25 committees, we found that almost all members (316 out of 341 or 93 percent) had forms on file. At the first meeting of every committee, the Academy's procedures require a confidential discussion among committee members and project staff of potential conflicts of interest. If a conflict of interest is identified, the committee member may be asked to resign from the committee. If the Academy determines that the conflict is unavoidable, the Academy will make the conflict public and will retain the committee member. After this meeting, the executive director of the relevant study unit makes a tentative determination of whether the committee as constituted is composed of individuals with the requisite expertise to address the task and whether the points of view of individual members are adequately balanced such that the committee as a whole can address its charge objectively. Final approval of the committee membership, however, rests with the President of the Academy. Committees meet in data-gathering sessions that are generally open to the public and in deliberative sessions that are closed to the public. The Academy defines a data-gathering meeting as "any meeting of a committee at which anyone other than committee members or officials, agents, or employees of the institution is present, whether in person or by telephone or audio or video teleconference." Committees also meet in closed sessions to discuss financial and personnel matters, to discuss conclusions, and to draft the committee report. The Academy's responsible staff officer facilitates the meetings. In order to identify the number of open versus closed meetings, we reviewed the meetings held from December 1997 through June 1998 for the 331 committees. Since we found that most meetings were a combination of open and closed sessions, we identified the number of open and closed hours during these meetings. Of the 331 committees, 129 either had no meetings or were not subject to section 15 for various reasons. The remaining 202 committees held a total of 353 meetings. For 300 (or 85 percent) of those meetings, at least some portion of the meeting was closed. For 139 of the 300 meetings where complete information about open and closed sessions was available, we found that slightly less than half (45 percent) of the time was spent in closed sessions. For 251 projects, we determined the reasons for the closed sessions: 61 meetings included discussions of potential bias of committee members, 36 meetings included discussions of the committee's composition and balance, and 201 meetings involved drafting the committee report. We also found that seven data-gathering meetings were closed under Freedom of Information Act exemptions. Every report is the collective product of the committee. According to the Academy's documents, a committee member may draft a chapter or portion of a report, but the author of record is the entire committee. The Academy's responsible staff officer can help with many aspects of developing the report, including researching, integrating portions of the report written by committee members, and ensuring consistent style and format, but the conclusions and recommendations are attributed to the committee as a whole. Throughout its work, the committee is subject to the oversight of the Academy's supervisory boards and commissions. The next step in the process is an independent review of the draft by individuals whose review comments are provided anonymously to the study committee. This process allows the Academy to exercise internal oversight and provides an opportunity for the study committee to obtain reactions from a diverse group of people with broad technical and policy expertise in the areas addressed by the report. The anonymity of the reviewers is intended to encourage individual reviewers to express their views freely and to permit the study committee to evaluate each comment on its merits without regard for the reviewer's position or status. The Academy Report Review Committee, composed of members of the Academy, oversees the report review process and appoints either a monitor and/or coordinator depending on the type of study. Liaisons are appointed from the Academy's membership to the major study unit for the purpose of suggesting qualified reviewers. The monitor and/or coordinator either participates in the selection of reviewers or checks the list of reviewers for their relevant expertise or particular perspective. Typically six to eight reviewers are appointed, although more are acceptable for a major policy report. According to the Academy's report review guidelines, the review of a manuscript takes about 10 weeks, on average, from when a report is sent to the reviewers until final approval; however, the time ranges from a few days to many months. The reviewers look at whether or not the report addressed the committee's charge; findings are supported by the evidence given; exposition of the report is effective; and tone of the report is impartial. All study committee members are given copies of the reviewers' comments (with the names of the reviewers removed from the comments) in time to prepare or approve a response to the comments. After the comments have been submitted, the monitor and/or coordinator may prepare a brief summary of the key review issues for the study committee. The study committee may provide a written explanation of how each comment was handled, or it may address the key review issues. The monitor and/or coordinator judges the adequacy of the committee's responses and may require a resubmission to the reviewers. The Academy's procedures state that no report is to be released to the project sponsor or the public, and no findings or recommendations are to be disclosed until this review process has been satisfactorily completed. All committee members are contacted to ensure that they approve the report before it is published or released. The Report Review Committee chair provides the final approval of the reports. The Academy is responsible for the report's dissemination plan. The report sponsor may also be involved in developing the plan. Targeted groups are selected to ensure that the report reaches all appropriate audiences. The report may also be made available via the National Academy Press web site. Briefings are often arranged for interested groups, and reports may become topics of future Academy workshops or symposia. The Academy developed a web site for current project information to increase public access as a result of section 15, added by the Federal Advisory Committee Act Amendments. However, we found that this information is not always posted in a timely manner and is sometimes incomplete. Among other things, section 15 generally requires the Academy to make names and brief biographies of committee members public, post notice of open meetings, make available written materials presented to the committee, post summaries of meetings that are not data-gathering meetings, make copies of the final committee report available to the public, and make available the names of the principal non-Academy reviewers of the draft report. The committee members' names and biographies, notice of open meetings, and summary minutes of closed meetings are available on the web site of current projects. Copies of reports, which include the names of the external reviewers of the reports, are available on the National Academy Press web site. According to Academy officials, written materials presented to the committees by individuals who are not agents, officials, or employees of the Academy are available for inspection at the Academy's public reading rooms in Washington, D.C. We reviewed a sample of the 331 current projects to determine whether the database included the names of the committee members. Five of the 30 projects that we reviewed were not required by the act or by the Academy to post committee membership for various reasons. We found that 24 of the 25 projects had the names of the members available on the web site. Five projects had only the names of the members and no biographical statements. However, these five committees were not required to post biographies because the committees were created prior to the act. The Academy's guidelines state that the summary minutes for closed meetings should be posted to the web site, preferably within 10 business days of the meeting. In order to determine whether this requirement was met by the Academy, we reviewed data on the closed meetings for the 202 committees that held meetings from December 17, 1997, through June 17, 1998. As previously stated, these committees held a total of 353 meetings, with 300 of those meetings having some portion closed. We found that 270 (or 90 percent) had the minutes of the closed sessions on the web site.The minutes of these closed sessions had an average posting time of 13.5 calendar days, within the Academy's guidelines of 10 business days. However, the amount of time to post the minutes ranged from 0 to 124 calendar days, with 26 percent of the minutes posted 15 or more days after the meeting. At the time of our audit, spot checks of information posted on the web site were conducted at least once a week for missing or improper information. However, we found that for a total of 63 out of 331 current committees (about 19 percent) there were chronological or typographical errors or missing data in the information provided on one or more of the meetings. For example, the listings of the meetings for three projects were out of order. One meeting had two different dates listed on the project web site. For 34 projects, the agenda or summary minutes were not posted. The Academy has already taken action to correct this information or has adequately explained these specific problems. In addition, since we conducted our audit, the Academy created a records officer position responsible for checking the timeliness and accuracy of data on a daily basis. Through the web site, the Academy also elicits public comments about committee composition. The public is allowed 20 calendar days to comment about the proposed committee members and/or suggest new members. Since the web site's inception in December 1997 through June 1998, the Academy received a total of 120 comments. Only 13 of those comments concerned committee composition--all concerning four committees: those on smokeless and black powder, illegal drug policy, repetitive motion and muscular disorders, and cancer research among minorities. Of these comments, six included suggestions for additional committee members, three provided general or positive comments about committee membership, three included negative comments regarding specific committee members (one of the three members later was removed from consideration), and two comments discussed the length of the public comment period. Prior to the passage of the Federal Advisory Committee Act Amendments, the Academy had efforts under way to increase public access to and participation in the Academy's committee work. After the amendments were passed, the Academy's web site of current projects increased public access to project information. However, the Academy had to quickly create and operationalize its web site of current projects in December 1997 and additional enhancements are under consideration pursuant to suggestions received from the public. Thus, it will be some time before an assessment can be made of the extent to which the general public uses the web site. Regarding the untimely posting of data and incomplete data, the Academy's new procedures should address our concerns. However, the availability of timely information on current projects depends on the effective implementation of the new procedures. We provided a draft of this report to the National Academy of Sciences and GSA for their review and comment. In general, the Academy said that the report was accurate and balanced. Regarding our finding that the Academy's data available on the web site are not always timely or complete, the Academy believed that it was important to note that in no case was there a violation of the requirements of section 15. We agree. Since section 15 does not provide a time frame for posting summaries of closed meetings, we noted instances in which data were untimely by the Academy's own guidelines and instances in which the information provided had some errors. The full text of the Academy's comments appears in appendix I. GSA had no comments on the report. To determine why the Academy sought relief from the act, we interviewed Academy officials and reviewed their statements to the Congress. We also talked with several committee members to obtain their views on the act--the Academy selected the committee members, with input from us. Each Academy study unit and the Presidents of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine selected members to respond to our questions. The Academy narrowed this sample, and each candidate was asked whether he or she would participate in the survey. The sample included past and current committee members and chairs of committees from across the country and from private industry, academia, and not-for-profit institutions. To identify the Academy's procedures for providing advice to the federal government, we interviewed Academy officials. We also reviewed the Academy's internal documents outlining the procedures, the treasurer's reports, and annual reports. To determine whether the Academy had implemented section 15, we interviewed Academy officials and reviewed official documents. We also reviewed the Academy's web site information, including committee meeting agendas for both open and closed portions of meetings and the content of the closed meetings as described in summary minutes, for Academy projects that were active as of June 17, 1998. To make this determination, we calculated the hours of open and closed meetings, calculated the time in which summary minutes were posted for closed meetings, and categorized the reasons for closed meetings. Each step was verified for accuracy and completeness. Only meetings that occurred in the 6-month period from December 17, 1997, to June 17, 1998, were analyzed. Of the 331 current Academy projects, 69 had no meetings within the stated 6-month time frame, and 24 had no meetings whatsoever. Thirty-six projects were standing committees that were not subject to section 15 and were therefore excluded from our analyses. None of the current project information from the web site was independently verified against the Academy's original records. For the analysis of open versus closed hours, we considered only the 139 meetings with both open and closed hours. For the closed meetings, we looked only at those meetings with summary minutes or with posted agendas. Of the 300 possible meetings with some closed sessions, 294 were analyzed to determine the reasons for the closed sessions. To measure the Academy's compliance with the section 15 requirement to make committee members' names and biographies available for public comment, we reviewed a random sample of 30 current projects' potential bias and conflict-of-interest forms to determine whether they were present in the Academy's files and signed by the committee members. We compared the Academy's files to the committee's printed lists from the Academy's current projects web site. Projects that did not have meetings within the December 17, 1997, to June 17, 1998, time frame were not sampled. We conducted our work from May through November 1998 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report for 10 days. At that time, we will send copies of this report to the President of the National Academy of Sciences and the Administrator of the General Services Administration. We will also make copies available to others on request. Please call me at (202) 512-3841 if you or your staff have any questions concerning this report. Major contributors to this report were Diane B. Raynes, Gregory M. Hanna, Lynn M. Musser, and Robin M. Nazzaro. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed the committee process at the National Academy of Sciences, focusing on the: (1) reasons the Academy sought relief from the Federal Advisory Committee Act; (2) Academy's committee procedures for providing advice to the federal government; and (3) Academy's implementation of the new requirements for providing information to the public. GAO noted that: (1) according to Academy officials, the Academy sought relief from the act for a number of reasons; (2) central to its concerns was the Academy's ability to maintain sole authority in appointing committee members and to conduct its work independently from sponsoring agencies' influence; (3) in addition, the Academy opposed opening deliberative meetings on the grounds that such an action could stifle open debate and could impact the Academy's ability to recruit committee members; (4) finally, the Academy was concerned about the amount of time and expense to perform the administrative requirements of the act, which could render the Academy unresponsive to the government; (5) prior to the enactment of the amendments, the Academy developed a number of procedures governing its committees' activities, including project formulation, committee selection, committee work, report review, and the release and dissemination of reports; (6) according to Academy officials, these procedures are intended to help ensure the integrity of advice provided to the federal government; (7) for example, committee selection includes procedures for identifying conflicts of interest and potential bias of committee members; (8) the committee work phase provides an opportunity for some public participation, and committee reports are reviewed by an Academy review committee before they are released to the sponsoring agency and the public; (9) in response to section 15, the Academy developed a web site to increase public access to current project information, however, GAO found that some descriptive information on current projects was not always posted in a timely manner and was not always complete; and (10) during this audit, the Academy addressed these problems and developed additional written guidelines regarding the posting of committee information as well as additional quality assurance procedures.

The U.S. General Accounting Office exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and assure the accountability of the federal government for the benefit of the American people. Given GAO's role as a key provider of information and analyses to the Congress, maintaining the right mix of technical knowledge and subject matter expertise as well as general analytical skills is vital to achieving the agency's mission. GAO spends about 80 percent of its resources on its people. And yet, like other federal agencies, GAO has faced significant human capital challenges--challenges that if not effectively addressed, could impair the timeliness and quality of its work for its congressional clients and the American people they represent. A number of these challenges were created by the significant reduction in the size of GAO undertaken in the mid-1990s. 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For upper-level staff, the proportion eligible to retire was even larger-- 48 percent of all band III management-level employees and 55 percent of all Senior Executive Service members. Thus, as at many federal agencies, GAO's human capital profile reflected a workforce that was smaller, closer to retirement, and at increasingly higher-grade levels. In addition to the succession-related concerns raised by such a profile, GAO also faced a range of skills gaps. As major policy issues have become more complex and as technology has radically altered the way the federal government conducts business, the types of skills and knowledge needed by GAO staff have been evolving, and the need for sophisticated technical skills has been increasing. Early in his tenure, Comptroller General David Walker recognized that GAO's human capital profile and selected skills gaps presented serious challenges to GAO's future ability to serve the Congress. Comptroller General Walker also sought to have GAO become a model federal agency and a world-class professional services organization that focuses on delivering positive results for the Congress and the country. The agency's ability to operate in an efficient, effective, and economical manner and meet the ever-changing and increasingly complex needs of the Congress could be seriously compromised if GAO's human capital challenges were not effectively addressed. As a first step in addressing these concerns, GAO used its internal administrative authority to implement measures to improve the alignment of its human capital with the agency's overall strategic goals and objectives as contained in GAO's Strategic Plan. Subsequent to developing its first strategic plan, GAO undertook a number of major human capital initiatives, including an agencywide realignment and reorganization, an overall human capital self-assessment, the revitalization of its recruiting and college relations programs, an agencywide knowledge and skills inventory, the development of competency-based performance appraisal systems, the establishment of an Employee Advisory Council, the enhancement of GAO's employee benefit programs, a comprehensive employee feedback survey, a workforce-planning process, and the establishment of a professional development program for entry-level analysts. In addition to these initiatives, GAO's leadership recognized that additional steps to reshape the agency's workforce were necessary and that preexisting personnel authorities did not allow the agency to address these challenges effectively. Therefore, GAO sought legislation establishing narrowly tailored flexibilities that would help to reshape the agency's workforce and recruit and retain staff with needed technical skills. Based on a sound business case, Public Law 106-303--known as the GAO Personnel Flexibilities Act--became law in October 2000. The act authorized the Comptroller General to implement the following personnel flexibilities: 1. Offer voluntary early retirement to realign the workforce to meet budgetary constraints or mission needs; correct skill imbalances; or reduce high-grade, managerial, or supervisory positions. 2. Offer separation incentive payments to realign the workforce to meet budgetary constraints or mission needs; correct skill imbalances; or reduce high-grade, supervisory, or managerial positions. 3. Establish modified regulations for the separation of employees during a reduction or other adjustment in force. 4. Establish senior-level scientific, technical, and professional positions and provide those positions with the same pay and benefits applicable to the Senior Executive Service while remaining within GAO's current allocation of super-grade positions. After the Congress passed the act in 2000 and the President signed it into law, GAO began the process of developing regulations to implement the four authorities it established. Because stakeholder involvement is a critical component of successful human capital management, particularly when initiatives are being introduced, GAO established a standard practice to ensure employee involvement in significant agency initiatives. GAO's standard practice involves the initial discussion and presentation of draft proposals to members of GAO's Employee Advisory Council--a panel of employees representing a variety of employee constituent groups--and also to the agency's senior executives. The Comptroller General was personally involved in the vast majority of those exchanges, which afforded an opportunity for the direct communication of employees' and managers' reactions. After the views of employees and managers were considered, further changes were made, if needed, before the draft proposal was issued to all employees for their review and consideration. Materials were posted on GAO's intranet home page, and employees were notified by E-mail that proposals were available for their review, comments, and suggestions for a period of 30 days. The documents were posted in a user-friendly format that allowed employees to access the documents and provide comments directly on any or all of the provisions. Generally, the regulations were accompanied by "Frequently Asked Questions," which elaborated on and explained the details of the provisions. The agency received 60 comments on the voluntary early retirement order, 33 on the workforce restructuring order, and 12 on the senior-level order. These comments were collected, reviewed, and carefully considered by GAO's Executive Committee prior to finalizing the regulations. The approaches that GAO took in implementing these four flexibilities as well as the results that the agency has achieved are described in the following four sections. At the time the GAO Personnel Flexibilities Act was passed, GAO's workforce was sparse at the entry level and plentiful at the midlevel. The agency was concerned about its ability to support the Congress with experienced and knowledgeable staff, given the significant percentage of the agency's senior managers and analysts reaching retirement eligibility and the relatively small number of entry-level employees who were in training to replace more senior staff. The use of the voluntary early retirement authority provided in section 1 of the act is one of the tools that the agency has used to confront this serious issue--one that is facing much of the federal community. The act allows the Comptroller General to offer voluntary early retirement to up to 10 percent of the workforce when necessary or appropriate to realign the workforce to address budgetary or mission constraints; correct skill imbalances; or reduce high-grade, supervisory, or managerial positions. This flexibility represents a proactive use of early retirement to shape the workforce to prevent or ameliorate future problems. GAO Order 2831.1, Voluntary Early Retirement, containing the agency's final regulations, was issued in April 2001 and is included in appendix I. Under the regulations, each time the Comptroller General approves a voluntary early retirement opportunity, he establishes the categories of employees who are eligible to apply. These categories are based on the need to ensure that those employees who are eligible to request voluntary early retirement are those whose separations are consistent with one or more of the three reasons for which the Comptroller General may authorize early retirements. Pursuant to GAO's regulations, these categories are defined in terms of one or more of the following criteria: organizational unit or subunit, occupational series, grade or band level, skill or knowledge requirements, performance appraisal average, geographic location, or other similar factors that the Comptroller General deems necessary and appropriate. Since it is essential that GAO retain employees with critical skills as well as its highest performers, certain categories of employees have been ineligible under the criteria. Some examples of ineligible categories are employees receiving retention allowances because of their unusually high or unique qualifications; economists, because of the difficulty that the agency has experienced in recruiting them; and staff in the information technology area. In addition, employees with performance appraisal averages above a specified level have not been eligible under the criteria. To give the fullest consideration to all interested employees, however, any employee may apply for consideration when an early retirement opportunity is announced, even if he or she does not meet the stated criteria. The Comptroller General may authorize early retirements for these applicants on the basis of the facts and circumstances of each case. The Comptroller General or his Executive Committee designee(s) considers each applicant and makes final decisions on the basis of the institutional needs of GAO. Only employees whose release is consistent with the law and GAO's objective in allowing early retirement are authorized to retire early. In some cases, this has meant that employees' requests must be denied. GAO held its first voluntary early retirement opportunity in July 2001. Employees who were approved for early retirement were required to separate in the first quarter of fiscal 2002. As required by the act, information on the fiscal 2002 early retirements was reported in an appendix to our 2002 Performance and Accountability Report. Another voluntary early retirement opportunity was authorized in fiscal 2003, and employees were required to separate by March 14, 2003. Table 1 provides the data on the number of employees separated by voluntary early retirement as of May 30, 2003. Of the 79 employees who separated from GAO through voluntary early retirement, 66, or 83.5 percent, were high-grade, supervisory, or managerial employees. High-grade, supervisory, or managerial employees are those who are in grade GS-13 or above, if covered by GAO's General Schedule, in band II or above, if covered by GAO's banded systems for Analysts and Attorneys or in any position in GAO's Senior Executive Service or Senior Level system. GAO's transformation effort is a work-in-progress and, for that reason, the agency supports additional legislation to make the voluntary early retirement provision in section 1 of Public Law 106-303 permanent. While the overall number of employees electing early retirement has been relatively small, GAO believes that careful use of voluntary early retirement has been an important tool in incrementally improving the agency's overall human capital profile. Each separation has freed resources for another use, enabling GAO to fill an entry-level position or to fill a position that will reduce a skill gap or address other succession concerns. Importantly, these separations are accomplished voluntarily with the acquiescence of both the employee and the agency. Although GAO has made progress in improving its human capital profile, there is still work to do. GAO needs to retain its option to use this flexibility when necessary to address current and future concerns. In making this recommendation, GAO points to its progress in changing the overall shape of the organization. As illustrated in figure 1, by the end of fiscal year 2002, GAO had almost a 74 percent increase in the proportion of staff at the entry level (Band I) compared with fiscal year 1998. Also, the proportion of the agency's workforce at the midlevel (Band II) decreased by about 16 percent. Since the beginning of fiscal 2001, a total of 447 employees have retired from GAO; 79 (or 17.6 percent) of those retirements are the result of GAO's early retirement offerings, and as noted above, 83.5 percent of those retiring were high-grade, supervisory, or managerial employees. The loss of these higher-level staff, along with other employees whose skills are no longer essential to GAO has helped the agency address succession planning and skill imbalance issues, in addition to increasing the numbers of entry-level staff who can be hired. In addition to authorizing voluntary early retirement for GAO employees, the act permits the Comptroller General to offer voluntary separation incentive payments--also known as "buyouts"--when necessary or appropriate to realign the workforce to meet budgetary constraints or mission needs; correct skill imbalances; or reduce high-grade, supervisory, or managerial positions. Under the act, up to 5 percent of employees could be offered such an incentive, subject to criteria established by the Comptroller General. The act requires GAO to deposit into the U.S. Treasury an amount equivalent to 45 percent of the final annual basic salary of each employee to whom a buyout is paid. The deposit is in addition to the actual buyout amount, which can be up to $25,000 for an approved individual. Given the many demands on agency resources, these costs present a strong financial incentive to use the provision sparingly, if at all. GAO anticipates little, if any, use of this authority because of the associated costs. For this reason, as well as to avoid creating unrealistic employee expectations, GAO has not developed and issued agency regulations to implement this section of the act. GAO also supports legislation making section 2---authorizing the payment of voluntary separation incentives--permanent. GAO notes that the Homeland Security Act of 2002 provides most federal agencies with buyout authority. Agencies with preexisting legislative authority to offer buyouts retain their authority, although they may be covered under the Homeland Security Act provision as well. Although GAO has not yet used its buyout authority and has no plans to do so in the foreseeable future, GAO recommends the retention of this flexibility and the elimination of the expiration date of December 31, 2003. The continuation of this provision maximizes the options available to the agency to deal with future circumstances. Since GAO is also eligible to request buyouts under the provisions of the Homeland Security Act, the agency will consider its options under this provision as well. Section 3 of the act allows the Comptroller General to prescribe regulations for the separation of GAO employees during a reduction in force or other adjustment in force consistent with those issued by the Office of Personnel Management under section 3502(a) of title 5. In the event that GAO is required to initiate involuntary job reductions, employees would compete for retention on the basis of the following factors in descending order of priority: tenure, veteran's preference, performance ratings, and length of federal service. At the discretion of the Comptroller General, retention may also be based on other objective factors, including skills and knowledge in addition to the preceding criteria. After careful analysis and deliberation, GAO Order 2351.1, Workforce Restructuring Procedures for the General Accounting Office, containing final agency regulations, was issued in January 2003. Those regulations, which are included in appendix II, provide for establishing "zones of consideration," which define the geographical and organizational boundaries within which employees compete for retention. All employees would be placed in "job groups" that comprise all positions within a zone of consideration that are at the same grade or band level and that perform the same duties and responsibilities. The highest priority would be placed on an employee's tenure of employment and veteran's preference. After consideration of those two factors, an employee would be ranked on the basis of his or her retention score. This score is based on the employee's 3- year appraisal average and his or her length of creditable federal service; greater weight is placed on performance than on length of service. GAO has not taken any actions under its workforce restructuring regulations and is sensitive to concerns that were expressed prior to the passage of Public Law 106-303 about the potential impact of GAO's modified reduction in force procedures on veterans. GAO is committed to protecting the rights of veterans in a manner consistent with title 5 and has retained all veterans' protections in GAO orders. Therefore, GAO does not foresee any impact on veterans that would differ from those at any other agency involved in realigning or reducing their workforce. Section 3, authorizing the Comptroller General to develop modified regulations for the conduct of a reduction or other adjustment in force, is a permanent authority. The act requires GAO to provide any recommendations for changes to the section at this time. GAO is unable to offer recommendations, however, because the procedures have not yet been used. Circumstances leading to the decision to separate employees involuntarily are infrequent, and it may be years before the agency has any significant experience with the use of its procedures. Therefore, GAO has no recommendations for changes to section 3 at this time. To address a variety of complex issues, GAO needed to increase its skill base in such highly competitive hiring areas as economics, information technology, actuarial science, and evaluation methodology. Section 4 of the act permits GAO to establish senior-level positions to meet critical scientific, technical, or professional needs. To recruit and retain qualified individuals, the act allows GAO to extend the rights and benefits of Senior Executive Service employees to these positions. GAO Order 2319.1, containing the agency's regulations for the employment of senior-level staff, was issued in March 2001 and is included in appendix III. GAO has used this authority to fill eight senior-level positions, including that of a Chief Accountant, Chief Economist, Chief Statistician, and Chief Actuary. In addition, three senior-level technologists have been appointed as well as a senior-level technologist with expertise in cryptography. The expertise of these senior experts in highly specialized areas of economics, technology, statistics, and cryptography has contributed significantly to GAO's efforts to support the Congress. The accomplishments achieved with the expertise and contributions of the agency's senior-level employees include work on biometric technologies for U.S. border security, anthrax irradiation of U.S. mail, and National Missile Defense systems. These experts have also contributed to ensuring that GAO's work is based on the most technically accurate methodologies for conducting cost-benefit studies and for utilizing appropriate data sources. GAO has found this flexibility to be a critical component in its efforts to ensure that the agency maintains the skills and knowledge necessary to address the many highly complex areas of interest to the Congress. The act does not require recommendations from GAO on section 4, which permits the agency to establish senior-level positions to meet critical scientific, technical, or professional needs. When the act was under consideration, some GAO employees expressed their concerns about the legislation to their Congressional representatives. To ensure the active consideration of employees' views, the act requires that this report include any assessments or recommendations of the GAO Personnel Appeals Board and of any interested groups or associations representing officers or employees of GAO. GAO also agreed to include in this report information about any impact upon employees' attitudes and opinions, as measured by employee feedback survey responses. In response to these requirements, GAO's Human Capital Officer sent a request soliciting recommendations for inclusion in this report to the Executive Director of the Personnel Appeals Board. The agency also alerted the members of GAO's Employee Advisory Council by sending all members a memorandum notifying them of this provision. The topic was included on the agenda of the council's quarterly meeting with the Comptroller General in March, and all members of the Employee Advisory Council were given a draft copy of the report for their review. GAO's managing directors were also given a draft of this report for review. In addition, on May 21, 2003, a meeting of all GAO's senior executives was held. At this meeting the Comptroller General solicited the views of senior staff on extending provisions of Public Law 106-303. The Personnel Appeals Board did not submit a specific assessment of the act's implementation. However, in letter to GAO's Human Capital Officer, dated May 15, 2003, Beth Don, Executive Director of the Personnel Appeals Board, stated that the board would be "willing to do a more comprehensive report in a year or so, at which point we think there will be more information available on the implementation and effectiveness of the personnel flexibilities granted under the Act." Importantly, Ms. Don indicated that no cases had been filed with the Personnel Appeals Board concerning the matters covered by the act. She also stated that the board did not believe it was appropriate to comment, among other things, on the substantive nature of the regulations promulgated by GAO, or the manner in which the regulations were promulgated since the Board may be called upon to adjudicate matters relating to the act and its implementation. The Employee Advisory Council responded on May 13, 2002, that it did not have any comments on the report at this time. Using electronic polling technology that allows for confidential responses, GAO's senior executives were asked if the voluntary early retirement and voluntary separation incentive authorities should be made permanent. All but one of the 110 respondents agreed or strongly agreed that GAO should seek legislation to make these provisions permanent. One respondent was undecided. As part of ongoing agency efforts to monitor progress in people measures, GAO conducted employee feedback surveys in 1999 and 2002--before and after the act's passage. This survey asked employees for their agreement or disagreement with a variety of statements relating to their work life but was not designed to measure the impact of the act's flexibilities on employee satisfaction. The 2000 survey elicited an 89 percent response rate, which was even better than the outstanding 87 percent achieved in 1999. On the basis of a comparison of responses to key questions in 2002 and 1999, employee satisfaction (as measured by the number of "strongly agree"/"agree" responses) was up in 50 of the 52 categories. Negative responses (as measured by the number of "strongly disagree"/"disagree" responses) also declined in 50 of 52 categories. GAO believes that the impact of the legislation on its employees has been positive. Clearly, the employees who requested and were approved for early retirement benefited from the act. Furthermore, the realignment of resources resulting from these retirements has had a positive impact on the remaining employees, as well. Ultimately, GAO's efforts to improve the strategic management of GAO's human capital, of which the legislation is a part, benefit all of GAO. Having the right people in the right places makes it easier for all GAO employees to be successful in accomplishing their part of the agency's mission. In the final analysis, the agency's efforts to maximize its value allow us to better serve the Congress and the American people.

Leading public organizations here and abroud have found that strategic human capital management must be the centerpiece of any serious change management initiative and effort to transform the culture of government agancies. GAO is not immune to these challenges facing the federal government. Over the past 3 years, however, we have made considerable progress toward addressing a number of our major human capital challenges through various initiatives. While many of the initiatives were administrative in nature, the additional flexibilities that the Congress authorized in Public Law 106-303 have helped to ensure that we have the right staff, with the right skills, in the right locations to better meet the needs of the Congress and the American people.

The public faces the risk that critical services could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, airline flights grounded, and national defense affected. The many interdependencies that exist among the levels of governments and within key economic sectors of our nation could cause a single failure to have wide-ranging repercussions. While managers in the government and the private sector are acting to mitigate these risks, a significant amount of work remains. The federal government is extremely vulnerable to the Year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations. This challenge is made more difficult by the age and poor documentation of many of the government's existing systems and its lackluster track record in modernizing systems to deliver expected improvements and meet promised deadlines. Year 2000-related problems have already occurred. For example, an automated Defense Logistics Agency system erroneously deactivated 90,000 inventoried items as the result of an incorrect date calculation. According to the agency, if the problem had not been corrected (which took 400 work hours), the impact would have seriously hampered its mission to deliver materiel in a timely manner. Our reviews of federal agency Year 2000 programs have found uneven progress, and our reports contain numerous recommendations, which the agencies have almost universally agreed to implement. Among them are the need to establish priorities, solidify data exchange agreements, and develop contingency plans. One of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, with this electronic dependence and massive exchanging of data comes increasing risk that uncorrected Year 2000 problems in other countries will adversely affect the United States. And there are indications of Year 2000 readiness problems internationally. In September 1997, the Gartner Group, a private research firm acknowledged for its expertise in Year 2000 computing issues, surveyed 2,400 companies in 17 countries and concluded that "hirty percent of all companies have not started dealing with the year 2000 problem." As 2000 approaches, the scope of the risks that the century change could bring has become more clear, and the federal government's actions have intensified. This past February, an executive order was issued establishing the President's Council on Year 2000 Conversion. The Council Chair is to oversee federal agency Year 2000 efforts as well as be the spokesman in national and international forums, coordinate with state and local governments, promote appropriate federal roles with respect to private-sector activities, and report to the President on a quarterly basis. As we testified last month, there are a number of actions we believe the Council must take to avert this crisis. We plan to issue a report later this month detailing our specific recommendations. The following summarizes a few of the key areas in which we will be recommending action. Because departments and agencies have taken longer than recommended to assess the readiness of their systems, it is unlikely that they will be able to renovate and fully test all mission-critical systems by January 1, 2000. Consequently, setting priorities is essential, with the focus being on systems most critical to our health and safety, financial well being, national security, or the economy. Agencies must start business continuity and contingency planning now to safeguard their ability to deliver a minimum acceptable level of services in the event of Year 2000-induced failures. Last month, we issued an exposure draft of a guide providing information on business continuity and contingency planning issues common to most large enterprises.Agencies developing such plans only for systems currently behind schedule, however, are not addressing the need to ensure business continuity in the event of unforeseen failures. Further, such plans should not be limited to the risks posed by the Year 2000-induced failures of internal information systems, but must include the potential Year 2000 failures of others, including business partners and infrastructure service providers. The Office of Management and Budget's (OMB) assessment of the current status of federal Year 2000 progress is predominantly based on agency reports that have not been consistently verified or independently reviewed. Without such independent reviews, OMB and the President's Council on Year 2000 Conversion have little assurance that they are receiving accurate information. Accordingly, agencies must have independent verification strategies involving inspectors general or other independent organizations. As a nation, we do not know where we stand with regard to Year 2000 risks and readiness. No nationwide assessment--including the private and public sectors--has been undertaken to gauge this. In partnership with the private sector and state and local governments, the President's Council could orchestrate such an assessment. Ensuring that information systems are made Year 2000 compliant is an enormous, difficult, and time-consuming challenge for a large organization such as the Department of the Interior. Interior's systems support a wide range of programs; unless they can function into the next century, the department is at risk of being unable to effectively or efficiently carry out its critical missions. As the nation's principal conservation agency, Interior has responsibility for managing most of our nationally owned public lands and natural resources, protecting our fish and wildlife, and preserving the environmental and cultural values of our national parks and historic places. The department's core business processes could fail--in whole or in part--if supporting information systems are not made Year 2000 compliant in time. These include systems that account for and disburse mineral royalties of about $300 million each support the management of the nation's lands and mineral resources, account for and maintain records on over $2.5 billion of American Indian trust fund assets, and detect and analyze ground motion and provide early warnings of earthquakes. A detailed example of this kind of risk can be seen in recent work we performed for the House Committee on Appropriations, Subcommittee on Interior and Related Agencies, where we concluded that recent and potential future delays in the Bureau of Land Management's (BLM) Automated Land and Mineral Record System (ALMRS) introduce the risk that BLM will lose information systems support for some core business processes. Two systems that ALMRS is scheduled to replace, the Case Recordation System and the Mining Claim Recordation System, are currently not Year 2000 compliant. BLM uses these two systems to create and manage land and mineral case files. They capture and provide information on case type, customer, authorizations, and legal descriptions. Without these systems, BLM cannot create and record new cases, such as mining claims, or update case information. Delays in implementing ALMRS introduce the risk that BLM will be forced to continue using these two systems beyond 2000. To mitigate this risk, BLM has begun planning to ensure that these two systems can run in 2000 and beyond, if necessary. BLM has not yet, however, completed its assessment to determine what specific actions are needed to accomplish this, nor has it developed a contingency plan to ensure the continuity of core business processes in the event that ALMRS is not fully deployed by 2000. In a draft report to be released soon, we are recommending that BLM assess the systems to be replaced by ALMRS to determine what actions are needed to ensure their continued use after January 1, 2000, and develop a contingency plan should ALMRS not be fully and successfully deployed in time. Interior officials have stated that they recognize the importance of ensuring that their systems are Year 2000 compliant. The Secretary has said that identifying and correcting Year 2000 computer problems is a priority, and the former Chief Information Officer called this challenge one of the most serious operational and administrative problems the department has ever faced. In assessing the magnitude of the problem, the department's bureaus and offices identified 95 mission-critical systems,with a total of about 18 million lines of software code, all of which must be examined. Interior estimates that correcting these 95 systems will cost $17.3 million, as shown in the following table. In addition to these systems, the department is also assessing its communications systems and embedded computer chip technologies to determine whether they will be affected by the coming century change. Embedded systems are special-purpose computers built into other devices. Many facilities used by the federal government that were built or renovated within the last 20 years contain embedded computer systems to control, monitor, or assist in operations. If the embedded chips used in such devices contain two-digit date fields for year representation, the devices could malfunction. For example, control systems that regulate water flow and generators in our nation's dams, which produce over 42 billion kilowatts of energy each year, could fail. Interior's Year 2000 program operates in a decentralized fashion as its bureaus and offices are responsible for identifying and assessing their mission-critical systems, determining correction priorities, and making their own mission-critical systems Year 2000 compliant. Departmental oversight is provided by Interior's Year 2000 Project Office. This office reports directly to the Chief Information Officer. The Year 2000 Project Team consists of a Year 2000 coordinator from the department and a representative located in each bureau or office. The bureaus and offices maintain information used to manage their Year 2000 activities. Bureau and office representatives submit monthly milestone and status information to the coordinator, which he analyzes and compiles manually. The coordinator tracks major milestones, such as systems assessments completed, Year 2000 renovations completed, and systems implemented. The information is forwarded to the Chief Information Officer and, each quarter, to OMB. According to Interior's Year 2000 coordinator, he tracks the 95 mission-critical systems and maintains status information in a word processing table that lacks the capability for automated tracking or analysis. He stated that he notifies the Chief Information Officer of any reported milestone delays, which are then discussed at senior-level management meetings. Table 2 shows the status of the 67 mission-critical systems that are being renovated, as reported to OMB on February 15, 1998. (This table does not include the other 28 mission-critical systems, which are considered already compliant or are being replaced.) Accurate reporting is critical to ensuring that executive management receives a reliable picture of the Year 2000 progress of component organizations. This is particularly important at Interior, where much of the Year 2000 program responsibility is delegated to the individual bureaus and offices. Although the department relies on its bureaus to provide monthly reports on the status of their Year 2000 renovation actions, to date it has not verified the accuracy and reliability of the reported information. As the only staff member in Interior's Year 2000 Project Office, the department's coordinator does not have the ability to verify the accuracy of reported information on the bureaus' and offices' mission-critical systems. Therefore, the Chief Information Officer requested that Interior's Inspector General assist in monitoring the progress of the individual bureaus in achieving Year 2000 compliance. It is important to verify because if the data are inaccurate, it will be more difficult to identify and correct problems promptly. Interior regularly exchanges data with other organizations. In many instances, these data are critical to the department's operations. In response to a recent survey we conducted, Interior reported that 40 of its 95 mission-critical systems exchange electronic data with other federal, state, and local agencies; domestic and foreign private sectors; and foreign governments. Although the bureaus have identified over 2,900 incoming and outgoing external data exchanges, the department does not have a central inventory. While it has asked each bureau and office head to certify that date-sensitive data exchanges have been identified and data exchange partners contacted to begin resolving date-format issues, the lack of a centralized inventory and an automated way to maintain it means that Interior could be missing key information showing whether exchange agreements are proceeding as scheduled. Failure to reach such agreements raises the risk that Interior's systems will receive noncompliant data that can corrupt its databases. The risk of failure is not limited to an organization's internal information systems, but includes the potential Year 2000 failures of others, such as business partners. One weak link in the chain of critical dependencies and even the most successful Year 2000 program will fail to protect against major disruption of business operations. Because of these risks, agencies must start business continuity and contingency planning now in order to reduce the risk of Year 2000-induced business failures. Interior has recognized, to some degree, the critical need for contingency planning, and has asked its bureaus and offices to develop such plans for all mission-critical systems that are behind schedule. However, it has not instructed its component organizations to develop plans to ensure the continuity of core business operations. As noted, agencies developing such plans only for systems currently behind schedule are not addressing the need to ensure business continuity in the event of unforeseen failures. Further, such plans should not be limited to the risks posed by Year 2000-induced failures of internal information systems. In conclusion, the change of century will initially present many difficult challenges in information technology and continuity of business operations, and has the potential to cause serious disruption to the nation and to the Department of the Interior. These risks can be mitigated and disruptions minimized with proper attention and management. While Interior has been working to mitigate its Year 2000 risks, further action must be taken to avoid losing the ability to continue mission-critical business operations. Continued congressional oversight through hearings such as this can help ensure that such attention continues and that appropriate actions are taken to address this crisis. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Committee may have at this time. Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, Exposure Draft, March 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Office of Thrift Supervision's Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation's Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC's Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation's Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems' Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration's Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computers Systems: Risks of VBA's Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed where the federal government stands in its efforts to lessen Year 2000 risks and GAO's preliminary observations on Year 2000 activities at the Department of the Interior. GAO noted that: (1) the federal government is extremely vulnerable to the Year 2000 issue due to its widespread dependence on computer systems; (2) its reviews of federal agency Year 2000 programs have found uneven progress, and its reports contain numerous recommendations, which the agencies have almost universally agreed to implement; (3) one of the largest, and largely unknown, risks relates to the global nature of the Year 2000 problem; (4) with electronic dependence and massive exchange of data comes increasing risk that uncorrected Year 2000 problems in other countries will adversely affect the United States; (5) setting priorities for Year 2000 conversion is essential, with the focus being on systems most critical to health and safety, financial well being, national security, or the economy; (6) agencies must start business continuity and contingency planning now to safeguard their ability to deliver a minimum acceptable level of services in the event of Year 2000-induced failures; (7) agencies must have strategies for independently verifying the status of their Year 2000 efforts; (8) no nationwide assessment, including the private and public sectors, has been undertaken of Year 2000 risks and readiness; (9) Interior estimates that correcting its 95 mission-critical systems will cost $17.3 million; (10) Interior is also assessing its communications systems and embedded chip technologies to determine whether they will be affected by the century change; and (11) Interior's Year 2000 coordinator does not have the ability to verify the accuracy of reported information on the bureaus' and offices' mission-critical systems.

Federal law and policy have established roles and responsibilities for federal agencies to coordinate with industry in enhancing the security and resilience of critical government and industry infrastructures. According to the Homeland Security Act of 2002, as amended, DHS is to, among other things, carry out comprehensive vulnerability assessments of CI; integrate relevant information, analyses, and assessments from within DHS and from CI partners; and use the information collected to identify priorities for protective and support measures. Assessments include areas that can be assessed for vulnerability (hereinafter referred to as "areas"), such as perimeter security, the presence of a security force, or vulnerabilities to intentional acts, including acts of terrorism. Presidential Policy Directive/PPD-21 directs DHS to, among other things, provide strategic guidance, promote a national unity of effort, and coordinate the overall federal effort to promote the security and resilience of the nation's CI. Related to PPD-21, the NIPP calls for the CI community and associated stakeholders to carry out an integrated approach to (1) identify, deter, detect, disrupt, and prepare for threats and hazards (all hazards); (2) reduce vulnerabilities of critical assets, systems, and networks; and (3) mitigate the potential consequence to CI to incidents or events that do occur. According to the NIPP, CI partners are to identify risk in a coordinated and comprehensive manner across the CI community; minimize duplication; consider interdependencies; and, as appropriate, share information within the CI community. Within DHS, 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 security program. NPPD's Office of Infrastructure Protection (IP) has overall responsibility for coordinating implementation of the NIPP across the 16 CI sectors, including providing guidance to SSAs and CI owners and operators on protective measures to assist in enhancing the security of infrastructure and helping CI sector partners develop the capabilities to mitigate vulnerabilities and identifiable risks to the assets. The NIPP also designates other federal agencies, as well as some offices and components within DHS, as SSAs that are responsible for, among other things, coordinating with DHS and other federal departments and agencies and CI owners and operators to identify vulnerabilities, and to help mitigate incidents, as appropriate. DHS offices and components or asset owners and operators have used various assessment tools and methods, some of which are voluntary, while others are required by law or regulation, to gather information about certain aspects of CI. For example, Protective Security Coordination Division (PSCD), within NPPD, relies on Protective Security Advisors (PSA) to offer and conduct voluntary vulnerability assessments to owners and operators of CI to help identify potential security actions; Infrastructure Security Compliance Division, within NPPD, requires regulated chemical facilities to complete a security vulnerability assessment pursuant to CFATS;TSA conducts various assessments of airports, pipelines, and rail and transit systems; and Coast Guard requires facilities it regulates under the Maritime Transportation Security Act of 2002 (MTSA) to complete assessments as part of their security planning process. In addition, SSAs external to DHS also offer vulnerability assessment tools and methods to owners or operators of CI and these assessments include areas such as resilience management or perimeter security. For example, the Environmental Protection Agency, the SSA for the water sector, provides a self-assessment tool for the conduct of voluntary security-related assessments at water and wastewater facilities. DHS's took steps to address barriers to conducting critical infrastructure vulnerability assessments and sharing information, in response to findings from our previous work. Specifically, DHS has made progress in the following areas: Determining why some industry partners do not participate in voluntary assessments. DHS supports the development of the national risk picture by conducting vulnerability assessments and security surveys to identify security gaps and potential vulnerabilities in the nation's high- priority critical infrastructure. In a May 2012 report, we assessed the extent to which DHS had taken action to conduct security surveys using its Infrastructure Survey Tool (IST) and vulnerability assessments among high-priority infrastructure, shared the results of these surveys and assessments with asset owners or operators, and assessed their effectiveness. We found that various factors influence whether industry owners and operators of assets participate in these voluntary programs, but that DHS did not systematically collect data on reasons why some owners and operators of high-priority assets declined to participate in security surveys or vulnerability assessments. We concluded that collecting data on the reason for declinations could help DHS take steps to enhance the overall protection and resilience of those high-priority critical infrastructure assets crucial to national security, public health and safety, and the economy. We recommended, and DHS concurred, that DHS design and implement a mechanism for systematically assessing why owners and operators of high-priority assets decline to participate. In response to our recommendations, in October 2013 DHS developed and implemented a tracking system to capture and account for declinations. In addition, in August 2014 DHS established a policy to conduct quarterly reviews to, among other things, track these and other survey and assessment programs and identify gaps and requirements for priorities and help DHS better understand what barriers owners and operators of critical infrastructure face in making improvements to the security of their assets. Sharing of assessment results at the asset level in a timely manner. 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 shared the results of security surveys and vulnerability assessments with asset owners or operators. However, we also found that the usefulness of security survey and vulnerability assessment results could be enhanced by the timely delivery of these products to the owners and operators. We reported 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 the 30-day time frame for delivering the results of its security surveys required by DHS guidance 60 percent of the time. DHS officials acknowledged the late delivery of survey and assessment results and said they were working to improve processes and protocols. However, DHS had not established a plan with time frames and milestones for managing this effort. 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. In response to our recommendation, DHS established timeframes and milestones to ensure the timely delivery of assessment results of the surveys and assessments to CI owners and operators. In addition, in February 2013, DHS transitioned to a web-based delivery system, which, according to DHS, has since resulted in a significant drop in overdue deliveries. 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, including vulnerabilities identified, with the primary stakeholders--officials representing the state where the RRAP was conducted--and that each report is generally available to SSAs and protective security advisors within DHS. Sharing information with sector-specific agencies and state and local governments. Federal SSAs 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), and how DHS worked with states and SSAs to develop the high-priority CI list. The program identifies a list of nationally significant critical infrastructure each year that is used to, among other things, prioritize voluntary vulnerability assessments conducted by PSAs on high-priority critical infrastructure. We reported that DHS had taken actions to improve its outreach to SSAs and states in an effort to address challenges associated with providing input on nominations and changes to the NCIPP list. 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. Among other actions, we recommended that DHS commission an independent, external peer review of the NCIPP with clear project objectives. In November 2013, DHS commissioned a panel that reviewed the NCIPP process, guidance documentation, and process phases to provide an evaluation of the extent to which the process is comprehensive, reproducible, and defensible. The panel made 24 observations about the NCIPP; however, panel members expressed different views regarding the classification of the NCIPP list, and views on whether private sector owners of the assets, systems, and clusters should be notified of inclusion on the list. As of August 2014, DHS officials reported that they are exploring options to streamline the process and limit the delay of dissemination among those who have a need-to-know. Our previous work identified a need for DHS vulnerability assessment guidance and coordination. Specifically, we found: Establishing guidance for areas of vulnerability covered by assessments. In a September 2014 report examining, among other things, the extent to which DHS is positioned to integrate vulnerability assessments to identify priorities, we found that the vulnerability assessment tools and methods DHS offices and components use vary with respect to the areas assessed depending on which DHS office or component conducts or requires the assessment. As a result, it was not clear what areas DHS believes should be included in a comprehensive vulnerability assessment. Moreover, we found that DHS had not issued guidance to ensure that the areas it deems most important are captured in assessments conducted or required by its offices and components. Our analysis of 10 vulnerability assessment tools and methods showed that DHS vulnerability assessments consistently included some areas that were assessed for vulnerability but included other areas that were not consistently assessed. Our analysis showed that all 10 of the DHS assessment tools and methods we analyzed included areas such as "vulnerabilities from intentional acts"--such as terrorism--and "perimeter security" in the assessment. However, 8 of the 10 assessment tools and methods did not include areas such as "vulnerabilities to all hazards" such as hurricanes or earthquakes while the other 2 did. These differences in areas assessed among the various assessment tools and methods could complicate or hinder DHS's ability to integrate relevant assessments in order to identify priorities for protective and support measures. We found that the assessments conducted or required by DHS offices and components also varied greatly in their length and the detail of information to be collected. For example, within NPPD, PSCD used its IST to assess high-priority facilities that voluntarily participate and this tool was used across the spectrum of CI sectors. The IST, which contains more than 100 questions and 1,500 variables, is used to gather information on the security posture of CI, and the results of the IST can inform owners and operators of potential vulnerabilities facing their asset or system. In another example from NPPD, ISCD required owners and operators of facilities that possess, store, or manufacture certain chemicals under CFATS to provide data on their facilities using an online tool so that ISCD can assess the risk posed by covered facilities. This tool, ISCD's Chemical Security Assessment Tool Security Vulnerability Assessment contained more than 100 questions based on how owners respond to an initial set of questions. Within DHS, TSA's Office of Security Operations offered or conducted a number of assessments, such as a 205-question assessment of transit systems called the Baseline Assessment for Security Enhancements that contained areas to be assessed for vulnerability, and TSA's 17-question Freight Rail Risk Analysis Tool was used to assess rail bridges. In addition to differences in what areas were included, there were also differences in the detail of information collected for individual areas, making it difficult to determine the extent to which the information collected was comparable and what assumptions and/or judgments were used while gathering assessment data. We also observed that components used different questions for the same areas assessed. These variations, among others we identified, could impede DHS's ability to integrate relevant information and use it to identify priorities for protective and support measures regarding terrorist and other threats to homeland security. For example, we found that while some components asked open-ended questions such as "describe security personnel," others included drop-down menus or lists of responses to be selected. We recommended that DHS review its vulnerability assessments to identify the most important areas to be assessed, and determine the areas and level of detail that are necessary to integrate assessments and enable comparisons, and establish guidance, among other things. DHS agreed with our recommendation, and established a working group in August 2015 to address this recommendation and others we made. As of March 2016 these efforts are ongoing and DHS intends to provide an update in the summer of 2016. Establishing guidance on common data standards to help reduce assessment fatigue and improve information sharing. As we reported in September 2014, federal assessment fatigue could impede DHS's ability to garner the participation of CI owners and operators in its voluntary assessment activities. During our review of vulnerability assessments, the Coast Guard, PSCD, and TSA field personnel we contacted reported observing what they called federal fatigue, or a perceived weariness among CI owners and operators who had been repeatedly approached or required by multiple federal agencies and DHS offices and components to participate in or complete assessments. One official who handles security issues for an association representing owners and operators of CI expressed concerns at the time about his members' level of fatigue. Specifically, he shared observations that DHS offices and components do not appear to effectively coordinate with one another on assessment-related activities to share or use information and data that have already been gathered by one of them. The official also noted that, from the association's perspective, the requests and invitations to participate in assessments have exceeded what is necessary to develop relevant and useful information, and information is being collected in a way that is not the best use of the owners' and operators' time. As figure 1 illustrates, depending on a given asset or facility's operations, infrastructure, and location, an owner or operator could be asked or required to participate in multiple separate vulnerability assessments. DHS officials expressed concern at the time that this "fatigue" may diminish future cooperation from asset owners and operators. We recommended in September 2014 that DHS develop an approach for consistently collecting and maintaining data from assessments conducted across DHS to facilitate the identification of potential duplication and gaps in coverage. Having common data standards would better position DHS offices and components to minimize the aforementioned fatigue, and the resulting declines in CI owner and operator participation, by making it easier for DHS offices and components to use each other's data to determine what CI assets or facilities may have been already visited or assessed by another office or component. They could then plan their assessment efforts and outreach accordingly to minimize the potential for making multiple visits to the same assets or facilities. DHS agreed with our recommendation, and as of March 2016 DHS had established a working group to address the recommendations from our report and planned to provide us with a status update in the summer of 2016. Addressing the potential for duplication, overlap, or gaps between and among the various efforts. As with the sharing of common assessment data, we found in our 2014 review of vulnerability assessments that DHS also lacks a department-wide process to facilitate coordination among the various offices and components that conduct vulnerability assessments or require assessments on the part of owners and operators. This could hinder the ability to identify gaps or potential duplication in DHS assessments. For example, among 10 different types of DHS vulnerability assessments we compared, we found that DHS assessment activities were overlapping across some of the sectors, but not others. Given the overlap of DHS's assessments among many of the 16 sectors, we attempted to compare data to determine whether DHS had conducted or required vulnerability assessments at the same critical infrastructure within those sectors. However, we were unable to conduct this comparison because of differences in the way data about these activities were captured and maintained. Officials representing DHS acknowledged at the time they encountered challenges with the consistency of assessment data and stated that DHS-wide interoperability standards did not exist for them to follow in recording their assessment activities that would facilitate consistency and enable comparisons among the different data sets. The NIPP calls for standardized processes to promote integration and coordination of information sharing through, among other things, jointly developed standard operating procedures. However, DHS officials stated at the time that they generally relied on field-based personnel to inform their counterparts at other offices and components about planned assessment activities and share information as needed on what assets may have already been assessed. For example, PSAs may inform and invite CI partners to participate in these assessments, if the owner and operator of the asset agrees. PSAs may also alert their DHS counterparts depending on assets covered and their areas of responsibility. However, we found that absent these field-based coordination or sharing activities, it was unclear whether all facilities in a particular geographic area or sector were covered. For example, after CFATS took effect, in 2007, ISCD officials asked PSCD to stop having PSAs conduct voluntary assessments at CFATS-regulated chemical facilities to reduce potential confusion about DHS authority over chemical facility security and to avoid overlapping assessments. In response, PSCD reduced the number of voluntary vulnerability assessments conducted in the chemical sector. However, one former ISCD official noted that without direct and continuous coordination between PSCD and ISCD on what facilities are being assessed or regulated by each division, this could create a gap in assessment coverage between CFATS-regulated facilities and facilities that could have participated in PSCD assessments given that the number of CFATS-regulated facilities can fluctuate over time. Without processes for DHS offices and components to share data and coordinate with each other in their CI vulnerability assessment activities, DHS cannot provide reasonable assurance that it can identify potential duplication, overlap, or gaps in coverage that could ultimately affect DHS's ability to work with its partners to enhance national CI security and resilience, consistent with the NIPP. We recommended in September 2014 that DHS develop an approach to ensure that vulnerability data gathered on CI be consistently collected and maintained across DHS to facilitate the identification of potential duplication and gaps in CI coverage. As of March 2016, DHS has begun a process of identifying the appropriate level of guidance to eliminate gaps or duplication in methods and to coordinate vulnerability assessments throughout the department. We also recommended that DHS identify key CI security-related assessment tools and methods used or offered by SSAs and other federal agencies, analyze them to determine the areas of vulnerability they capture, and develop and provide guidance for what areas should be included in vulnerability assessments of CI that can be used by DHS and other CI partners in an integrated and coordinated manner. DHS concurred with our recommendations and stated that it planned to take a variety of actions to address the issues we identified, including conducting an inventory survey of the security-related assessment tools and methods used by SSAs to address CI vulnerabilities. As of March 2016, DHS has established a working group, consisting of members from multiple departments and agencies, to enhance the integration and coordination of vulnerability assessment efforts. These efforts are ongoing and we will continue to monitor DHS's progress in implementing these recommendations. In addition to efforts to address our recommendations, DHS is in the process of reorganizing NPPD to ensure that it is appropriately positioned to carry out its critical mission of cyber and infrastructure security. Key priorities of this effort are to include greater unity of effort across the organization and enhanced operational activity to leverage the expertise, skills, information, and relationships throughout DHS. The NPPD reorganization presents DHS with an opportunity to engage stakeholders in decision-making and may achieve greater efficiency or effectiveness by reducing programmatic duplication, overlap, and fragmentation. It also presents DHS with an opportunity to mitigate potential duplication or gaps by consistently capturing and maintaining data from overlapping vulnerability assessments of CI and improving data sharing and coordination among the offices and components involved with these assessments. Chairman Ratcliffe, Ranking Member Richmond, and members of the sub-committee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (404) 679-1875 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 include Ben Atwater, Assistant Director; Andrew Curry, Analyst-in-Charge; and Peter Haderlein. 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 security 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.

Protecting the security of CI is a top priority for the nation. CI includes assets and systems, whether physical or cyber, that are so vital to the United States that their destruction would have a debilitating impact on, among other things, national security or the economy. Multiple federal entities, including DHS, are involved in assessing CI vulnerabilities, and assessment fatigue could impede DHS's ability to garner the participation of CI owners and operators in its voluntary assessment activities. This testimony summarizes past GAO findings on progress made and improvements needed in DHS's vulnerability assessments, such as addressing potential duplication and gaps in these efforts. This statement is based on products GAO issued from May 2012 through October 2015 and recommendation follow-up conducted through March 2016. GAO reviewed applicable laws, regulations, directives, and policies from selected programs. GAO interviewed officials responsible for administering these programs and assessed related data. GAO interviewed and surveyed a range of stakeholders, including federal officials, and CI owners and operators. GAO's prior work has shown the Department of Homeland Security (DHS) has made progress in addressing barriers to conducting voluntary assessments but guidance is needed for DHS's critical infrastructure (CI) vulnerability assessments activities and to address potential duplication and gaps. For example: Determining why some industry partners do not participate in voluntary assessments . In May 2012, GAO reported that various factors influence whether CI owners and operators participate in voluntary assessments that DHS uses to identify security gaps and potential vulnerabilities, but that DHS did not systematically collect data on reasons why some owners and operators of high-priority CI declined to participate. GAO concluded that collecting data on the reason for declinations could help DHS take steps to enhance the overall security and resilience of high-priority CI crucial to national security, public health and safety, and the economy, and made a recommendation to that effect. DHS concurred and has taken steps to address the recommendation, including developing a tracking system in October 2013 to capture declinations. Establishing guidance for areas of vulnerability covered by assessments. In September 2014, GAO reported that the vulnerability assessment tools and methods DHS offices and components use vary with respect to the areas of vulnerability--such as perimeter security--assessed depending on which DHS office or component conducts or requires the assessment. As a result it was not clear what areas DHS believes should be included in its assessments. GAO recommended that DHS review its vulnerability assessments to identify the most important areas of vulnerability to be assessed, and establish guidance, among other things. DHS agreed and established a working group in August 2015 to address this recommendation. As of March 2016 these efforts were ongoing with a status update expected in the summer of 2016. Addressing the potential for duplication, overlap, or gaps between and among the various efforts . In September 2014, GAO found overlapping assessment activities and reported that DHS lacks a department-wide process to facilitate coordination among the various offices and components that conduct vulnerability assessments or require assessments on the part of owners and operators. This could hinder the ability to identify gaps or potential duplication in DHS assessments. GAO identified opportunities for DHS to coordinate with other federal partners to share information regarding assessments. In response to GAO recommendations, DHS began a process of identifying the appropriate level of guidance to eliminate gaps or duplication in methods and to coordinate vulnerability assessments throughout the department. GAO also recommended that DHS identify key CI security-related assessment tools and methods used or offered by other federal agencies, analyze them to determine the areas they capture, and develop and provide guidance for what areas should be included in vulnerability assessments of CI that can be used by DHS and other CI partners in an integrated and coordinated manner. DHS agreed, and as of March 2016, established a working group to address GAO recommendations. GAO made recommendations to DHS in prior reports to strengthen its assessment efforts. DHS agreed with these recommendations and reported actions or plans to address them. GAO will continue to monitor DHS efforts to address these recommendations.

We found weak or nonexistent controls in the process that FEMA used to review disaster registrations and approve assistance payments that leave the federal government vulnerable to fraud and abuse. In the critical aftermath of hurricanes Katrina and Rita, FEMA moved swiftly to distribute expedited assistance payments to allow disaster victims to mitigate and overcome the effects of the disasters. In this context, the establishment of an effective control environment was a significant challenge. Specifically, we found that FEMA had implemented some controls prior to the disaster to provide automated validation of the identity of registrants who applied for assistance via the Internet. Our work thus far indicates that this resulted in FEMA rejecting some registrants who provided names and SSNs that did not pass the validation test. However, FEMA did not implement the same preventive controls for those who applied via the telephone. Our use of fictitious names, bogus addresses, and fabricated disaster stories to obtain expedited assistance payments from FEMA demonstrated the ease with which expedited assistance could be obtained by providing false information over the telephone. Because expedited assistance is a gateway to further IHP payments (up to $26,200 per registration), approval for expedited assistance payments potentially exposes FEMA, and the federal government, to more fraud and abuse related to temporary housing, home repair and replacement, and other needs assistance. During the course of our audit and investigation, FEMA officials stated that they did not verify whether registrants had insurance and whether registrants were unable to live in their home prior to approving expedited assistance payments. According to FEMA officials, the unprecedented scale of the two disasters and the need to move quickly to mitigate their impact led FEMA to implement expedited assistance. Expedited assistance differs from the traditional way of delivering disaster assistance in that it calls for FEMA to provide assistance without requiring proof of losses and verifying the extent of such losses. Consequently, FEMA implemented limited controls to verify eligibility for the initial expedited assistance payments. According to FEMA officials, these controls were restricted to determining whether the damaged residence was in the disaster area and limited validation of the identity of registrants who used the Internet. Registrants who FEMA thought met these qualifications based on their limited assessments were deemed eligible for expedited assistance. FEMA implemented different procedures when processing disaster registrations submitted via the Internet and telephone calls. Of the more than 2.5 million registrations recorded in FEMA's database, i.e., registrations that were successfully recorded--60 percent (more than 1.5 million) were exempt from any identity verification because they were submitted via the telephone. Prior to sending out expedited assistance payments, FEMA did not have procedures in place for Internet or telephone registrations that screened out registrations where the alleged damaged address was a bogus address. The lack of identity verification for telephone registrations and any address validation exposed the government to fraud and abuse of the IHP program. For registrations taken through FEMA's Web site, registrants were required to first provide a name, SSN, and date of birth. This information was immediately provided (in electronic format) to a FEMA contractor to compare against existing publicly available records. While registrants were waiting on the Internet, the FEMA contractor took steps to verify registrants' identities. The verification steps involved confirming that the SSN matched with a SSN in public records, that the name and SSN combination matched with an identity registered in public records, and that the SSN was not associated with a deceased individual. The FEMA contractor was responsible for blocking any registrations for which any of these three conditions was not met. Additionally, registrants who passed the first gate had to provide answers to a number of questions aimed at further corroborating the registrants' identities. Registrants who were rejected via the Internet were advised to contact FEMA via telephone. Our audit and investigative work indicated that this verification process helped deter obviously fraudulent Internet registrations using false names and SSNs. However, FEMA kept no record of the names, SSNs, and other information related to the rejected registrations, and no record of the reasons that the FEMA contractor blocked the registration from going forward. FEMA acknowledged that it was conceivable that individuals who were rejected because of false information submitted via the Internet could get expedited assistance payments by providing the same false information over the telephone. Although the identity verification process appeared to have worked for most Internet registrations, it did not identify a small number of registrations with invalid SSNs. According to information we received from the SSA, nearly 60 Internet registrants who received FEMA payments provided SSNs that were never issued or belonged to individuals who were deceased prior to the hurricanes. Results indicate that these individuals may have passed the verification process because public records used to verify registrants' identities were flawed. For example, one credit history we obtained indicated that a registrant had established a credit history using an invalid SSN. Unlike the Internet process, FEMA did not verify the identity of telephone registrants who accounted for over 60 percent of disaster registrations recorded in FEMA's system. For registrants who registered only via telephone, or registrants who called FEMA subsequent to being denied on the Internet, FEMA did not have controls in place to verify that the SSN had been issued, that the SSN matched with the name, that the SSN did not belong to a deceased individual, or whether the registrants had been rejected on prior Internet registrations. Because the identity of telephone registrants was not subjected to basic verification, FEMA did not have any independent assurance that registrants did not falsify information to obtain disaster assistance. According to FEMA officials, FEMA had a request in place to modify its computer system to allow for identity verification for telephone registrations similar to those used for the Internet. FEMA also represented to us that due to budget constraints and other considerations, the change was not implemented in time to respond to hurricanes Katrina and Rita. However, to date we have not received documentation to validate these representations. The lack of identity verification of phone registrants prior to disbursing funds makes FEMA vulnerable to authorizing expedited assistance payments based on fraudulent information submitted by registrants. Prior to obtaining information on the control procedures FEMA used to authorize expedited assistance payments, we tested the controls by attempting to register for disaster relief through two portals: (1) the Internet via FEMA's Web site and (2) telephone calls to FEMA. For both portals, we tested FEMA's controls by providing falsified identities and bogus addresses. In all instances, FEMA's Web site did not allow us to successfully finalize our registrations. Instead, the Web site indicated that there were problems with our registrations and advised us to contact the FEMA toll-free numbers if we thought that we were eligible for assistance. This is consistent with FEMA's representation that Internet registrations were compared against third-party information to verify identities. Our investigative work also confirmed that the lack of similar controls over telephone registrations exposed FEMA to fraud and abuse. Specifically, in instances where we submitted via the telephone the same exact information that had been rejected on the Internet, i.e., falsified identities and bogus addresses, the information was accepted as valid. Subsequently, the claims were processed and $2,000 expedited assistance checks were issued. Figure 1 provides an example of an expedited assistance check provided to GAO. Additional case study investigations, which we discuss later, further demonstrated that individuals not affected by the disasters could easily provide false information to obtain expedited assistance and other IHP payments from FEMA. Convictions obtained by the Department of Justice also show that others have exploited these control weaknesses and received expedited assistance payments. For example, one individual in a College Station, Texas relief center pleaded guilty to false claims and mail fraud charges related to IHP and expedited assistance. Despite never having lived in any of the areas affected by the hurricane, this individual registered for and received $4,358 ($2,000 in expedited assistance and $2,358 in rental assistance) in hurricane Katrina IHP payments. We also found that FEMA instituted limited pre-payment checks in the National Emergency Management Information System (NEMIS) to automate the identification of duplicate registrations. However, the subsequent review process used to resolve these duplicate registrations was not effective in preventing duplicate and potentially fraudulent payments. We also found that FEMA did not implement procedures to provide assurance that the disaster address was not a bogus address, either for Internet or telephone registrations. FEMA's controls failed to prevent thousands of registrations with duplicate information from being processed and paid. Our work indicates that FEMA instituted limited automated checks within NEMIS to identify registrations containing duplicate information, e.g., multiple registrations with the same SSNs, duplicate damaged address telephone numbers, and duplicate bank routing numbers. Data FEMA provided enabled us to confirm that NEMIS identified nearly 900,000 registrations--out of 2.5 million total registrations--as potential duplicates. FEMA officials further represented to us that the registrations identified as duplicates by the system were "frozen" from further payments until additional reviews could be conducted. The purpose of the additional reviews was to determine whether the registrations were true duplicates, and therefore payments should continue to be denied, or whether indications existed that the registrations were not true duplicates, and therefore FEMA should make those payments. It appeared from FEMA data that the automated checks and the subsequent review process prevented hundreds of thousands of payments from being made on duplicate registrations. However, FEMA data and our case study investigations also indicate that the additional review process was not entirely effective because it allowed payments based on duplicate information. We also found that FEMA did not implement effective controls for telephone and Internet registrations to verify that the address claimed by registrants as their damaged address existed. As will be discussed further below, many of our case studies of potential fraud show that payments were received based on claims made listing bogus damaged addresses. Our undercover work also corroborated that FEMA provided expedited assistance to registrants with bogus addresses. With limited or nonexistent validation of registrants' identities and the reported damaged addresses, it is not surprising that our data mining and investigations found substantial indicators of potential fraud and abuse related to false or duplicate information submitted on disaster registrations. Our audits and investigations of 20 cases studies comprising 248 registrations that received payments, and the undercover work we discussed earlier, clearly showed that individuals can obtain hundreds of thousands of dollars of IHP payments based on fraudulent and duplicate information. These case studies are not isolated instances of fraud and abuse. Rather, our data mining results to date indicate that they are illustrative of the wider internal control weaknesses at FEMA--control weaknesses that led to thousands of payments made to individuals who provided FEMA with incorrect information, e.g., incorrect SSNs and bogus addresses, and thousands more made to individuals who submitted multiple registrations for payments. Our audits and investigations of 20 case studies demonstrate that the weak or nonexistent controls over the registration and payment processes have opened the door to improper payments and individuals seeking to obtain IHP payments through fraudulent means. Specifically, a majority of our case study registrations--165 of 248--contained SSNs that were never issued or belonged to deceased or other individuals. About 20 of the 248 registrations we reviewed were submitted via the Internet. Further, of the over 200 alleged damaged addresses that we tried to visit, about 80 did not exist. Some were vacant lots, others turned out to be bogus apartment buildings and units. Because the hurricanes had destroyed many homes, we were unable to confirm whether about 15 additional addresses had ever existed. We also identified other fraud schemes unrelated to the weak and nonexistent validation and prepayment controls previously discussed, such as registrants who submitted registrations using valid addresses that were not their residences. In total, the case study registrants of whom we conducted investigations have collected hundreds of thousands of dollars in payments based on potentially fraudulent activities. These payments include money for expedited assistance, rental assistance, and other IHP payments. Further, as our work progresses, we are uncovering evidence of larger schemes involving multiple registrants that are intended to defraud FEMA. We found these schemes because the registrants shared the same last names, current addresses, and/or damaged addresses--some of which we were able to confirm did not exist. While the facts surrounding the case studies provided us with indicators that potential fraud may have been perpetrated, further testing and investigations need to be conducted to determine whether these individuals were intentionally trying to defraud the government or whether the discrepancies and inaccuracies were the results of other errors. Consequently, we are conducting further investigations into these case studies. Table 1 highlights 10 of the 20 case studies we identified through data mining that we investigated. In addition, some individuals in the cases cited below submitted additional registrations but had not received payments as of mid December 2005. The following provides illustrative detailed information on several of the cases. Case number 1 involves 17 individuals, several of whom had the same last name, who submitted at least 36 registrations claiming to be disaster victims of both Katrina and Rita. All 36 registrations were submitted through the telephone, using 36 different SSNs and 4 different current addresses. These individuals used their own SSNs on 2 of the registrations, but the remaining 34 SSNs were never issued or belonged to deceased or other individuals. The individuals received over $103,000 in IHP payments, including $62,000 in expedited payments and $41,000 in payments for other assistance, including temporary housing assistance. Our analysis shows that the individuals claimed 13 different damaged addresses within a single apartment building, and 4 other addresses within the same block in Louisiana. However, our physical inspection of these addresses revealed that 10 of the addresses were bogus addresses. Further audit and investigative work also shows that these individuals may not have lived at any of the valid disaster addresses at the time of hurricanes Katrina and Rita. We are conducting additional investigations on this case. Case number 2 involves an individual who used 15 different SSNs--one of which was the individual's own--to submit at least 15 registrations over the telephone. The individual claimed a different damaged address on all 15 registrations, and used 3 different current addresses--including a post office box, where the individual received payments. The individual received 16 payments totaling over $41,000 on 15 of the registrations. In all, the individual received 13 expedited assistance payments, 2 temporary housing assistance payments, and another payment of $10,500. Further investigative work disclosed that the individual may have committed bank fraud by using a false SSN to open a bank account. Other publicly available records indicate that the individual had used 2 SSNs that were issued to other people to establish credit histories. Case number 3 relates to a group of 8 registrations that resulted in 8 payments totaling $16,000. According to FEMA data, an individual registered for Rita disaster assistance at the end of September 2005. About 10 days later, the same individual submitted at least 7 additional registrations claiming 7 different disaster addresses, 2 of which we were able to confirm belonged to the individual and may be rental properties that the individual owns. However, because the FEMA database showed that these addresses were entered as the individual's primary residence--a primary requirement for IHP--the individual received 8 expedited assistance payments instead of just the one that he may have qualified for. We also found that the automated edits established in NEMIS identified these registrations as potential duplicates. In spite of the edit flags, FEMA cleared the registrations for improper expedited assistance payments. Case number 4 involves 2 individuals who appear to be living together at the same current address in Texas. These 2 individuals received payments for 23 registrations submitted over the telephone using 23 different SSNs-- two of which belonged to them--to obtain more than $46,000 in disaster assistance. The information the registrants provided related to many of the disaster addresses appeared false. The addresses either did not exist, or there was no proof the individuals had ever lived at these addresses. Case number 8 relates to 6 registrants with the same last name who registered for disaster assistance using the same damaged address, with 5 of the 6 using the same current address. FEMA criteria specify that individuals who reside together at the same address and who are displaced to the same address are entitled to only one expedited assistance payment. However, all 6 possible family members received 12 payments totaling over $23,000--$10,000 in expedited assistance and more than $13,000 in other assistance, including rental assistance. The case studies we identified and reported are not isolated instances of potential fraud and abuse. Rather, our data mining results show that they are indicative of fraud and abuse beyond these case studies, and point directly to the weaknesses in controls that we have identified. The weaknesses identified through data mining include ineffective controls to detect (1) SSNs that were never issued or belonged to deceased or other individuals, (2) SSNs used more than once, and (3) other duplicate information. Our data mining and case studies clearly show that FEMA's controls over IHP registrations provided little assurance that registrants provided FEMA with a valid SSN. Under 42 U.S.C. SS 408, submitting a false SSN with the intent to deceive in order to obtain a federal benefit or other payment is a felony offense. Based on data provided by the SSA, FEMA made expedited assistance payments to thousands of registrants who provided SSNs that were never issued or belonged to deceased individuals. Further, SSA officials who assisted GAO in analyzing FEMA's registrant data informed us that tens of thousands more provided SSNs that belonged to other individuals. This problem is clearly illustrated in case 2, where FEMA made payments totaling over $41,000 to an individual using 15 different SSNs. According to SSA records, the individual received payments on 4 SSNs that belonged to deceased individuals and 10 SSNs that did not match with the names provided on the registrations. As previously discussed, further testing and investigations need to be conducted to determine whether this individual was intentionally trying to defraud the government or whether the discrepancies and inaccuracies were the results of other errors. Our data mining and case studies clearly show that FEMA's controls do not prevent individuals from making multiple IHP registrations using the same SSN. We found thousands of SSNs that were used on more than one registration associated with the same disaster. Because an individual can receive disaster relief only on his or her primary residence and a SSN is a unique number assigned to an individual, the same SSN should not be used to receive assistance for the same disaster. This problem is illustrated in case 3 above, where an individual registered for IHP 8 times using the same name, same SSN, and same current address--and thus could have qualified for only 1 expedited assistance payments--but instead received expedited assistance payments of $2,000 for 8 different registrations. Our data mining and case studies also show that the IHP controls to prevent duplicate payments did not prevent FEMA from making payments to tens of thousands of different registrants who used the same key registration information. FEMA's eligibility criteria specify that individuals who reside together at the same address and who are displaced to the same address are typically entitled to only one expedited assistance payment. FEMA policy also provides for expedited assistance payments to more than one member of the household in unusual circumstances, such as when a household was displaced to different locations. However, both our investigations and data mining found thousands of instances where FEMA made more than one payment to the same household that shared the same last name and damaged and current addresses. As illustrated in case 8, 5 of 6 individuals with the same last name, the same damaged address, and the same current address received multiple expedited assistance payments, instead of just one for which they qualified. While not all of the registrations that used the same key information were submitted fraudulently, additional investigations need to be conducted to determine whether or not the entire family was entitled to expedited and other IHP assistance. Similarly, our data mining also determined that FEMA made payments to tens of thousands of IHP registrants who provided different damaged addresses but the same exact current address. As shown in case study 4 above, some registrations that fell into this category contained bogus addresses or addresses that were not the registrants' residences. Under 18 U.S.C. SS 1001, a person who knowingly and willfully makes any materially false, fictitious, or fraudulent statement or representation shall be fined or imprisoned up to 5 years, or both. Our data mining also found that FEMA made duplicate expedited assistance payments to tens of thousands of individuals for the same FEMA registration number. FEMA policy states that registrants should only receive one expedited assistance payment. However, in some cases, FEMA paid as many as four $2,000 expedited assistance payments to the same FEMA registration number. As discussed later, we also found that FEMA issued expedited assistance payments to more than 5,000 registrants who had already received debit cards. FEMA officials represented to us that they traced some of these obviously duplicate payments to a computer error that inadvertently caused the duplicate payments. However, they provided no supporting documentation. In the days following hurricane Katrina, FEMA experimented with the use of debit cards to expedite payments of $2,000 to about 11,000 disaster victims at three Texas shelters who, according to FEMA, had difficulties accessing their bank accounts. Figure 2 is an example of a FEMA debit card. The debit card program was an effective means of distributing relief quickly to those most in need. However, we found that because FEMA did not validate the identity of debit card recipients who registered over the telephone, some individuals who supplied FEMA with SSNs that did not belong to them also received debit cards. We also found that controls over the debit card program were not effectively designed and implemented to prevent debit card recipients from receiving duplicate expedited assistance payments, once through the debit card and again through check or EFT. Finally, unlike the guidance provided to other IHP registrants, at the time FEMA distributed the debit cards, FEMA did not provide instructions informing them that the funds on their cards must be used for appropriate purposes. As discussed previously, FEMA did not verify the identity of individuals and/or households who submitted disaster registrations over the telephone. This weakness occurred in the debit card program as well. FEMA required the completion of a disaster registration prior to a household or individual being able to receive a debit card. According to FEMA officials, registrants at the three centers applied for assistance via the telephone and Internet. Therefore, to the extent that registrations for the debit card were taken over the telephone, FEMA did not subject the identity of the registrants to a verification process. Consequently, we identified 50 debit cards issued to registrants listing SSNs that the SSA had no record of issuing, and 12 cards issued to registrants using SSNs belonging to deceased individuals. For example, one registrant used an invalid SSN to receive a $2,000 debit card and used about $500 of that money to pay prior traffic violations to reinstate a driver's license. In another case, a registrant used the SSN of an individual who died in 1995 to receive a $2,000 debit card. FEMA subsequently deposited an additional $7,554 in IHP payments to that debit card account for additional claims submitted by that individual. This registrant withdrew most of the $9,554 deposited into the debit card account by obtaining ATM cash withdrawals. Based on a comparison of FEMA's IHP payments and the list of debit card recipients, we found that over 5,000 of the 11,000 debit card recipients received more than one $2,000 expedited assistance payment because they received a debit card and another form of payment (check or EFT). According to FEMA officials, they were aware that several individuals had already registered for IHP assistance and that some payments had already been made prior to issuance of a debit card. However, FEMA officials stated that individuals in the three shelters in Texas would not have access to their home addresses or bank accounts and therefore needed immediate assistance in the form of debit cards. Our review of FEMA data disproved FEMA's belief that only a few individuals who received debit cards also received other disaster assistance payments. Instead, thousands, or nearly half, of the individuals who received debit cards also received checks or EFTs that were made several days after the debit cards had been issued. The result was that FEMA paid more than $10 million dollars in duplicate expedited assistance payments to individuals who had already received their $2,000 of expedited assistance. In general, once FEMA receives a disaster registration, FEMA sends a package containing IHP information and detailed instructions, including instructions on how to follow up on benefits, how to appeal if denied benefits, and the proper use of IHP payments. However, FMS and FEMA officials informed us that FEMA did not specifically provide instructions on how the debit cards should only be used for necessary expenses and serious needs related to the disasters at the same time the debit cards were distributed. We found that in isolated instances, debit cards were used for adult entertainment, to purchase weapons, and for purchases at a massage parlor that had been previously raided by local police for prostitution. Our analysis of debit card transaction data provided by JP Morgan Chase found that the debit cards were used predominantly to obtain cash which did not allow us to determine how the money was actually used. The majority of the remaining transactions was associated with purchases of food, clothing, and personal necessities. Figure 3 shows a breakdown of the types of purchases made by cardholders. We found that in isolated instances, debit cards were used to purchase goods and services that did not appear to meet serious disaster related needs as defined by the regulations. In this regard, FEMA regulation provides that IHP assistance be used for housing-related needs and items or services that are essential to a registrant's ability to overcome disaster related hardship. Table 2 details some of the debit cards activities we found that did not appear to be for essential disaster related items or services. FEMA has a substantial challenge in balancing the need to get money out quickly to those who are actually in need and sustaining public confidence in disaster programs by taking all possible steps to minimize fraud and abuse. Based on our work to date, we believe that more can be done to prevent fraud through validation of identities and damage addresses and enhanced use of automated system verification intended to prevent fraudulent disbursements. Once fraudulent registrations are made and money is disbursed, detecting and pursuing those who committed fraud in a comprehensive manner is more costly and may not result in recoveries. Further, many of those fraudulently registered in the FEMA system already received expedited assistance and will likely receive more money, as each registrant can receive as much as $26,200 per registration. Another key element to preventing fraud in the future is to ensure there are consequences for those that commit fraud. For the fraud cases that we are investigating, we plan to refer them to the Katrina Fraud Task Force for further investigation and, where appropriate, prosecution. We believe that prosecution of individuals who have obtained disaster relief payments through fraudulent means will send a message for future disasters that there are consequences for defrauding the government. Madam Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. To assess controls in place over the Federal Emergency Management Agency (FEMA)'s Individuals and Households Program (IHP), we interviewed FEMA officials and performed walkthroughs at the National Processing Service Center in Winchester, Va. We reviewed the Stafford Act, Pub. L. 93-288, the implementing regulations, and FEMA's instructions to disaster registrants available via the Internet. In addition, to proactively test controls in place, we applied for assistance using falsified identities, bogus addresses, and fictitious disaster stories to determine if IHP payments could be obtained based on fraudulent information. Because of several key unanswered requests for documentation from the Department of Homeland Security (DHS), information needed to fully assess the expedited assistance program was limited. For example, FEMA and DHS had not provided us documentation to enable us to conclusively determine the reason that FEMA submitted some registrations, and did not submit other registrations, to identity validation prior to issuing expedited assistance payments. Consequently, our work was limited to our analysis of the FEMA databases, investigations we conducted, data widely available to the public via the Internet, and information FEMA officials orally provided to us. To determine the magnitude and characteristics of IHP payments, we obtained the FEMA IHP database as of December 2005. We validated that the database was complete and reliable by comparing the total disbursements against reports FEMA provided to the Senate Appropriations Committee on Katrina/Rita disbursements. We summarized the amounts of IHP provided by type of assistance and by location of disaster address. To determine whether indications existed of fraud and abuse in expedited assistance and other disbursements, we provided FEMA data to the Social Security Administration (SSA) to verify against their records of valid social security numbers (SSNs). We also used data mining and forensic audit techniques to identify registrations containing obviously false data, such as multiple registrations containing the same name, same current or damaged address, but different SSNs, and registrations containing duplicate information, such as duplicate names and SSNs. To determine whether registrations from our data mining resulted in potentially fraudulent and/or improper payments, we used a nonrepresentative selection of 248 registrations representing 20 case studies (case studies included multiple individuals and registrations) for further investigation. We restricted our case studies to registrations that received payments as of mid-December 2005, and noted that some registrants within our case studies also submitted additional registrations--for which they may receive future payments. We also identified instances where groups of registrants may have been involved in schemes to defraud FEMA. We found these schemes because the registrants provided the same SSNs, last names, current addresses, and/or damaged addresses on their registrations. Our macro analysis of potentially fraudulent use of SSNs and other data mining are ongoing, and we plan to report additional results at a future date. For purposes of this testimony, we did not conduct sufficient work to project the magnitude of potentially fraudulent and improper payments of IHP. We also visited over 200 of the claimed damaged addresses related to our case studies to determine whether or not the addresses were valid. To assess the types of purchases made with FEMA debit cards distributed at relief centers, we reviewed a database of transactions provided by JP Morgan Chase, the administrating bank for the debit cards. SSA also assisted us to compare cardholder data with SSA records to determine whether registrants receiving debit cards had provided valid identities. We performed data mining on debit card transactions to identify purchases that did not appear to be indicative of necessary expenses as defined by the Stafford Act's implementing regulations. Finally, we validated specific transactions identified in the database by obtaining information on actual items purchased from the vendors. In the course of our work, we made numerous written requests for key documents and sets of data related to the IHP, most dating back to October 2005. While FEMA officials promptly complied with one key part of our request--that is FEMA made available databases of IHP registrants and payments--the majority of items requested have not been provided. On January 18, 2006, the Department of Homeland Security Office of General Counsel provided us with well less than half of the documents that were requested. For example, FEMA and the DHS had not provided us documentation to enable us to conclusively determine the reason that FEMA submitted some registrations, and did not submit other registrations, to identity validation prior to issuing expedited assistance payments. While the database and other data provided by FEMA enabled us to design procedures to test the effectiveness of the FEMA's system of internal controls, it did not enable us to comprehensively determine the root causes of weak or non-existent controls. During the course of our audit work, we identified multiple cases of potential fraud. For cases that we investigated and found significant evidence of fraudulent activity, we plan to refer our cases directly to the Hurricane Katrina Fraud Task Force. Except for scope limitations due to a lack of documentation provided by DHS, we performed our work from October 2005 through January 2006 in accordance with generally accepted government auditing standards and quality standards for investigations as set forth by the President's Council on Integrity and Efficiency. 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.

As a result of widespread congressional and public interest in the federal response to hurricanes Katrina and Rita, GAO conducted an audit of the Individuals and Households Program (IHP) under Comptroller General of the United States statutory authority. Hurricanes Katrina and Rita destroyed homes and displaced millions of individuals. In the wake of these natural disasters, FEMA faced the challenge of providing assistance quickly and with minimal "red tape," while having sufficient controls to provide assurance that benefits were paid only to eligible individuals and households. In response to this challenge, FEMA provided $2,000 in IHP payments to affected households via its Expedited Assistance (EA) program. Victims who received EA may qualify for up to $26,200 in IHP assistance. As of mid-December 2005, IHP payments totaled about $5.4 billion, with $2.3 billion provided in the form of EA. These payments were made via checks, electronic fund transfers, and a small number of debit cards. GAO's testimony will provide the results to date related to whether (1) controls are in place and operating effectively to limit EA to qualified applicants, (2) indications exist of fraud and abuse in the application for and receipt of EA and other payments, and (3) controls are in place and operating effectively over debit cards to prevent duplicate EA payments and improper usage. We identified significant flaws in the process for registering disaster victims that leave the federal government vulnerable to fraud and abuse of EA payments. For Internet applications, limited automated controls were in place to verify a registrant's identity. However, we found no independent verification of the identity of registrants who registered for disaster assistance over the telephone. To demonstrate the vulnerability inherent in the call-in applications, we used falsified identities, bogus addresses, and fabricated disaster stories to register for IHP. We also found that FEMA's automated system frequently identified potentially fraudulent registrations, such as multiple registrations with identical social security numbers (SSN) but different addresses. However, the manual process used to review these registrations did not prevent EA and other payments from being issued. Other control weaknesses include the lack of any validation of damaged property addresses for both Internet and telephone registrations. Given the weak or non existent controls, it is not surprising that our data mining and investigations to date show the potential for substantial fraud and abuse of EA. Thousands of registrants misused SSNs, i.e., used SSNs that were never issued or belonged to deceased or other individuals. Our case study investigations of several hundred registrations also indicate significant misuse of SSNs and the use of bogus damaged property addresses. For example, our visits to over 200 of the case study damaged properties in Texas and Louisiana showed that at least 80 of these properties were bogus--including vacant lots and nonexistent apartments. We found that FEMA also made duplicate EA payments to about 5,000 of the nearly 11,000 debit card recipients--once through the distribution of debit cards and again by check or electronic funds transfer. We found that while debit cards were used predominantly to obtain cash, food, clothing, and personal necessities, a small number were used for adult entertainment, bail bond services and weapons purchase, which do not appear to be items or services that are essential to satisfy disaster related essential needs.

When the Congress passed the Comprehensive Environmental Response and Compensation Act (CERCLA), commonly known as the Superfund law, in 1980, it established a trust fund (Superfund), financed primarily by taxes on crude oil and certain chemicals, for cleaning up highly contaminated hazardous waste sites. It also required EPA to develop a list of priorities for cleaning up the most hazardous waste sites, called the National Priorities List (NPL). In 1986, the Congress reauthorized Superfund and required EPA to meet certain cleanup schedules and to give preference to methods that permanently decontaminate sites. In 1990, the Congress again reauthorized Superfund, adding $5.1 billion to the program. In total, $15.2 billion has been authorized for the program. As of September 30, 1995, EPA had listed or proposed to list about 1,290 sites on the NPL, completed construction at about 304 sites, and deleted 84 sites from the list. The agency estimates that the average cost of cleaning up an NPL site, to the federal government or responsible parties, is $26 million. The Senate bill contains numerous provisions designed to address cleanup costs. We would now like to discuss some of the implications of the bill's provisions. Several provisions in S. 1285 would elevate the role of risk and site-specific risk assessments in decisions about whether and how extensively a site should be cleaned up. We have reported that basing these decisions on environmental standards and generic assumptions about such things as the projected future use of a site, rather than actual data from the site, can lead to extensive and costly cleanups. EPA has recently introduced reforms to resolve some of these issues, but S. 1285 would take more extensive measures. One criticism of the current Superfund law is that it has resulted in some cleanups that were more extensive and costlier than were warranted by the health risks at sites. Such results may occur, in part, because the 1986 Superfund amendments require that cleanups comply with all "applicable" or "relevant and appropriate" standards set in other federal and state environmental laws, including certain standards set under the Safe Drinking Water Act and the Clean Water Act where relevant and appropriate. The Senate bill would require compliance only with "applicable" standards, that is, with those that directly pertain to hazardous waste cleanups, and it would eliminate the reference to the specific acts. The bill would also provide opportunities for the states to define their own applicable standards. The proposed legislation would allow EPA to waive the standards if reaching them, among other things, is technically infeasible or unreasonably costly. The extent to which this change affects cleanups will depend, in large part, on whether states establish their own cleanup standards and whether these standards differ significantly from those that have been used at cleanups to date. In a recent survey of states, we found that 21 of the 33 states we contacted had already set standards for groundwater or soil cleanups, or for both types, that specify numeric limits on acceptable concentrations of chemicals. Additionally, some states have general policies about cleanup, such as requirements that chemicals be limited to the levels that occur naturally in the immediate environment. For groundwater, 20 of the states had set numeric standards that were similar to the federal drinking water standards, although most of these states had set more stringent standards for a few chemicals. For soil, which has few federal standards, 13 of the 20 states had set their own cleanup standards. We did find, however, that the states were flexible in allowing exceptions to the cleanup levels required under the standards in order to account for conditions making it difficult or unnecessary to reach the standards. In states that have not established their own standards, site-specific risk assessments would play a more important role in determining the extent of Superfund cleanups. When we reviewed EPA's data for 225 Superfund sites, we found that having used risk assessments instead of standards to determine the need for cleanups would not significantly have changed the number of sites cleaned up but would sometimes have changed the extent of the cleanups. To comply with the law, EPA had used federal and state standards rather than risk assessments to determine the extent of the cleanups at about three-fourths of the 139 sites in the database for which information on the basis for cleanup was available. If EPA had relied more on risk assessments, as S. 1285 would require, some of these cleanups might have been less extensive--and less expensive. This is because, as EPA program officials acknowledged, standards tend to require more stringent cleanups than risk assessments. Using risk assessments to determine cleanup levels without changing the risk assessment process itself could still result in more extensive cleanups than might be warranted at some sites. When EPA lacks specific data about a site, it makes assumptions in its estimates of risk about both the quantity of contaminants that will reach people and the toxicity of these contaminants. EPA tends to make relatively conservative assumptions, justifying this tendency on the basis that it has a mandate from the Congress to protect all individuals around Superfund sites. Critics argue that these assumptions are not realistic for all sites. The Senate proposal calls for the use of site-specific data and "realistic and plausible" assumptions about the risks posed by contaminants. For example, the bill calls for considering data about a site when deciding how the land at a site may be used in the future. Determining a site's future use is key to estimating people's future exposure to contaminants at the site, which, in turn, helps to determine the level of cleanup required for the site. We found that when EPA lacked specific data on a site's future use, it adopted the assumptions that would be the most protective of human health, namely, that the land would be used for residential rather than commercial or industrial purposes. Assuming future residential use can lead to estimates of health risks that warrant cleaning up a site immediately. In reviewing EPA's data for 225 Superfund sites, we found that at about half of the 190 sites where EPA had decided cleanup was necessary, the health risks were ranked as high not because of the land's current use but because EPA had assumed the land's use would change in the future. EPA recognizes that this assumption leads to costlier cleanups, and last year the agency decided to use more site-specific data when deciding what assumptions to make about a site's future uses. The proposed legislation would go farther to incorporate the assumptions about future land use in cleanup decisions. Given that both the government and private industry have spent billions of dollars to date on the Superfund program but significant numbers of sites remain to be cleaned up, it is important to achieve the maximum amount of environmental protection from the available federal resources. We reported in 1994 that although EPA had adopted a policy of addressing the worst sites first, its regional offices had set priorities using such factors as the amount of work needed to evaluate a site instead of considering the site's health and environmental risks. Recently, in response to expected budget reductions, EPA convened a panel to help rank NPL sites nationwide on the basis of risk and other factors. In the past, EPA has taken similar actions when resources have been limited, but its efforts have been short-term. We have also reported that national risk-based priority-setting systems have not been fully implemented at the Departments of Defense and Energy. Of the hundreds of federally owned hazardous waste sites, only eight have been cleaned up so far. Although most of the work remains to be done, agencies' budgets for the federal cleanup and compliance effort, whose costs may ultimately total $400 billion, have been declining. By basing cleanup priorities largely on the relative risks of sites, agencies could ensure that funds are effectively allocated. Both the Congress and EPA are concerned about the high costs of cleanups and are trying to curb these costs. The current law's requirements that cleanup remedies comply with federal and state environmental standards and permanently treat waste have limited the alternatives available to cut costs. EPA now plans to review any remedies that exceed certain cost thresholds to determine whether lower-cost alternatives are available. The agency is also evaluating the results of a 1992 initiative that uses EPA's emergency response, or removal, authority to clean up portions of sites more quickly and at less cost. The Senate bill would also address costs by eliminating the preference for permanent treatments of waste, thereby allowing for greater consideration of remedies that rely on the containment of waste than exists under current law. The bill would also increase the current law's dollar and time limits on federally funded removals. These changes would facilitate EPA's use, where appropriate, of removal actions, which are faster and less costly than EPA's traditional cleanup processes. After the 1986 amendments to CERCLA established a preference for permanently treating wastes, EPA increasingly selected permanent measures, such as incinerating contaminated soil, rather than containment measures, such as fencing it off from human contact. This preference, in turn, increased shorter-term cleanup costs because constructing treatment technologies is more expensive than installing containment measures. Currently, about half of all cleanup plans include permanent treatments. The bill would eliminate the preference for permanence, thereby allowing the expanded use of containment options. Such options include implementing lower-cost engineering controls (like waterproof covers to contain rather than clean up waste) and institutional controls (like land-use restrictions), as long as they protect human health and the environment. However, while the costs to implement these remedies might be lower, they would require long-term monitoring and maintenance to ensure that they remain protective. We estimate that the average cost of operating and maintaining a site with contained waste could be $5 million over 30 years. We also estimate that during this period, overall operation and maintenance costs to the federal government, states, and responsible parties could be $5 billion, $8 billion, and $18 billion, respectively. We recently reported EPA had identified several sites where alternatives to treatment had been used and problems had developed, requiring additional work. In response to criticism that cleanups were costing too much and taking too long, EPA implemented its Superfund Accelerated Cleanup Model in 1992. One of the model's initiatives was for EPA to expand its use of non-time-critical removals--actions the agency typically uses to clean up portions of sites requiring urgent, but not emergency, treatment. These non-time-critical removals result in quicker cleanups than actions taken under EPA's traditional remedial program because they streamline the steps used to study a site's contamination and design a cleanup method. The Senate bill would raise the current law's dollar and time limits on federally funded removal actions. We recently reported that EPA could potentially use these removals at portions of the 1,000 sites currently awaiting cleanup on the NPL, as well as at portions of the estimated 2,000 additional sites that could be listed.Typically, for these portions, EPA is more certain of the types of contamination present and the appropriate methods to address it, and the agency does not need to conduct extensive studies and designs before taking action. EPA site managers estimate that the non-time-critical removals conducted to date have reduced cleanup time--from 4 years to 2 years, on average--and saved money--cutting $500,000 from an average total cleanup cost of $4.1 million per site. By addressing contamination sooner, these actions also can reduce risks to public health and prevent contamination from spreading farther in the environment. However, the current legal time and dollar limits on these actions constrain the use of these removals at federally funded sites. Raising the limits from 12 months to 24 months and from $2 million to $4 million, as S. 1285 provides, would allow EPA to use these removals more easily at portions of many Superfund sites. Although EPA has assessed and cleaned up some NPL sites, thousands of other sites need to be addressed. The bill would authorize EPA to delegate some of its responsibilities for cleanups at NPL sites to qualified states. To promote faster and less costly cleanups, the bill would provide financial and technical assistance to states to set up programs through which private parties would voluntarily clean up sites under a state's supervision. At this Committee's request, we are currently reviewing several programs from among the 31 states with such programs to identify their best practices, including streamlining cleanups, creating financial incentives for redevelopment, and protecting property owners from further liability for contamination. In other work for this Committee, we are addressing the redevelopment of abandoned or underutilized contaminated urban properties, known as brownfields. Our work shows that the bill--in limiting the liability of lenders, property owners, and prospective purchasers--would help to remove barriers to the properties' redevelopment. In addition, the loans that would be provided under the bill to municipalities would cover the up-front costs at most brownfield sites of assessing the sites for contamination and cleaning them up. These measures would help reduce the uncertainty that currently makes these sites unattractive to developers. Whether states have sufficient resources to implement the Superfund program is an issue in transferring the federal government's responsibility for the program to them. For example, one provision in the bill would allow only 125 more sites to be added to the NPL. Our recent work shows that under this limit, the states could acquire responsibility for the 1,400 to 2,300 potential NPL sites whose cleanups could otherwise have been funded out of the Superfund trust fund, at a potential cost of $8 billion to $20 billion. Seven of the eight states whose programs we studied were concerned about their financial ability to manage these additional cleanups, given their current level of funding for environmental restoration. The additional cleanup costs they could face under a capped NPL would depend on whether and how quickly they decided to address the additional sites. We have previously reported that parties involved at Superfund sites incur high legal expenses to resolve their liability for contamination and allocate cleanup expenses among one another. The Senate bill would change the current liability rules and establish a nonbinding process to allocate costs at some sites. Our work in this area has documented the extent and causes of responsible parties' legal expenses. Our 1994 survey of the Superfund legal expenses of Fortune 500 Industrial and Service corporations showed that about half of the respondents had been involved at Superfund sites and had spent a median of $1.5 million at each site. One-third of their Superfund costs were legal expenses, incurred primarily in allocating the responsibility for cleanup costs among the responsible parties. For de minimis parties, that is, those responsible for minor contamination at a site, legal expenses constituted almost half of the total Superfund costs. The corporations attributed their high legal expenses to EPA's not identifying all responsible parties or taking action against all parties that had been identified. When parties identified by EPA believe that others are also responsible but have not been pursued by EPA, they will often sue these other parties themselves for a contribution to the cleanup costs. The defendants in these contribution suits are sometimes responsible for only small amounts of waste at sites. Seventy-one percent of the respondents to our survey said that they were parties to these contribution suits. Provisions in S. 1285 would address these issues. The bill's allocation process would allow parties to submit information to EPA about others they believe should share in the costs. De minimis parties, defined as those who contributed relatively small amounts of hazardous waste at a site, would be exempt from liability. In addition, certain civic or charitable organizations would have limited liability. Under the bill's allocation process, the government would cover the costs attributed to parties that cannot pay or are exempt from liability, as well as other costs. In addition to their cleanup obligations, responsible parties are liable for damages to natural resources caused by contamination. The bill would limit natural resource damage claims under CERCLA. At this Committee's request, we have determined the amount of past federal damage settlements and estimated the potential for future federal claims. We reported that settlements to date and estimated future claims have been or are likely to be limited to a relatively small number of sites. However, some future claims could be large. Through April 1995, the Department of the Interior and the National Oceanic and Atmospheric Administration, the principal federal agencies with trustee responsibility for natural resources, together had reached 98 settlements, about half of which involved cash payments to these agencies by responsible parties totaling $106 million. The median amount of the settlements requiring payment was $200,000--a small figure compared with the current average cost to clean up a site of about $26 million. Eleven settlements required payments of over $1 million. Officials from the two agencies estimate that the claims for up to 20 of their pending and future cases may eventually exceed $50 million each and that the claims for up to another 40 cases may range between $5 million and $50 million each. According to Department of Justice officials involved in these claims, the number of future cases is likely to be limited by a shortage of enforcement resources and the difficulty of establishing responsibility for damages. The Senate bill would authorize the use of new, potentially cost-reducing technologies at certain federally owned hazardous waste sites. The bill would authorize the President to designate specific federal facilities as sites for testing innovative technologies and authorize the EPA Administrator to approve their use at these sites. Our reports have shown that although EPA and the Departments of Defense and Energy have spent substantial sums to develop waste cleanup technologies, few such technologies have been used in cleanups. Even when a new technology has been successfully demonstrated, we found, agencies are often reluctant to try it because of its unfamiliarity or other reasons. This new authority may help to overcome the resistance we found to these technologies. 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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GAO discussed how the proposed Accelerated Cleanup and Environmental Restoration Act would affect the Superfund Program's reauthorization. GAO noted that the legislation would: (1) require that cleanups comply only with standards that pertain to hazardous waste cleanups, rather than with water quality standards; (2) allow states to define their own standards and permit the Environmental Protection Agency (EPA) to waive those standards; (3) require that EPA use site-specific data and less conservative assumptions when assessing cleanup sites; (4) require that cleanup sites be ranked by risk; (5) allow the expanded use of low-cost hazardous waste containment measures at cleanup sites; (6) relax the restrictions on non-time-critical removals, which can speed the cleanup process; (7) provide assistance to states to establish programs through which private parties would voluntarily clean up sites; (8) restrict the number of additional sites that could be added to the National Priorities List (NPL); (9) shift the financial burden of the Superfund program from the federal government to state governments; (10) limit the liability of responsible parties at Superfund sites, establish a nonbinding process to distribute the cost of cleanups, and decrease liability for natural resource damage; and (11) mandate the testing and use of new, potentially cost-reducing technologies such as bioremediation at cleanup sites.

H.R. 4401 would establish a Health Care Infrastructure Commission within the Department of Health and Human Services (HHS) to design, construct, and implement an immediate claim, administration, payment resolution, and data collection system that would initially be used by the Medicare part B program.This system would (1) immediately advise each provider and supplier of coverage determination; (2) immediately notify each provider and supplier of any incomplete or invalid claims, including the identification of missing data and coding errors; (3) immediately process clean claimsso that a provider or supplier may provide a written explanation of medical benefits, including costs and coverage to any beneficiary at the point of care; and (4) allow electronic payment of claims for which payment is not made on a periodic payment basis. The bill also calls for the commission to conduct and publicize a study, with final recommendations, on the design and construction of such a system within 3 years and establishes a timetable with specific performance measures for its initial, intermediate, and full implementation. Another key provision of H.R. 4401 that relates to the Medicare program is the elimination of section 1842(c)(3) of the Social Security Act (42 U.S.C. 1395u(c)(3)), which prohibits the payment of claims until after 13 calendar days from the date received if electronically submitted or until after 26 calendar days if manually submitted. In addition, H.R. 4401 would affect FEHBP--the federal government's health benefits program for employees and retirees--which is run by the Office of Personnel Management (OPM). It would require OPM to adapt the immediate claim, administration, payment resolution, and data collection system for use by FEHBP and require FEHBP carriers to use that system. H.R. 4401 also sets a timetable with specific performance measures for initial, intermediate, and full implementation of the system. Although H.R. 4401 is explicit in that the proposed system would cover the Medicare part B program and FEHBP, it is unclear whether other federal health programs would also be included in this system. H.R. 4401 calls for the establishment of an advanced informational infrastructure for "ederal health benefits programs which consists of an immediate claim, administration, payment resolution, and data collection system . . . that is initially for use by carriers to process claims submitted by providers and suppliers under part B of the edicare program . . . ." (In a later section, the bill requires that this system be applied to FEHBP.) The bill does not define "federal health benefits programs," and provides for inclusion of only Medicare part B and FEHBP in the system. However, if in the future the proposed system is intended to include other federal health benefits programs such as Medicare part A, Medicaid, veterans' health services, the Department of Defense's health services, and Indian health services, development and implementation of the system envisioned by the bill would be different and much more challenging. These other federal health programs are markedly different. In some cases, the federal government acts like other large employers that contract with insurance companies and health plans to offer health benefits to employees and their dependents. In other cases, it acts like a large insurance company that pays directly for health care services. In still other instances, it acts like a large staff-model health maintenance organizationthat operates a network of hospitals and employs health care professionals. Accordingly, if the proposed real-time claims processing system were to later be intended to address the claims processing requirements of any of these programs, it would have a significant impact on the system's design and complexity. Administered by HHS' Health Care Financing Administration (HCFA), Medicare is the nation's largest health insurer, covering almost 40 million beneficiaries at a cost of over $200 billion annually. Medicare operates through a complicated administrative structure. Its authorizing legislation--title XVIII of the Social Security Act--required HCFA to contract with the private sector for claims processing and payment functions. This requirement has led to a large contractor network comprised of insurance companies responsible for processing Medicare claims in given states. These Medicare contractors are responsible for claims processing and administration, including (1) receiving claims; (2) judging their appropriateness; (3) paying appropriate ones promptly; (4) identifying potentially fraudulent claims or providers, and withholding payment, if necessary; and (5) recovering overpayments or inappropriate payments. Contractors develop a set of criteria to determine which claims to pay, guided by laws, regulations, the Medicare policy manuals, and periodic agency directives. For the Medicare part B program, HCFA uses 22 companies doing business as carriers to process claims. Each carrier relies on one of four standard systems to process its claims, adding its own front-end and back-end processing systems. These systems interface with the common working file (CWF)--a set of nine databases containing beneficiary information for specific geographic regions--to authorize claims payments and determine beneficiary eligibility. The CWF obtains information, such as beneficiary enrollment data, from HCFA's internal systems. Contractors pay approved claims by check or by electronic funds transfers. Each day, contractors' banks draw money from the Federal Reserve System sufficient to cover the provider checks and electronic funds transfers expected to clear the bank during the next business day. Figure 1 provides an overview of the Medicare fee-for-service claims process for the part B program. In fiscal year 1999, about 81 percent of part B claims that were completed were submitted electronically by providers or billing services, which use one of two standard electronic formats. As illustrated in figure 2, once claims are submitted, carriers and HCFA use a variety of automated edits to determine the validity of these claims. Carriers generally use three types of edits before authorizing the payment of a claim. First, front-end edits are used to ensure that valid values are used and appropriate fields are completed. Claims that fail the front-end edits are rejected and returned to the provider. Second, carriers use utilization/medical policy edits to check claims against the medical- necessity criteria in medical policies. Utilization/medical policy edits are particularly important because Medicare pays providers a fee for covered medical services, which are identified through a complex, three-level coding system, the HCFA Common Procedure Coding System. Using these codes, utilization/medical policy edits flag indicators such as whether the medical diagnosis was appropriate for the patient's gender or age or whether the medical procedure exceeded the threshold allowed during a given year. These edits can result in (1) a claim passing to the next set of edits, (2) a claim denial, (3) a claim being suspended until a manual review by claims examiners (who may request additional documentation) is conducted, or (4) a claim adjustment. The third type of carrier edits check for other payers, which are other primary sources of payment, such as employer-sponsored insurance or third-party liability settlements. If another potential payer is identified, the claim is generally denied. Once a claim passes the carrier edits, the claim is checked against one of the nine CWFs that are processed at seven different computer sites around the country. The CWF edits check for items such as beneficiary eligibility, deductibles and limits, and duplicate claims. These edits can result in (1) an authorized claim, (2) a claim returned to the carrier for further review, or (3) a claim adjustment. The CWF also checks for other payers and, if found, the claim is returned to the carrier for further review. One outcome of developing an immediate claim, administration, payment resolution, and data collection system would be faster Medicare part B claims payments. However, most Medicare claims could be paid more quickly using current processes by simply eliminating the mandatory delay in paying claims. Specifically, by enacting the section of the bill that eliminates the mandatory claims payments delay until after 13 calendar days from the date of electronic submission (26 calendar days if submitted manually), the mean time to pay claims would likely be substantially reduced. The mean time for processing and paying a clean part B claimthat required minimal or no manual intervention was 17.3 days in fiscal year 1999 (14.5 days for electronic submissions). However, HCFA estimates that carriers process almost two-thirds of all claims within 5 days.Once processed and authorized for payment, the claims are held until the next payment cycle after the 13- or 26-day requirement has been met (carriers generally make payments every work day). The carrier then issues a check or authorizes an electronic funds transfer to pay the claim. One drawback to eliminating the mandatory payment delay is that the Supplementary Medical Insurance trust fund, from which the Medicare part B program is funded, would lose some of the interest it earns on its balance if payments were made more quickly. Under HCFA's current claims processing environment, we estimate that the trust fund could lose as much as about $140 million in interest revenue annually if the mandatory payment delay were removed. This amount assumes (1) annual part B outlays of $60 billion, (2) that the average time to pay claims would drop from 17.3 days to 5 days, and (3) an average interest rate of about 7 percent on securities.The amount the trust fund could lose may be even higher if a real-time claims processing system were implemented because the average time to pay a claim could drop below 5 days. The Medicare Supplementary Medical Insurance trust fund is financed by payments from federal government general revenues and by monthly premiums charged beneficiaries. Consequently, a decrease in interest earnings could prompt the need for additional appropriations or increases in beneficiaries' premiums to compensate for the interest that the trust fund would otherwise have earned. While the development of an immediate claim, administration, payment resolution, and data collection system to be used by the Medicare part B program might be feasible, it would significantly change the government's current processes because it would require the real-time processing of certain elements of the claims process that are currently performed in batch mode or manually.In the abstract, a real-time Medicare part B claims process could be achievable if appropriate systems development policies and techniques are used. Although more beneficiaries might have to pay their copayments immediately, it could provide health care providers and beneficiaries with several benefits--primarily the immediate notification of approved or denied claims. However, without appropriate safeguards, a real-time claims processing system could involve serious risks because it opens the process to a possible rise in the number of improper Medicare payments.In addition, the technical and cost risks associated with developing a real-time claims processing system could be considerable. We have long identified Medicare as a high-risk program that is vulnerable to fraud, abuse, and payment errors.Many of Medicare's vulnerabilities stem from its size and decentralized administrative structure, which make it a perpetually attractive target for exploitation and make payment errors more likely. Because wrongdoers are continually finding new ways to dodge program safeguards, HCFA and its contractors periodically revise their pre-payment edit and post-payment audit routines. As a result, the proposed real-time claims processing system must include appropriate internal controls to help ensure that operational problems are minimized and program integrity protected. Key to the design of appropriate controls is the effective assessment of both external and internal risks that an agency faces in achieving its objectives, as well as determining how risks should be minimized. A major internal control challenge that a real-time claims processing system would have to overcome is ensuring that prepayment processes currently performed manually are adequately addressed. Any new real- time claims process applied to all claims would have to find a way to accommodate existing manual processes (e.g., postpone until after claims payment or provide tentative claims approval in certain circumstances), such as in the case of claims examiners' reviews of claims that are suspended because they did not pass utilization/medical policy edits or in cases that involved claims in which Medicare should be the secondary, rather than primary, payer. This latter issue is particularly problematic because determining another insurer's liability can be a time-consuming process of discovering whether insurance coverage overlaps and, if so, ascertaining Medicare's liability. If issues such as these are not adequately addressed, additional improper Medicare payments can result. It is also essential that current program safeguards, such as the edit process illustrated in figure 2, not be compromised. The utilization/medical policy edits that address the often complex art of coding claims are a particular area of concern. As previously mentioned, HCFA's Common Procedure Coding System uses three levels of codes: Level 1, the American Medical Association's Physicians' Current Procedural Terminology, consists of a list of 5-digit codes for most of the services performed by physicians. These codes are used to bill for most procedures and services but have limited selections for describing supplies, materials, and injections. Level 2 are national codes that supplement the level 1 codes and are used to bill for a range of services and supplies such as vision services and surgical supplies. These codes have a uniform description nationwide, but due to what is known as "carrier discretion," their processing and reimbursement are not necessarily uniform. Level 3 are local codes developed by individual Medicare carriers. The codes are often used to describe new services, supplies, and materials, as well as to report procedures and services that have been deleted from Current Procedural Terminology codes but are still recognized and reimbursed by the carrier. The Medicare coding system is difficult to use because it (1) attempts to identify codes for all accepted medical procedures, including codes to describe minor procedures that are components of more comprehensive procedures, and (2) changes every year. For example, the fee for surgery often includes the cost of related services for the global service period, that is, for a set number of days before and after the surgery. To prevent overpayment in these cases, Medicare carriers need to identify when claims for surgery include codes that represent related services and reduce the payment accordingly. These complexities can inadvertently lead providers to submit improperly coded claims. They also make the Medicare program vulnerable to abuse from providers or billing services that attempt to maximize reimbursement by intentionally submitting claims containing inappropriate combinations of codes. Because a real-time claims processing system can be particularly vulnerable to code manipulation (e.g., through repeated submission of fraudulent claims until they pass the system's edits), it would be prudent to exclude problem providers from participating in a real-time system and require that new providers complete a probationary period before they become eligible to participate. In another situation--agency "fast pay" initiatives (when payment authorization is made prior to verifying receipt and acceptance of goods or services)--we have similarly stated that agencies should limit its use to those cases in which suppliers have had and continue to have good ongoing business relationships with the agency.While the system proposed by H.R. 4401 is not a "fast pay" situation, it would be prudent to employ these same controls since Medicare has areas in which mispayment and fraud have been particular problems. For example, medical equipment supply is an area vulnerable to fraud, as indicated by its the high payment error rate. Indeed, according to fiscal year 1997 and 1998 Department of Justice reports, a few medical equipment suppliers were able to enroll in the Medicare program and obtain millions of dollars in fraudulent payments before post-payment reviews and utilization analyses were able to identify the fraudulent activity. Further, ensuring that adequate documentation controls (e.g., detailed history files and/or logs) are in place and enforced to ensure that the electronic trail is not lost or tampered with would be particularly important in a Medicare real-time processing environment. The importance of maintaining detailed Medicare payment histories and medical records is demonstrated by the results of HHS' Office of the Inspector General's fiscal year 1999 claims review. The Office of the Inspector General found that claim payment histories and provider medical records were essential to identifying the payment errors it found. In addition to the Medicare part B improper payment implications of H.R. 4401, other considerations to be taken into account are the technical and cost risks associated with the development and implementation of a real- time claims processing system. The Clinger-Cohen Act requires agency heads to design and implement a process for maximizing the value and assessing and minimizing the risks of information technology acquisitions. Guidance prepared by the Office of Management and Budget and by us on how to implement such a process calls on agencies to assess projects' benefits, costs, and risks.Items to consider before undertaking an information technology project include the project's return on investment, its link to the business' objectives or strategic plan, and evidence of compliance with the organization's overall systems architecture. Without such analyses, it is risky to require that this system be implemented. Response times, which can be slowed by the amount and type of telecommunications involved and the complexity of processing, are a critical factor in the success of real-time systems. An example of a systems development that failed, in part due to a response time problem, is the Bureau of Land Management's Automated Land and Mineral Record System Initial Operating Capability. As we testified in March 1999, during an operational assessment test and evaluation, users reported that system response time problems were severe or catastrophic at all test sites.Because of this and other problems and after obligating over $67 million, the Bureau of Land Management decided that the Initial Operating Capability was not deployable. While a high-quality system design would reduce the risk of slow response times, hundreds of thousands of providers could be submitting millions of transactions daily (carriers completed action on almost 718 million Medicare part B claims in fiscal year 1999). Moreover, it is critical that system controls (such as the many and varied edits previously discussed) not be compromised in an effort to achieve reasonable response times. Security, already a major concern in the Medicare program, must also be adequately addressed in any proposed real-time claims processing system. H.R. 4401 requires that the real-time claims processing system include strict security measures that guard system integrity, including protecting the privacy of patients and the confidentiality of personally identifiable health insurance data. Implementing such requirements, however, is not easy. Both HHS' Office of the Inspector Generaland wehave reported that HCFA's computer controls do not effectively prevent unauthorized access to, and disclosure of, sensitive Medicare information. This problem could be compounded if appropriate security controls are not designed into the proposed system. In particular, without appropriate controls, electronic connections can provide a path that can be used by hackers and others to gain access to databases that contain sensitive information or to simply disrupt operations. Recent experiences with the Melissa and "ILOVEYOU" computer viruses demonstrate the formidable challenge the federal government faces in protecting its information technology assets and sensitive data.Although key government services remained largely operational, these viruses were disruptive and provided evidence that computer attack tools and techniques are becoming increasingly sophisticated. Moreover, if the design for the real-time claims processing system includes a World Wide Web-based system, the possibility of other types of attacks must also be considered and addressed. For example, a "denial-of-service" attack (e.g., a web site is flooded with fake requests for pages) can make it difficult or even impossible for legitimate customers to access a web site or cause the targeted system to crash.Computer attacks are also a cause for broader information security concerns across government because of the inability to detect, protect against, and recover from computer attacks; inadequately segregated duties, which increase the risk that people can take unauthorized actions without detection; and weak configuration management processes. Because Medicare part B and FEHBP are substantially different programs, it would be difficult to design and implement a single system to process claims under both programs, as called for by H.R. 4401. Specifically, H.R. 4401 requires that (1) OPM adapt the immediate claim, administration, payment resolution, and data collection system for use by the FEHBP and (2) carriers participating in FEHBP use the system to satisfy certain minimum requirements for claim submission, processing, and payment. Under FEHBP, the government contracts with private plans to finance or provide care to federal workers and retirees for negotiated annual premiums. The government runs no plans, pays no claims, and its financial obligations are limited to its share of the cost of the private plan premiums and certain administrative costs. For 2000, federal employees could select from seven nationwide fee-for-service plans,six fee-for-service plans open to specific groups, and hundreds of health maintenance organization plans available throughout the nation. As we explained in August 1998, Medicare and FEHBP are significantly different.For example, HCFA and its carriers authorize claims payments and monitor abuse or fraud, while these roles are delegated to the hundreds of health plans that are enrolled under FEHBP.In addition, traditional Medicare covers the same standard package of services and requires the same deductibles, coinsurance, and copayment requirements for all beneficiaries. In contrast, FEHBP does not require participating plans to cover a standard or core benefits package. Although all plans offer inpatient hospital and outpatient medical coverage as well as certain OPM-required services, specific benefits vary. These differences would make it challenging and costly to design and implement a real-time claims processing system for both programs. Moreover, FEHBP carriers may balk at being forced to implement a system that was not developed with their particular systems and processes in mind, and it could cause them to drop out of the program. The implications of having a real-time claims processing system that would initially be used by Medicare part B carriers and be developed and implemented by the seven-member Health Care Infrastructure Commission instead of HCFA should be carefully considered.Specifically, the bill charges the commission, which does not include HCFA, with designing, constructing, and implementing a real-time claims processing system. Adding another organization to the already complicated Medicare process would compound the project's complexity. Moreover, any system related to processing Medicare part B claims would greatly affect HCFA's current systems as well as its future systems development. Further, the bill is silent on whether the commission would also be responsible for maintaining the system, which raises additional uncertainties about the commission's and HCFA's respective roles. The commission could elect to use HCFA for the development, implementation, and maintenance of the system. In such a case, if a real- time claims processing system is to be developed, it may be more fitting for the proposed commission to oversee HCFA's actions, rather than develop and implement the system itself. Such oversight could include evaluating the system design and monitoring HCFA's development and implementation actions. Aside from its role, the composition of the commission also needs to be carefully considered. In particular, having health care and financial management expertise on the commission would be critical. As currently conceived, though, the commission includes several officials from federal agencies with expertise in advanced information technology but not health care or financial management. Specifically, the bill explicitly calls for each official appointed to the commission to "be an expert in advanced information technology" but does not address health care or financial management expertise. If a real-time claims processing system is to be developed, as envisioned by the bill, consideration should be given to including key HCFA and carrier officials with health care claims processing, program integrity, and financial management expertise on the commission. One reason it is important for HCFA and its contractors to be part of the commission is that the development of a real-time claims processing system could overlap--and possibly conflict with--ongoing and planned HCFA initiatives, which could be costly and disruptive to both efforts. For example, HCFA plans to transition from four to two standard Medicare part B systems (one is only for durable medical equipment carriers) by fiscal year 2003. Initiatives such as this would clearly affect, and be affected by, a real-time claims processing system. Other entities that should be considered for membership in the commission if the real-time claims processing system set out in the bill is to be developed are OPM and providers. A representative from OPM should be considered as a member of the commission since, as currently called for in the bill, any system developed would be applied to the FEHBP. Moreover, it may be desirable to have a representative from the provider community on the commission, since a real-time claims processing system would also significantly affect providers. A past HCFA system development failure could provide valuable lessons in the type of approach that could be taken to determine whether a cost- effective, real-time claims processing system can be built. In the mid-1990s HCFA attempted to improve the efficiency and effectiveness of its Medicare operations by developing one unified computer system--the Medicare Transaction System (MTS)--to replace its existing standard systems. This single system would have integrated data from Medicare part A and part B and managed care and provided a comprehensive view of billing practices. As we previously reported, the MTS project encountered problems from the very beginning.It was plagued with schedule delays, cost overruns, and the lack of effective management and oversight. Ultimately, in August 1997, HCFA terminated the MTS contract on which it had spent over 3 years and about $80 million. Although about $50 million of this amount was for software development (the other $30 million went to internal HCFA costs), this failed project did not produce integrated claims processing software. As we testified in September 1997, MTS provided HCFA with a huge learning experience about the difficulty of acquiring such a large system under a single contract and a better understanding of the requirements for developing a Medicare claims processing system. The learning experience HCFA gained from MTS can provide lessons for the proposed real-time claims processing system. In particular, as we reported in May 1997, MTS was not adequately managed as an investment.HCFA had not followed practices that are essential if management is to make informed information technology decisions. Such practices include preparing a valid cost-benefit analysis, considering viable alternatives and assessing risks, and evaluating how the proposed technology will contribute to improvements in mission performance. While H.R. 4401 requires the commission to perform a study on the design and construction of the proposed real-time claims processing system, the bill does not require that analyses such as these be performed, which can reduce risks and help ensure that information technology projects achieve maximum return on investment. Accordingly, the proposed system could benefit from the completion of investment management analyses before a decision is made about whether the system should be implemented. These analyses could determine whether cost-effective ways to address the issues that we have outlined exist. Another lesson that can be learned from the MTS project is that a phased approach can reduce the financial, schedule, and technical risks of a project. The original MTS schedule was developed on the basis of a grand design approach, in which the complete system would be implemented at one time.A phased approach can reduce the risks inherent in any large computer development effort--cost overruns, schedule delays, and the system's failure to perform as expected. Accordingly, it might also be desirable to take a phased approach to the proposed real-time claims processing system, which could reduce its risks. In summary, H.R. 4401 has worthwhile objectives and would offer benefits to providers and beneficiaries in that decisions on authorized and denied claims would be provided immediately. Nevertheless, Medicare part B claims could be paid more quickly using HCFA's current processes without such a system. Paying claims faster, however, may not be desirable because Medicare's Supplementary Medical Insurance trust fund would lose interest revenue. Before an implementation decision is made, it is particularly important to demonstrate that a real-time claims processing system can be designed that provides the safeguards necessary to minimize improper payments. Moreover, because of the complexity of the Medicare process, additional analyses of the technical and cost risks of a real-time claims processing system would be prudent before requiring that it be developed and implemented. In addition, the administrative and benefits differences between Medicare and FEHBP would make the development and implementation of a system applicable to both programs difficult. Further, the role and makeup of the commission should be carefully considered to help ensure that any such system would take into account the current Medicare environment, as well as health care and financial management issues. Finally, lessons learned in HCFA's MTS failure demonstrate that it is important that critical analyses be performed before implementation decisions are made. Accordingly, it may be premature to require implementation of the system envisioned by the bill until such analyses are completed. Mr. Chairman, this concludes our statement on H.R. 4401. We have also provided additional technical comments on the bill to your staff. We would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For information about this testimony, please contact Joel Willemssen at (202) 512-6253 or by e-mail at [email protected] Gloria Jarmon at (202) 512-4476 or by e-mail at [email protected]. Individuals making key contributions to this testimony included Naba Barkakati, Kay Daly, Michael Fruitman, Donald Hunts, Linda Lambert, Wayne Marsh, and Margaret Mills. (511858/916364)

Pursuant to a congressional request, GAO discussed the Health Care Infrastructure Investment Act of 2000 (H.R. 4401), which calls for the development of an immediate claim, administration, payment resolution, and data collection system, focusing on the: (1) effects of the system on the claims process of both the Medicare part B program and the Federal Employees Health Benefits Program (FEHBP); and (2) the role and composition of a proposed Health Care Infrastructure Commission. GAO noted that: (1) H.R. 4401 would establish an Infrastructure Commission within the Department of Health and Human Services to design, construct, and implement an immediate claim, administration, payment resolution, and data collection system that would initially be used by the Medicare part B program; (2) this system would: (a) immediately notify each provider and supplier of coverage determination; (b) immediately notify each provider and supplier of any incomplete or invalid claims, including the identification of missing data and coding errors; (c) immediately process clean claims so that a provider or supplier may provide a written explanation of medical benefits, including costs and coverage to any beneficiary at the point of care; and (d) allow electronic payment of claims for which payment is not made on a periodic payment basis; (3) one outcome of developing an immediate claim, administration, payment resolution, and data collection system would be faster Medicare part B claims payments; (4) while the development of an immediate claim, administration, payment, resolution, and data collection system to be used by the Medicare part B program might be feasible, it would significantly change the government's current processes because it would require the real-time processing of certain elements of the claims process that are performed in batch mode or manually; (5) H.R. 4401 would also affect FEHBP, which is run by the Office of Personnel Management (OPM); (6) H.R. 4401 requires that: (a) OPM adapt the immediate claim, administration, payment resolution, and data collection system for use by the FEHBP; and (b) carriers participating in FEHBP use the system to satisfy certain minimum requirements for claim submission, processing, and payment; (7) because Medicare part B and FEHBP are substantially different programs, it would be difficult to design and implement a single system to process claims under both programs, as called for by H.R. 4401; (8) although all health plans offer inpatient hospital and outpatient medical coverage as well as certain OPM-required services, specific benefits vary; (9) these differences would make it challenging and costly to design and implement a real-time claims processing system for both programs; and (10) if a real-time claims processing system is to be developed, consideration should be given to including key Health Care Financing Administration (HCFA) and carrier officials with health care claims processing, program integrity, and financial management expertise on the Infrastructure Commission, as well as OPM and providers, since the system would affect HCFA, OPM, and the providers.

DC Courts' records indicated that total obligations in fiscal years 1996, 1997, and 1998 were $115.4, $119, and $126.3 million, respectively. Fiscal year 1998 obligations reflect our adjustments, as discussed later, and are not comparable to the prior years' obligations. This is primarily due to the changes resulting from the Revitalization Act of 1997. For example, DC Courts non-judicial employees received federal benefits that increased DC Courts' obligations for fiscal year 1998. In addition, the adult probation function was transferred from DC Courts to a new entity, the Court Services and Offender Supervision Agency for the District of Columbia (COSA), in fiscal year 1998. DC Courts also provided its non-judicial employees a 7-percent pay raise and assumed responsibility for the judges' pension costs as part of its fiscal year 1998 appropriation for court operations. Prior to the decision to transfer the adult probation function to a new entity, DC Courts had requested $123.5 million to fund its fiscal year 1998 operations. When DC Courts received $108 million in its fiscal year 1998 appropriation, it no longer had operational responsibility for the adult probation function, but continued to pay salaries and related costs on behalf of the COSA Trustee. In March 1998, the COSA Trustee took over the payments for the operations and subsequently reimbursed DC Courts $7.8 million for the costs DC Courts paid on the COSA Trustee's behalf. These costs and the related reimbursements were included in DC Courts' fiscal year 1998 obligations and available funds. Upon receipt of its fiscal year 1998 appropriation, DC Courts was responsible for developing a spending plan based on an appropriation that was about $15.5 million less than it requested. DC Courts did not develop a plan to ensure that its obligations did not exceed available resources. It obligated throughout the year based on its expectation of receiving additional funds. While DC Courts received an additional $1.7 million in appropriated funds for the fiscal year, it did not receive all of the funding it anticipated. DC Courts also received $12.1 million in grants, interest, and reimbursements, including the $7.8 million from the COSA Trustee, during the fiscal year. However, letters between DC Courts and the Office of Management and Budget (OMB) during fiscal year 1998 reflect DC Courts officials' expectations of receiving additional resources and OMB's concern that if DC Courts did not lower its rate of spending, its obligations would exceed available funds. For example, in an April 1998 letter, OMB advised DC Courts that it was incurring obligations at a rate that would necessitate a deficiency or supplemental appropriation. For their part, DC Courts officials continued to seek additional funds during their discussions with the COSA Trustee, Department of Justice, and OMB. By the end of the fiscal year, DC Courts' records showed that obligations exceeded available resources by about $350,000. Specifically, its records showed obligations of almost $122.2 million and funds received of about $121.8 million. However, as I will now discuss, we found that adjustments needed to be made to these amounts. DC Courts deferred more than $4.1 million of court-appointed attorney payments that were eventually paid with fiscal year 1999 funds, but did not record these amounts as fiscal year 1998 obligations. While DC Courts officials had the authority to make these payments with fiscal year 1999 funds, this did not make the deferred payments fiscal year 1999 obligations. The vouchers were approved by the presiding judges or hearing commissioners in fiscal year 1998, and the obligations should have been recorded in fiscal year 1998. Accordingly, we added this amount to DC Courts' reported fiscal year 1998 obligations. DC Courts treated interest earned primarily from its quarterly apportionments of its appropriation as available budgetary resources for court operations. However, DC Courts did not have authority to spend this interest. For this reason, we have reduced the amount that DC Courts reported as available resources for fiscal year 1998 by $773,000. As adjusted, DC Courts' recorded obligations and available funding for fiscal year 1998 would be $126.3 and $121 million, respectively, resulting in a potential over-obligation of more than $5 million. The Anti-Deficiency Act prohibits federal and DC government officials from making expenditures or obligations in excess of amounts available in an appropriation or fund unless otherwise authorized by law. The Anti- Deficiency Act requires the head of an agency to report immediately any such violation to the President and the Congress, including all relevant facts and a statement of actions taken. OMB Circular A-34, Instructions on Budget Execution, provides additional guidance on information that the agency is to include in its report to the President. OMB instructs agencies to include the primary reason or cause for the over-obligation, any extenuating circumstances, the adequacy of the system of administrative control of funds, any changes necessary to ensure compliance with the Anti-Deficiency Act, and steps taken to prevent a recurrence of the same type of violation. DC Courts officials told us that they do not believe that a violation of the Anti-Deficiency Act occurred. In essence, DC Courts officials assert that the authority Congress provided in the fiscal year 1999 Appropriation Act to use fiscal year 1999 funds for deferred attorney payments constitutes an exception to the Anti-Deficiency Act. DC Courts officials further assert that the exception is available whenever they have obligations in excess of their budgetary resources. We disagree with this position. The fiscal year 1999 Appropriation Act was enacted after fiscal year 1998 ended. The authority cited by DC Courts only authorizes it to use fiscal year 1999 appropriations to pay deferred amounts to court-appointed attorneys, but does not excuse DC Courts from managing its activities within the appropriation level Congress provided or authorize obligations in excess of available budgetary resources. Accordingly, the critical issue for applying the Anti-Deficiency Act in this case is whether the over-obligations were entirely attributable to the mandatory obligations for court-appointed attorneys and were, therefore, authorized by law. We conclude that they were not, primarily because 1. fiscal year 1998 obligations for court-appointed attorneys were similar to the prior fiscal year and the estimated amount for fiscal year 1998; 2. DC Courts did not base its spending during most of the fiscal year on the appropriation it received; and 3. DC Courts' records indicated that a discretionary pay raise of about $2.8 million was given to its non-judicial employees during fiscal year 1998. In addition, DC Courts officials told us that they were authorized to retain the interest earned on quarterly apportionments of their appropriation and make it available for court operations. They noted that no statute prohibits retaining interest earned on apportionments. We disagree with this position primarily because the Revitalization Act specifically requires "that all money received by the District of Columbia Courts shall be deposited in the Treasury of the United States or the Crime Victims Fund." Thus, DC Courts did not have statutory authority to augment its appropriation with interest earned on apportioned appropriations. Recently, DC Courts officials advised us that there were obligations of over $1 million in their fiscal year 1998 records that needed to be de-obligated. DC Courts officials stated that these included amounts that the District should not have recorded as obligations and amounts for services that were no longer anticipated. We are currently reviewing these proposed de- obligations. It will be important that DC Courts continue reviewing its records and do all required investigating and reporting under the Anti- Deficiency Act. Throughout fiscal year 1998, it was clear that unless DC Courts modified its spending or received additional funds, it was facing a shortfall. By the third quarter when DC Courts had not received the additional funds it anticipated, there were limited options available for addressing the projected shortfall. DC Courts officials considered furloughing employees and closing the courts for a period during the summer, as well as deferring court-appointed attorneys' and expert service providers' payments. In May 1998, OMB officials advised DC Courts to reduce non-personnel costs instead of furloughing employees or closing the courts to avoid an Anti- Deficiency Act violation. DC Courts made the decision on July 24, 1998, to defer payments for court-appointed attorneys for the remainder of the fiscal year, and then used fiscal year 1999 appropriations to pay those amounts. DC Courts had budgeted $31.6 million for such payments in fiscal year 1998, an amount that was similar to the previous fiscal year, and as of July 1998, $25.8 million had been expended on court-appointed attorney payments. The Congress authorized use of the DC Courts' fiscal year 1999 appropriation to fund these deferred payments. However, this did not change the payments from fiscal year 1998 obligations to fiscal year 1999 obligations. The presiding judges or hearing commissioners approved the vouchers in fiscal year 1998 and the obligations should have been recorded in fiscal year 1998. Now I would like to discuss the payments that were made to court- appointed attorneys during fiscal year 1998 in terms of the process for making such payments, and whether they were made promptly. Your concern was that court-appointed attorneys were being paid late or not the right amount and that vouchers were sometimes being lost. We found that DC Courts processed vouchers for court-appointed attorneys in accordance with its policies and procedures. However, its procedures did not include time frames for making payments to court- appointed attorneys. Our analysis of DC Superior Court's fiscal year 1998 paid voucher data through July 1998, showed that 94 percent of the vouchers for court-appointed attorneys and expert service providers were paid within 30 days of the presiding judge's or hearing commissioner's approval and 83 percent of these vouchers were paid within 60 days of the date submitted. You were also interested in the incidence of voucher amounts being reduced at the time they are approved by the presiding judges or hearing commissioners. Our analysis of fiscal year 1998 paid voucher data showed that judges or hearing commissioners reduced voucher amounts in 9 percent of the cases, of which more than half involved reductions of $100 or less. DC Courts did not have procedures covering how judges or hearing commissioners were to report to the attorney or expert service provider their decisions to reduce voucher amounts claimed. However, DC Courts officials stated that this information was available to attorneys who requested it. Regarding lost or missing vouchers, we found that there were no procedures for retaining data on the number of vouchers reported as missing or the disposition of such vouchers. DC Courts officials stated that such data were not maintained. I would now like to discuss a matter that did not affect DC Courts' use of its fiscal year 1998 appropriation for court operations, but that will need to be addressed if DC Courts is to have the requisite authority to make payments out of its Crime Victims Fund. A District law established the Crime Victims Compensation Program under DC Courts jurisdiction prior to the enactment of the Revitalization Act. The Revitalization Act supports the authority of DC Courts to deposit fines, fees, and other money to the credit of the Crime Victims Fund under the District law. The District law provides that payments of up to $25,000 from the Fund can be made to crime victims for shelter, burial costs, or medical expenses. DC Courts' records indicated that over $1.5 million in such payments were made during fiscal year 1998. However, there is nothing in the language of the District's fiscal years 1998 or 1999 Appropriation Acts that appropriates amounts from the Crime Victims Compensation Fund, nor have we identified any other federal law authorizing payments from the Fund. Accordingly, we conclude that DC Courts did not have the requisite legislative authority to make payments from the Fund. This is a matter for the Congress and DC Courts to address. Mr. Chairman, this concludes my statement. 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Pursuant to a congressional request, GAO discussed the issues related to the District of Columbia (DC) Courts' financial operations for fiscal year (FY) 1998, focusing on: (1) identifying DC Courts' total obligations for fiscal years 1996, 1997, and 1998; (2) whether DC Courts had a spending plan for FY 1998, and whether it obligated funds consistent with available resources; (3) why payments to court-appointed attorneys were deferred between July and September 1998; and (4) whether DC Courts processed payments to court-appointed attorneys in accordance with policies and procedures. GAO noted that: (1) DC Courts experienced difficulties in planning and budgeting during this transition year; (2) DC Courts' records showed that it did not operate within its available resources, potentially in violation of the Anti-Deficiency Act; (3) GAO also identified a legal issue regarding the Crime Victims Compensation Program; (4) DC Courts' records indicated that total obligations in fiscal years 1996, 1997, and 1998 were $115.4, $119, and $126.3 million, respectively; (5) FY 1998 obligations reflect GAO's adjustments, and are not comparable to the prior years' obligations; (6) upon receipt of its FY 1998 appropriations, DC Courts was responsible for developing a spending plan based on an appropriation that was about $15.5 million less than it requested as a result of funding changes under the Revitalization Act and the FY 1998 appropriation act; (7) DC Courts did not develop such a plan or properly monitor spending to ensure that its obligations did not exceed available resources; (8) it obligated throughout the year based on its expectation of receiving additional funds; (9) by the end of the fiscal year, DC Courts' records showed obligations of almost $122.2 million and funds received of about $121.8 million; (10) however, GAO found that adjustments needed to be made to these amounts; (11) as adjusted, DC Courts' recorded obligations and available funding for FY 1998 would be $126.3 and $121 million, respectively; (12) thus, DC Courts potentially over-obligated available funds by more than $5 million; (13) the Anti-Deficiency Act prohibits federal and DC government officials from making expenditures or obligations in excess of amounts available in an appropriation or fund unless otherwise authorized by law; (14) to avoid an Anti-Deficiency Act violation, the DC Courts made the decision to defer payments for court-appointed attorneys for the remainder of the fiscal year, and then used FY 1999 appropriations to pay those amounts; (15) however, since the vouchers were approved by the presiding judges or hearing commissioners in FY 1998, the obligations should have been recorded in FY 1998; (16) DC Courts processed vouchers for court-appointed attorneys in accordance with its policies and procedures; and (17) however, its procedures did not include timeframes for making payments to court-appointed attorneys.

The CFO Act requires that an agency Chief Financial Officer (CFO) oversee all financial management activities relating to the programs and operations of the agency. Some key CFO responsibilities are: developing and maintaining integrated accounting and financial directing, managing, and providing policy guidance and oversight of all agency financial management personnel, activities, and operations; approving and managing financial management system design and developing budgets for financial management operations and overseeing the recruitment, selection, and training of personnel to carry out agency financial management functions. One of the most important positions under the CFO is the comptroller. The comptroller is the CFO's technical expert who oversees and manages the day-to-day operations. As such, the comptroller in any agency, including the military services, is a key financial manager. As of October 1, 1996, the Navy had 100 military officers filling key comptroller jobs. These jobs have responsibilities involving a significant range of Navy resources, and are designated to be staffed by officers who range in rank from captain to lieutenant. For example, the comptroller of the Pacific Fleet, billeted for a Navy captain, is responsible for financial management and financial reporting of an annual budget of about $5 billion, comparable in size to a Fortune 500 corporation; whereas a comptroller at a small installation, billeted for a lieutenant, manages an annual budget of about $5 million. "Directs formulation, justification and administration of fiscal and budgetary management policies, plans and procedures. Determines budget and fiscal control policies. Coordinates and approves allocation of funds to programs and organizational units. Develops reports on status of appropriations. Provides required data on utilization of labor, material, and commercial services. Prescribes required methods for budget estimation, fiscal administration, and accounting. Exercises internal control over these systems through administrative and internal activities." Table 1 shows the 100 comptroller jobs by rank. In November 1995, the Joint Financial Management Improvement Program (JFMIP) published Framework for Core Competencies for Financial Management Personnel in the Federal Government, designed to highlight the knowledge, skills, and abilities that accountants, budget analysts, and financial managers in the federal government should possess or develop to perform their functions effectively. JFMIP stated that federal financial managers need to be well equipped to contribute to financial management activities such as: the preparation, analysis, and interpretation of consolidated financial statements; the formulation/execution of budgets under increasingly constrained resource caps; and the development and implementation of complex financial systems. In defining core competencies needed to effectively perform as a senior accountant and financial manager, which includes positions such as military service comptrollers, JFMIP emphasizes the need for a broad range of knowledge, skills, and abilities, including: accounting education with updated knowledge of accounting principles and federal accounting concepts; knowledge of agency financial statements, internal control environment, and agency business practices; strategic vision for implementation of GPRA and formulation of budgets; resource and program management skills, with knowledge of appropriation structure and agency management control systems; and human resource skills to effectively manage a workforce. These core competencies suggest that individuals filling key comptroller positions in the federal government need to come to their jobs with a broad range of knowledge, skills, and abilities, including a strong foundation of experience and education in accounting. Accordingly, the Office of Personnel Management (OPM) has required that individuals in civilian accounting positions in the federal government, which are in the GS-510 series, meet a minimum qualification standard of 24 semester hours of college-level accounting courses plus an appropriate number of years of experience for the specific position. We recognize that there are always individuals who may lack the educational background desired but who have developed the technical competencies needed through actual experience. However, formal education and technical training are crucial factors in maintaining a professional workforce whether an individual is a warfare officer or a financial manager. The financial management core competencies needed by individuals in comptroller positions require both formal education in accounting and business, and experience in financial management. The Navy has recognized the need to upgrade the knowledge and skills of its individuals in financial management positions. However, unlike the Air Force and the Army, the Navy has no specific career path in financial management aimed at developing needed core competencies for officers in key comptroller positions. "Serious problems exist in many facets of DON financial management...and (we) have responsive improvement plans well under way... Recent changes in law and policy have made this a more demanding task and require staffs to acquire new knowledge and skills." We agree with the ASN/FM&C that financial management staff need to acquire new knowledge and skills. One of the more critical positions in a strong financial management function is the comptroller. However, we found that the Navy's present staffing practices for military officers fail to provide a career path for the critically important comptroller function. Under present practices, Navy officers filling fiscal administration jobs, including comptrollers, devote most of their careers to either operational command positions or logistics functions. About half of the key comptroller positions are staffed by line officers and half by officers in the supply corps. Line officers are generally individuals who are eligible to command at sea, and whose primary occupational specialty is surface warfare, aviation, or submarines. Line officers may also include individuals not eligible to command who serve in various operational staff positions. The supply corps officers are considered by the Navy to be the Navy's business managers and they serve in a wide variety of logistics and financial management positions. By contrast, the Air Force and the Army offer a career path in comptrollership. Under the Air Force's career program in financial management and comptrollership, many Air Force officers devote their entire careers to financial management. The Army has designed its own unique approach to developing a cadre of financial management officers. All Army officers are required to spend at least the first 5 years of their careers in positions in either comptrollership or one of the operational branches of the Army, such as infantry, artillery, or armor. Army officers can elect to serve in comptrollership positions under one of two programs. In the single track program, an officer can stay exclusively in financial management as a specialty. In the dual track program, an officer can rotate between financial management jobs and command positions in the operational branch. To illustrate, we judgmentally selected and reviewed the career experiences of a Navy captain, an Air Force colonel, and an Army colonel, each currently serving as the comptroller of a major command. Each of these comptrollers carries significant responsibility for the financial management and financial reporting of activities with annual budgets ranging from around $1 to $5 billion. The profiles show that the Air Force and Army comptrollers have significant career experiences that are important in developing core competencies needed by a military comptroller. However, the Navy officer's profile illustrates a focus on a career as a Navy combat operations officer, rather than on developing competencies needed as a military comptroller. He graduated from a major university with a degree in business. Devoted his first 7 years to junior command positions as a warfare officer, then went to graduate school and obtained a masters degree in business. In the following 14 years, he served in various assignments at sea and in training as a warfare officer, and spent almost 2 years as a plans and policies director for the Joint Chiefs of Staff. He was subsequently appointed commanding officer of a naval station and, 2 years later, became commanding officer of an amphibious group in the Pacific Fleet. After a 26-year career as a warfare officer, this captain was assigned as comptroller of a Navy fleet. He graduated from a major university with a degree in finance. Spent the first 13 years primarily as a budget officer at two bases and an air field, at the U.S. Air Forces Europe, and at the Office of the Air Force Comptroller at the Pentagon. Then, he went to graduate school and obtained a masters degree in business administration. For the next 7 years, he served in various positions, such as, base comptroller and director of budget for a major command. Then he spent 2 years as an executive officer and division chief in the Office of Assistant Secretary of the Air Force for Financial Management and Comptroller (ASFM). Then, for approximately 1 year, he was Director of Accounting and Finance for a major command. Then, he returned to the Pentagon as Director of Budget and Appropriations, ASFM, for about 3 years. After a 27-year career in financial management, he was appointed comptroller of a major command. He graduated from a major university with a degree in finance. Spent the first 5 years as a tank platoon leader and a special services officer, then entered the single track comptrollership series and served as an installation comptroller (resource management officer) and a finance instructor over the next 7 years. During that 7-year period, he obtained a masters degree in business administration with an emphasis in comptrollership. Over the next 5 years, he served as military assistant to the Director of the Office of Management and Budget, White House. Then he was assigned for 4 years to a comptroller billet position at the Office of the Joint Chiefs of Staff, Pentagon. He then served as the Deputy Chief of Staff for Resource Management for an army installation. After a 24-year Army career, with 19 years in financial management, he became the comptroller of U.S. Army, Pacific. We also looked at an Army colonel who was a comptroller of a $4 billion activity. This individual was in the Army's dual track program. Out of a 25-year career this person spent only 6 years in financial management positions. While most Army officers are in the dual track program, we have not reviewed the Army's comptroller billets to determine if this Army colonel comptroller is typical. Also, the single track officer may not be representative of Army comptrollers either, but he demonstrates the type of experience one would expect of a comptroller of a major activity. The Navy has staffed its military comptroller positions with individuals who, on average, lack the depth of financial management experience and the accounting education needed for the financial management environment of the 1990s. Line officers, who fill most of the senior-level comptroller positions at the captain and commander ranks, have spent almost their entire careers in command positions such as surface warfare officers, aviators, or submariners. Supply corps officers fill the remaining comptroller positions, and, although they have stronger business-related educational backgrounds and more exposure to financial management activities, most of their careers have been devoted to Navy logistics. Of the 100 key comptroller positions filled by Navy officers in October 1996, 53 were occupied by line officers whose primary career fields were in Navy operational commands, including surface weapons officers, aviators, and submariners. For these officers, a comptroller position offers a temporary shore duty between commands at sea. While these line officers are typically highly educated individuals and have considerable operational experience, they lack both the financial management experience and accounting education needed by a comptroller. These 53 officers present the following profile: They filled mostly senior-level comptroller positions--14 were captains and 25 were commanders. They averaged 17.8 years of commissioned service in the Navy, but only 3.4 years in financial management jobs, including their tenure in their current comptroller position. Only 19 of the 53 (36 percent) majored in accounting or other business-related curriculum as undergraduate students. Thirty-two of the 53 officers (60 percent) obtained masters degrees in a business-related major, but 14 of the remaining 21 officers (26 percent) lacked either undergraduate or graduate education in any business-related field. Our review of a sample of line officers' college transcripts reveals that they averaged about 12 semester hours of accounting courses, mostly acquired in graduate studies in financial management. Appendix II summarizes the education and experience of the 53 line officers filling comptroller positions in October 1996. Of the 53 line officers in comptroller positions, 43 earned masters degrees, 22 from the Naval Postgraduate School (NPS) in Monterey, California. Based on Navy data, officers selected for NPS spend 18 months in the program at a cost of about $150,000, including salary and benefits. Of the 43 officers with masters degrees, 32 earned their masters in business from either NPS or other participating universities. The NPS degree program in financial management includes approximately 11 semester hours of accounting and has the objective of preparing Navy officers for assignments to positions in budgeting, accounting, business and financial management, and internal control and auditing. However, after graduating with their masters degrees in business, many line officers do not rotate directly to a financial management position where they could immediately apply their education. Navy data on officers serving in comptroller positions show that line officers selected for financial management positions spend only a small percentage of their career in finance. Navy data on a broader universe of all officers who obtain a masters degree in financial management at NPS show that 49 percent of line officers do not use their training for at least 6 years after graduation and 40 percent never use their education in a Navy financial management job. Navy staffing practices are inadequate to ensure that the investment made in postgraduate financial management training is effectively utilized in financial management positions. The remaining 47 of the 100 Navy officers filling comptroller positions on October 1, 1996, were supply corps officers. The Navy defines the mission of the supply corps as providing expertise to the Navy and other Department of Defense (DOD) operations in logistics, acquisition, and financial management, and refers to the cadre of supply officers as the Navy's business managers. While these officers have careers with more exposure to financial management activities than line officers, many supply officers still lack the depth of experience in fiscal administration and the accounting education needed for comptrollership in today's complex financial management environment. The 47 supply officers present the following profile. They filled both senior- and mid-level comptroller positions--27 were captains or commanders and 20 were lieutenant commanders or lieutenants. They averaged 16.1 years of commissioned service in the Navy of which 3.4 years were in fiscal-related positions and 5.7 years were in logistics positions that involved some financial management experience. Twenty of the 47 (43 percent) majored in accounting or some other business-related field in undergraduate school. Thirty-one of the 47 officers (66 percent) obtained masters degrees in business-related fields. Our analysis of transcripts for a sample of these officers showed that they averaged about 14 semester hours of accounting. Appendix III summarizes the education and experience of the 47 supply corps officers filling comptroller positions in October 1996. An officer assigned to the supply corps usually will spend his or her career in one of seven occupational groups: 1. fiscal, 2. subsistence, open mess, and bachelors quarters management, 3. transportation, 4. material distribution, 5. procurement, 6. inventory control, or 7. general. Of the seven occupational groups, six are predominantly logistics- oriented, while fiscal assignments can provide Navy officers with experience for developing core competencies needed by comptrollers. The following five job series are included under the fiscal grouping. "Directs supply department activities. Applies supply policies to operation of department. Determines demand in accordance with mission and standard allowance lists. Approves requisitions, balance sheets and summaries. Directs receiving, storage, inventory control, issue and salvage of material. Oversees procurement and sale of goods and services. Administers operation of general mess, including procurement, storage, issue, and inventory of provisions. Conducts disbursing activities in connection with property accountability and transfer, payroll, and personal accounts." The duties of a general supply officer provide financial management experience to supply corps officers, as indicated by the above description of duties. Other supply officer assignments in logistics specialties also have financial management components, such as budget management. While the logistic positions provide officers with some financial management experience, it is the fiscal administration-type assignment, i.e., budget officer, accountant, or comptroller that best addresses the core competencies needed by key financial managers. Although the Navy does not have a career path in financial management, a few supply corps officers have a career profile that was heavily focused on fiscal assignments. For example, one captain now serving as the comptroller of a major Navy command has 25 years in the Navy, and he has spent 10 of the past 13 years in comptroller positions. However, we believe most of the supply corps officers in comptroller positions would fall short of meeting JFMIP's core competencies because their career paths have not been concentrated in fiscal administration. As stated earlier in this report, recent reform initiatives aimed at addressing long-standing and severe federal financial management problems, including the CFO Act and GPRA, have placed demands on comptrollers in the 1990s that are substantially greater than in the past. To meet these demands, Navy personnel practices for key comptroller positions need improvement to ensure the development of the core competencies and experience necessary to meet today's considerable challenges. Conversion of military financial management and other support positions to civilian status was the topic of our October 1996 report. We cited two advantages of conversion to civilian status: (1) dollar savings because civilians are less expensive than military members of equivalent rank, and (2) stability of personnel because of frequent rotation of military staff that rotate in and out of positions. Our report suggested that DOD could save as much as $95 million annually by converting positions occupied by military officers to civilian status. In that report, we identified about 9,500 administrative and support positions that civilians may be able to fill at lower cost and with greater productivity due to the civilians' much less frequent rotations. Examples of career fields that contain positions that might be converted are information and financial management, which would include comptroller positions. DOD guidance on civilian versus military staffing of positions was written in 1954. It requires that civilians be used to staff positions wherever possible. However, the guidance also provides a high degree of flexibility to DOD by allowing positions to be designated as military essential, and therefore to be filled by an active military officer for any of the following reasons. Required training is only available in the military. The position is needed to maintain combat readiness. The position requires a general military background for successful execution. The law requires that the position be staffed by military personnel. The position must be military in order to maintain good order and discipline or exercise authority under the Uniform Code of Military Justice. The position is needed to ensure adequate opportunities to rotate personnel from overseas locations or sea duty to tours of duty in the continental United States. The position must be military for security reasons in which the incumbent may be involved in combat, expected to use deadly force, or expected to exhibit an unquestioned response to orders. The position requires unusual duty hours that are not normally compatible with civilian employment. Since these guidelines were issued over 40 years ago, the government's financial management environment and personnel needs have changed substantially, particularly with respect to the need for specialized positions such as comptroller. Increased demands and challenges faced by government financial managers resulting from financial management reform legislation of the 1990s warrants a closer look at staffing these key positions. To identify candidates for conversion in our October 1996 report, we developed criteria based on the above DOD directive and service implementing guidance. The criteria consisted of four questions that reflect the substance of the DOD criteria. Answering "no" to all four questions would be one approach to identifying positions that could be converted to civilian status. The questions were as follows. (1) Is the primary skill or knowledge required in the position uniquely available in the military? (2) Does the position have a mission to deploy to a theater of operations in wartime or during a contingency? (3) Does any law require that the position be staffed by a military person? (4) Is the position needed to support the normal rotation of service members deployed overseas or afloat to assignments in the continental United States? DOD's response to our October 1996 report acknowledged the potential savings and other advantages of military-to-civilian conversions. DOD also noted impediments to placing civilians in certain positions, such as the lack of consistent funding for the hiring of civilian replacements, the ongoing civilian personnel draw-down, and military strength floors. DOD, in its response to the report's recommendation, said the issue of military-to-civilian conversion is an important component of DOD manpower requirements determination and the issue is currently being discussed in planning for the Quadrennial Defense Review (QDR). We recognize the difficulties DOD and the Navy face while operating in fiscally constrained times. However, DOD and the Navy should benefit significantly in terms of more efficient and effective operations if a strong comptroller function is established and maintained. A well-educated and experienced cadre of comptrollers, whether military or civilian, is critical to managing a large organization such as the Navy. While DOD anticipates that the QDR will concentrate on identifying methods to overcome the impediments to large-scale military-to-civilian conversions for all the military services, steps need to be taken to address the Navy's lack of a career path for military comptrollers. As the Air Force and the Army have recognized, financial management and comptrollership is a professional career track that requires highly trained and skilled individuals. In the military combat operations environment one would not expect an officer with only 3 to 4 years experience to command a ship, squadron, or fleet. Similarly, one would not expect a comptrollership, responsible for billions of dollars, to be staffed temporarily by a less than fully experienced financial manager. This would be true whether the comptroller was a military officer or a civilian. However, that in effect is the unintended consequence of the Navy's present personnel practices with respect to assigning its military officers to comptroller positions. Therefore, if the Navy is to be successful in meeting the objectives of the various governmentwide financial management reform initiatives, it must have a highly skilled and experienced financial management staff in place to help guide and manage its efforts. We recommend that the Secretary of Defense ensure that the following steps are taken by the Navy. Identify which key military comptroller positions can be converted to civilian status in order to gain greater continuity, technical competency, and costs savings. For those comptroller positions identified for conversion to civilian status, ensure that those positions are filled by individuals who possess both the proper education and experience needed to meet the JFMIP core competencies. For those comptroller positions that should remain as military billets, establish a career path in financial management that ensures that military officers are prepared, both in terms of education and experience, for comptrollership responsibilities. In commenting on a draft of this report, DOD generally agreed with the report findings. These comments are summarized below and reprinted in appendix IV. Specifically, DOD agreed that there may be key military comptroller positions that can be converted to civilian status. The Department also recognized the need to fill such positions with individuals who possess the proper education and experience, and supported the report's message that the Navy needs to strengthen its existing training program for financial management subspecialists. However, DOD did not concur with our third recommendation on establishing a specific career path in financial management. This recommendation is aimed at ensuring that Navy military officers develop the technical competencies needed to be effective comptrollers through training and experience. The Navy does not believe a formal career program in comptrollership is feasible because of the small number of officers in this field combined with a need for extensive experience in fleet operations. While fleet experience may help to develop a better understanding of operational issues, a comptrollership function demands a high level of financial management expertise for an individual to be effective in today's complex environment. Further, the relative number of military comptrollers is not the issue, rather the issue is that these officers should have the technical competencies necessary to perform in these key Navy comptroller positions. Although DOD did not concur with our recommendation, the Department acknowledged that some naval officers may have been assigned as comptrollers without a strong background in some aspects of financial management. To address this problem, DOD plans to take steps to increase the number of tours or months of experience required to become a financial management subspecialist and upgrade all comptroller billets to proven subspecialist billets. These steps should increase the amount of experience that Navy officers bring to the comptroller positions. However, the Navy needs to ensure that its comptroller positions are filled with individuals who bring a strong background of financial management experience to those positions. We are concerned that simply increasing the number of months necessary to qualify as a subspecialist or adding a tour of duty, though a positive step, will not fully achieve the desired goal. We continue to believe that a career path, similar to the Air Force or Army, is the best approach. We are also pleased that the Navy plans to enhance its training for military officers who will serve in comptroller positions. A critical aspect of such training is that officers completing the course should be assigned to a comptroller position within a relatively short period of time so that the benefits of the training are not lost before being put into application for the benefit of the Navy. As noted in this report, utilization of financial management training by Navy officers has been a problem in the past because many years elapsed between completion of training and an assignment to a key financial management position. As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from the date of this letter. At that time, we will send 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 and Oversight and other interested committees. We will also send copies to the Secretaries of Defense and the Navy and the Director of the Office of Management and Budget. Copies will be made available to others upon request. If you have any questions about this report, please contact me at (202) 512-9095. The major contributors to this report are listed in appendix V. We identified the Navy's military comptroller billets by interviewing Bureau of Naval Personnel officials and reviewing Navy staffing policy and procedures manuals. We obtained a database from the Bureau of Naval Personnel on Navy officers who were in financial management positions. Using this database, we identified the universe of military officers in comptroller positions as of October 1, 1996. We also used this database to document the formal education and experience of these officers. We supplemented the database information by reviewing microfiche records which contained detailed career histories and college transcripts for each officer. We interviewed officials at the Bureau of Naval Personnel and met with selected Navy comptrollers to obtain a detailed understanding of Navy staffing practices and Navy recordkeeping systems. We identified 191 military comptroller (code 1050) billets as of October 1, 1996. Further analysis showed that 91 of the 191 comptrollers were in either the Medical Service Corps or Civil Engineering Corps. We excluded the 89 medical corps officers from our analysis because (1) medical comptrollers perform specialized duties that are closely related to the field of health care administration and (2) funding in this area represented only about 1 percent of the Navy's budget. We also excluded the two civil corps officers to maintain a clear distinction between the line officers and supply officers who were the focus of our review. Based on the data provided by the Navy, we profiled the career experiences, in terms of education and assignment history, of the remaining 100 Navy officers filling comptroller positions. We segregated these officers for purposes of analysis into line officers and supply officers to assess if there were any differences in educational background and financial management experiences due to a career track. Further, to illustrate the possible disparities in the financial management experiences of comptrollers representing the three military services, we judgmentally selected for analysis senior officers representing the Navy, Air Force, and Army. These individuals were chosen based solely on whether the officer was the comptroller of a major command--in the $1 to $5 billion dollar budget range. However, this assignment was principally focused on the analysis of the qualifications of Navy officers in key comptroller positions. As such, we did not review the profiles of all Air Force and Army officers in key comptroller positions. This review excluded any analysis of civilians in comptroller positions because we have a broader review underway that will analyze the education and experience of key financial managers throughout DOD. We conducted our work from July 1996 to March 1997 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Secretary of Defense. DOD provided us with written comments. These comments are discussed in the "Agency Comments and our Evaluation" section and are reprinted in appendix IV. The following is GAO's comment on the Department of Defense's letter dated April 18, 1997. 1. Discussed in the "Agency Comments and Our Evaluation" section. Richard L. 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Pursuant to a congressional request, GAO reviewed opportunities to improve the experience and training of key Navy comptrollers, focusing on: (1) personnel practices and the education and experience of Navy officers serving in comptroller positions; and (2) options for strengthening these practices. GAO noted that: (1) the Navy's personnel practices do not provide a career path for Navy officers to develop and maintain the core competencies needed by a comptroller; (2) by contrast, the Air Force and the Army offer a career path in comptrollership; (3) because of the Navy's approach, many officers in key comptroller positions lack the financial management experience and the accounting education needed to meet the demands of today's financial management environment; (4) slightly more than half of the Navy's key comptroller positions are filled by line officers whose primary occupation in the Navy is in surface warfare, submarines, aviation, or operational staff positions; (5) these officers averaged 17.8 years of commissioned service in the Navy, but only 3.4 of those years had been spent in any financial management position, including their current comptroller job; (6) about 60 percent of the line officers had obtained masters degrees in business-related majors, but due to Navy personnel practices, many did not utilize their financial management education until several years after graduation and generally served in a comptroller position for only one tour in their career; (7) about 26 percent of the line officers serving as comptrollers had no college degree in any business-related field; (8) supply corps officers, while more qualified from a formal education perspective than line officers for comptroller positions, generally lacked the depth of experience needed by a comptroller for the 1990s and beyond; (9) most of the supply officers held a college degree at the bachelors or masters level in accounting or business, but few had substantial experience in Navy fiscal administration assignments involving such roles as budget officer, accountant, or comptroller; (10) they averaged 16.1 years of commissioned service in the Navy of which 3.4 years were in fiscal administration and 5.7 years were in logistics positions that involved some financial management experience; and (11) in a few cases, senior supply corps officers had as much as 10 years experience in fiscal administration.

When the Medicare program was established in 1965, it only covered health care services for the diagnosis or treatment of illness or injury. Preventive services did not fall into either of these categories and, consequently, were not covered. Since 1980, the Congress has amended Medicare law several times to add coverage for certain preventive services for different age and risk groups within the Medicare population. (See table 1.) For most of these services, Medicare requires some degree of cost-sharing by beneficiaries, although most beneficiaries have additional insurance, which may cover most, if not all, of these cost-sharing requirements. Some services, such as pneumonia and flu shots and the fecal-occult blood test for colorectal cancer, have no cost-sharing requirements. Many other preventive services exist besides those specifically covered as preventive services under Medicare, such as blood pressure screening and cholesterol screening. Although Medicare does not explicitly provide coverage for these other services, Medicare beneficiaries may receive some of them during office visits for other medical problems. Data from surveys of Medicare beneficiaries indicate that the receipt of such services is common. For example, in 1999, nearly 98 percent of seniors reported that they had had their blood pressure checked within the last 2 years, and more than 88 percent of seniors reported having their cholesterol checked within the prior 5 years. At least a portion of these services were likely ordered by physicians in order to diagnose the causes of medical problems, and were paid for by Medicare as such. To identify how best to increase use of preventive services needed by the Medicare population, CMS sponsors reviews of studies that examine various kinds of interventions that have been used in the past for populations age 65 and older. CMS also takes action to implement interventions in each state through its Peer Review Organization (PRO) program. Under this program, CMS contracts with 37 organizations responsible for each state, U.S. territory, and the District of Columbia. The PRO program, which is designed to monitor and improve quality of care for Medicare beneficiaries, currently includes the goal of increasing the use of flu and pneumonia immunizations, as well as breast cancer screening, in each state. These organizations collaborate with hospitals and health care professionals, suggesting systemic changes to improve how preventive services are provided. CMS also conducts a variety of health promotion activities to educate beneficiaries about the benefits of preventive services and to encourage their use. These include the publication of brochures on certain covered services and media campaigns. Use of preventive services offered under Medicare has increased over time. Some services are used more extensively than others, and use of individual services varies by state and, to a lesser extent, by demographic characteristics such as ethnicity, income, and education. Although opportunities remain to increase the use of preventive services within Medicare, there are limits to the extent some beneficiaries would be expected to use certain services. Information on usage for 4 of the 10 preventive services covered under Medicare is available in the data we used--immunizations against pneumonia and flu and screening for cervical and breast cancer. This information shows that beneficiaries age 65 and older are increasing their use of all 4 services. (See table 2.) For example, 68 percent of beneficiaries received flu shots in 1999, compared with 60 percent in 1995. In 1999, although each preventive service was used by the majority of Medicare beneficiaries, fewer receive multiple preventive services. For example, 1999 data show that while 91 percent of female Medicare beneficiaries received at least 1 preventive service, only 10 percent of these beneficiaries were screened for cervical, breast, and colon cancer, as well as immunized against flu and pneumonia. These data also show that 44 percent of male beneficiaries were immunized against both flu and pneumonia. When colorectal screening is included in this set of services, the proportion of men who had received all 3 services falls to less than 27 percent. While national rates provide an overall picture of current use, they mask substantial differences in how seniors living in different states use some services. For example, the national breast cancer screening rate for Medicare beneficiaries was 75 percent in 1999, but rates for individual states ranged from a low of 66 percent to a high of 86 percent. In table 3, we show the range over which state estimates of preventive service usage rates vary from lowest to highest for selected states. While usage rates for each service varied from state to state, the services with the highest rates in each state were generally the same. For example, in most states, screening rates for breast and cervical cancer were higher than rates for colorectal screens. Usage rates for Medicare beneficiaries also varied based on ethnicity, and on socioeconomic status, as defined by income and education. By ethnicity, the biggest differences occurred in use of immunization services. For example, 1999 data show that about 57 percent of whites and 54 percent of "other" ethnic groups were immunized against pneumonia, compared to about 37 percent of African Americans and Hispanics. Similarly, about 70 percent of whites and "other" ethnic groups received flu shots during the year compared to 49 percent of African Americans. The only other statistically significant difference between ethnic groups was for the fecal-occult blood test for colon cancer, for which 26 percent of whites received screenings within the past year compared to 16 percent of Hispanics and "other" ethnic groups. For income and education, in general, as income and education rose, the rates at which individuals used preventive services also increased. (See table 4.) Various studies have identified a variety of factors affecting beneficiary decisions to seek preventive care, including low patient awareness of the benefits of the services as well as the need for service. Some factors, such as those involving patient awareness of the benefits, may represent opportunities to increase the use of preventive services. For example, see the following. In a 1997 report, the Agency for Healthcare Research and Quality found that, although patients may be unaware of the risks or symptoms of colorectal cancer, they are more likely to participate in screening once they understand the nature and risks of the disease. Data from CMS's 1999 Medicare Current Beneficiary Survey show that, while about one-fourth of beneficiaries who did not receive flu shots were unaware of the benefits of obtaining this immunization, about half of the people who were not immunized avoided getting the shot for reasons such as concerns about side effects and whether doing so would effectively prevent illness. On the other hand, usage rates alone may not provide a clear picture of success, and may mask inherent limitations to increasing usage rates. For example, survey data show that 44 percent of women age 65 and over have had hysterectomies--an operation that usually includes removing the cervix. For these women, researchers state that cervical cancer screening may not be necessary unless they have a prior history of cervical cancer. Also, according to officials in charge of research on preventive services at the National Institutes of Health, it is reasonable for beneficiaries, their families, or their providers to decide to forgo services because of the limited benefits they would offer patients with terminal illnesses or of advanced age. These officials explained that research has shown, for example, that the benefits of cancer screening services, such as for prostate, breast, and colon cancer, can take 10 years or more to materialize, a time frame that could exceed the life expectancy of as much as half of the Medicare population. CMS officials also pointed out that the controversy over the effectiveness of some services, such as mammography and prostate cancer screening, may add to the difficulty in further improving screening rates for these services. The benefit of mammography has recently been challenged by two Danish researchers and an independent group of experts on the National Cancer Institute's (NCI) advisory panel citing serious flaws in 6 of the 8 clinical trials that showed benefits. However, subsequent to the Danish report and the NCI panel's statement, both the NCI and the U.S. Preventive Services Task Force reiterated their recommendation for regular mammography screening. While acknowledging the methodological limitations in these trials, the U.S. Preventive Services Task Force concluded that the flaws in these studies were unlikely to negate the reasonable, consistent, and significant mortality reductions observed in these trials. Routine screening for prostate cancer is also a matter of controversy. For example, the American Cancer Society and the American Urological Association support routine prostate cancer screening, while the U.S. Preventive Services Task Force and others state that there is insufficient evidence to support it. CMS has studied various types of interventions to increase the use of preventive services among seniors. These studies show that many types of interventions can potentially be effective, but also that interventions must be tailored to the circumstances of specific situations. CMS is funding efforts in every state to implement interventions for three preventive services that Medicare covers. CMS also has efforts under way aimed at increasing the use of preventive services among minority and low-income seniors. CMS has sponsored reviews of studies looking at the effectiveness of interventions to increase use of preventive services among people age 65 and older. One of these reviews evaluated the effectiveness of interventions targeting people over age 65 for five services covered by Medicare--immunizations for flu and pneumonia and screenings for breast, cervical, and colon cancer. The report evaluated 218 separate studies on interventions designed to increase use of preventive services. The studies were performed in both academic and nonacademic settings in various geographic areas, and in a mixture of reimbursement systems. Most of the interventions studied that involved pneumococcal and influenza immunizations were targeted toward persons over 65 years of age, while cancer screening interventions were targeted at adults, but not necessarily those 65 years of age. This evaluation concluded that no specific intervention was consistently most effective for all services and settings, and that success depended on how closely the intervention addressed the unique circumstances in each state and for different populations within each state, while also taking into account the cost and difficulty of implementation. Obstacles to improved screening rates can differ across states thus requiring different approaches. For example, officials responsible for improving the use of preventive services in Idaho and Washington explained that while a significant barrier in Idaho was beneficiary access to Medicare providers, this was not a barrier in Washington. The CMS evaluation also showed that using multiple interventions generally provided greater success than using a single approach. The types of interventions evaluated in the CMS-sponsored review included a variety of efforts targeting health delivery systems, providers, and patients. The key conclusion the report drew from the literature was that organizational and system change, such as the use of standing orders and the use of financial incentives, were the most consistent at producing the largest increase in the use of preventive services. These and other interventions found to be effective follow. System Change. These interventions change the way a health system operates so that patients are more likely to receive services. For example, medical or administrative staff may be given responsibility to ensure that patients receive services, or standing orders may be implemented in nursing homes to allow nonphysician personnel to administer immunizations without a physician's order. Incentives. These interventions include gifts or vouchers to patients for free services. Medicare allows this type of approach only in limited circumstances. Reminders. These interventions include computer-generated or other approaches by which medical offices (1) reminded physicians to provide the preventive service as part of services performed during a medical visit or (2) generated notices to patients that it was time to make an appointment for the service. Studies show that reminders to either patients or physicians can effectively improve rates for cancer screening. However, a computerized provider reminder is consistently more cost effective than notifying the patient directly when a computerized information system is already available in a physician's medical office. Patient reminders that are personalized or signed by the patient's physician are more effective than generic reminders. Education. These interventions include pamphlets, classes, or public events providing information for physicians or beneficiaries on coverage, benefits, and time frames for services. The study found that while the effect of patient education is significant, it is consistently less effective than system change, incentives, or reminders. CMS is implementing interventions in all states through its PRO program. Under this program, CMS contracts with 37 PROs, each responsible for monitoring and improving the quality of care for Medicare beneficiaries in one or more states, in U.S. territories, or in the District of Columbia. These efforts are currently aimed at three preventive services offered under Medicare--immunizations against flu and pneumonia and screening for breast cancer. CMS chose these topics based on their public health importance and other factors. CMS also contracts with select PROs to provide support and assistance to all PROs for each area of focus. For example, CMS has contracted with two of the existing PROs, one for flu and pneumonia immunizations and one for breast cancer screening, to provide support and share information among the PROs regarding their efforts to improve usage rates for these services. Our discussions with the officials from these two PROs indicate that, for immunizations, most PROs are focusing on ways to better educate patients and providers on the importance of getting flu and pneumonia shots. For breast cancer screening, efforts are focusing on developing integrated reminder systems, such as chart stickers or computer-based alerts that physicians' offices can use to contact patients on a timely basis. Officials for the two PROs providing support indicated that most PROs were implementing multiple interventions. For example, in a newsletter intended to help PROs share information, officials at one PRO reported that they have developed concurrent breast cancer screening interventions for their state, which are targeted at physicians and their staffs, nurses, and beneficiaries. Officials for this PRO report the following. For physicians and their staffs, they (1) host seminars to teach them about reminder and billing systems, (2) provide toolkits that include reminder systems, checklists, and other materials, and (3) conduct on-site consultations to encourage providers to implement system changes. For nurses, they are conducting a campaign intended to increase awareness and encourage nurses and student nurses to identify female friends and family members who are overdue for mammograms. The campaign includes information packets, a newsletter, and information booths at nursing organization meetings. For beneficiaries, the PRO publishes a periodic newsletter on the subject of preventive medicine. This newsletter includes articles on the importance of mammography for early detection of breast cancer. CMS has taken steps to evaluate the success of PRO efforts. CMS officials explained that the contracts with the PRO organizations are "performance based" and provide financial incentives as a reward for superior outcomes. The contracts include a methodology in which the performance of the PRO for each state, U.S. territory, and the District of Columbia is scored based on 22 indicators, including flu and pneumonia vaccination rates and mammography rates. The performance of the PRO in each state will then be ranked against all other states in order to identify the higher and lower performing PROs. CMS intends to automatically renew the contracts with the top 75 percent of the PROs for the next contract cycle, which begins in 2002. The PRO contracts also contain financial performance incentives allowing each PRO to receive up to an additional 2 percent payment based on the positive outcomes of their interventions. CMS officials expect information on the results by the summer of 2002. Consequently, we have not assessed the outcome of PRO efforts or CMS's methodology for measuring PRO performance. While the current efforts include 3 of the 10 preventive services covered by Medicare, CMS is also developing indicators and performance measures necessary for interventions to increase use of screening services for osteoporosis and colorectal and prostate cancer. CMS officials stated that such interventions would be implemented in future contracts with PROs. CMS is not currently developing indicators for the remaining preventive services covered by Medicare--hepatitis B immunizations or screenings for glaucoma and vaginal cancer. CMS is also sponsoring PRO interventions and projects in each state to increase use of preventive services by minorities and low-income Medicare beneficiaries. CMS-funded research on successful interventions for the general Medicare population 65 and older concluded that evidence was insufficient to determine how best to increase use of services by minorities and low-income seniors across various geographic settings. Differences in how populations use preventive services are sometimes found even when the populations have similar geographic settings or delivery systems. For example, a study showed that although use of flu shots among white and African American seniors is higher under managed care than fee-for-service, the significant disparities in levels of use between these ethnic groups persist in both these environments. To begin addressing these information gaps, CMS requires that each PRO conduct a project focusing on one of several specified Medicare populations. This population can be low-income seniors enrolled in both Medicare and Medicaid or one of several minority groups: American Indians, Alaska Natives, Asian Americans and Pacific Islanders, African Americans, or Hispanics. For the population chosen, the PRO is to target interventions for one service. The projects in most states are focusing on increasing breast cancer screening or flu and pneumonia immunization among African American or low-income seniors. PROs are required to identify the barriers that exist for the selected population and service, and to implement interventions specifically designed to address these barriers for patients and providers. A summary of PRO efforts to increase services for minorities and low-income seniors is expected to be published sometime after the spring of 2002. Other studies or projects under way by CMS also aim to identify barriers and increase use of services by certain Medicare populations. For example, the Congress directed CMS to conduct a demonstration project to, among other things, develop and evaluate methods to eliminate disparities in cancer prevention screening measures. The law specifies a total of nine demonstration projects to include two state-level demonstrations for each of four minority groups (American Indians, including Alaska Natives, Eskimos, and Aleuts; Asian Americans and Pacific Islanders; African Americans; and Hispanics) and one project in the Pacific Islands. In addition, one of the projects must have a rural focus and one must have an urban focus for each group. CMS expects to produce a report by December 2002, after the project's first phase is completed, identifying best practices and models to be tested in demonstration projects. The second phase, which is to start around December 2002, is to test these models by implementing them in actual demonstration projects intended to determine which methods are most effective in reducing the incidence of cancer and improving minority health by overcoming barriers to the use of preventive services in the target populations. A report evaluating the cost effectiveness of the demonstration projects, the quality of preventive services provided, and beneficiary and health care provider satisfaction is due to the Congress in 2004. We obtained comments on our draft report from CMS. CMS commented that the draft report focused on the activities of its PROs and did not consider all of CMS's health promotion activities. CMS provided details on its publication and educational campaigns to inform Medicare beneficiaries about preventive service benefits and to encourage their use. CMS's comments are reproduced in appendix I. We acknowledge that our report does not describe all of CMS's health promotion/education activities underway that relate to increasing the use of preventive services among the Medicare population. While beneficiary education activities are worthwhile, CMS studies have shown that other interventions, such as those that are directed at changing the way a health delivery system operates so that patients are more likely to receive services, are more effective. Because PROs and CMS demonstration projects are accountable for facilitating the implementation of these types of interventions, we focused our efforts in describing these activities and the status of their evaluations. We have revised the report to make it clear that PRO activities are in addition to other CMS beneficiary education efforts. CMS also provided technical comments that we considered and incorporated where appropriate. As arranged with your office, unless you release its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time we will send copies of this report to the secretary of health and human services, the administrator of the Centers for Medicare and Medicaid Services, the director of the Centers for Disease Control and Prevention, and others who are interested. We will also make copies available to others on request. If you or your staff have any questions, please contact me at (202) 512- 7119, or Frank Pasquier at (206) 287-4861. Other major contributors are included in appendix II. Other major contributors to this report include Lacinda Ayers, Matthew Byer, Jennifer Cohen, Jennifer Major, Behn Miller, and Stan Stenersen.

Preventive medicine, including immunizations for many diseases and screening for some types of cancer, holds the promise to extend and improve the quality of life for millions of Americans. Medicare now covers three preventive services for immunizations and three for screenings, and the Centers for Medicare and Medicaid Services (CMS) sponsors "interventions" to increase the use of preventive services. GAO found that the use of preventive services varies widely by service, state, ethnic group, income, and education. The greatest differences among ethnic groups were for immunization rates. Cancer screening rates tended to differ according to income and education level. CMS pays for interventions that promote breast cancer screenings and pneumonia and flu shots. Most of the techniques being used, such as reminder systems that medical offices can use to alert doctors and patients to needed cancer screenings, have been effective. CMS is evaluating what its current efforts have accomplished and expects the results later this year.

The Domestic Preparedness Program is aimed at enhancing domestic preparedness to respond to and manage the consequences of potential terrorist WMD incidents. The authorizing legislation designated DOD as lead agency, and participating agencies include FEMA, the Federal Bureau of Investigation (FBI), the Health and Human Services' Public Health Service, the Department of Energy, and the Environmental Protection Agency. The Army's Chemical and Biological Defense Command designed a "train-the-trainer" program to build on the existing knowledge and capabilities of local first responders--fire, law enforcement, and medical personnel and hazardous materials technicians--who would deal with a WMD incident during the first hours. The legislation also designated funds for the Public Health Service to establish Metropolitan Medical Strike Teams to help improve cities' medical response to a WMD incident. Other aspects of the program included systems to provide information and advice to state and local officials and a chemical/biological rapid response team. DOD received $36 million in fiscal year 1997 to implement its part of the program, and the Public Health Service received an additional $6.6 million. DOD's fiscal year 1998 and 1999 budgets estimate that $43 million and $50 million, respectively, will be needed to continue the program. DOD expects the last 2 years of the 5-year program to cost about $14 million to $15 million each year, and continuing an exercise program for 2 more years could add another $10 million. Thus, the total projected program cost for the DOD segment could exceed $167 million. This does not include the costs of the Public Health Service, which hopes to establish and equip (an average of $350,000 of equipment and pharmaceuticals per city) Metropolitan Medical Strike Teams in all 120 program cities. In addition to the $6.6 million that the Public Health Service initially received, it spent $3.6 million in fiscal year 1997 to expand the number of strike teams. The Public Health Service received no additional funding in fiscal year 1998, but it estimates program requirements at $85 million for the remaining 93 cities. Domestic Preparedness Program training gives first responders a greater awareness of how to deal with WMD terrorist incidents. Local officials in the seven cities we visited praised the training program content, instructors, and materials as well as DOD's willingness to modify it based on suggestions from local officials. They also credited the program with bringing local, state, and federal regional emergency response agencies together into a closer working relationship. By December 31, 1998, DOD expects to have trained about one-third of the 120 cities it selected for the program. All training is to be complete in 2001. The first responders trained are expected to train other emergency responders through follow-on courses. The cities we visited were planning to institutionalize various adaptations of the WMD training, primarily in their fire and law enforcement training academies. A related field exercise program to allow cities to test their response capabilities also has begun. DOD decided to select cities based on core city population. It also decided to select 120 cities, which equates to all U.S. cities with a population of over 144,000 according to the 1990 census. The 120 cities represent about 22 percent of the U.S. population and cover at least 1 city in 38 states and the District of Columbia. Twelve states and the U.S. territories have no cities in the program, and 25 percent of the cities are in California and Texas. DOD took a city approach because it wanted to deal with a single governmental entity that could select the most appropriate personnel for training and receive equipment. In selecting the cities DOD did not take into account a city's level of preparedness or financial need. There was also no analysis to evaluate the extent to which the cities selected for the program were at risk of a terrorist attack warranting an increased level of preparedness, or whether a smaller city with high risk factors might have been excluded from the program due to its lower population. In fact, in none of the seven cities we visited did the FBI determine there was a credible threat of a WMD attack, which would be one factor considered in a threat and risk assessment. In our April 1998 report, we cited several public and private sector entities that use or recommend threat and risk assessment processes to establish requirements and target investments for reducing risk. Although we recognize there are challenges to doing threat and risk assessments of program cities, we believe that difficulties can be overcome through federal-city collaboration and that these assessments would provide a tool for making decisions about a prudent level of investment to reduce risks. In implementing the Domestic Preparedness Program, DOD could leverage state emergency management structures, mutual aid agreements among local jurisdictions, or other collaborative arrangements for emergency response. By delivering the program to cities based on population size, DOD is replicating training in nearby cities that might be part of the same response system or mutual aid area. Because of such mutual aid agreements and response districts or regions--as well as traditional state roles in both training and the established federal response system--a more consolidated approach could have resulted in fewer training iterations. Training in fewer locations while taking advantage of existing emergency response structures could hasten the accomplishment of program goals and reinforce local response integration. Such an approach also could cover a greater percentage of the population and make effective use of existing emergency management training venues. Under this approach, WMD training would be delivered over the long term through existing state training systems. As shown in appendix I, DOD's city approach resulted in clusters of nearby cities, each of which is to receive training and equipment. Our analysis shows that 14 clusters of 44 different cities, or 37 percent of the total number of the cities selected for the program, are within 30 miles of at least one other program city. Southern California is a key example of the clustering effect where training efficiencies could be gained. Appendix II shows California's mutual aid regions. Consistent with the statewide standardized emergency management system involving countywide operational areas within 6 mutual aid regions, the Los Angeles County sheriff is in charge of the consolidated interagency response to an incident occurring in any of the county's 88 local jurisdictions and 136 unincorporated areas. These include Los Angeles, Long Beach, and Glendale, all of which are treated separately in the program. Further, the nearby cities of Anaheim, Huntington Beach, Santa Ana, San Bernardino, and Riverside are within 30 miles of at least one other program city and also are treated separately. Through mutual aid and under California's statewide system, Los Angeles county conceivably could assist or be assisted by these other neighboring program cities or any other jurisdictions in the state in the event of a major incident. Similarly, as shown in appendix III, Virginia has 13 regional hazardous materials teams to respond to a WMD incident. Through these regional teams operating under state control, four adjacent program cities--Norfolk, Virginia Beach, Newport News, and Chesapeake--would assist one another along with Portsmouth and Hampton, which are not program cities. Texas has four program cities less than 30 miles from each other: Dallas, Fort Worth, Irving, and Arlington. In yet another example, the Washington, D.C., metropolitan area established a Metropolitan Medical Strike Team with a council-of-governments approach involving six jurisdictions in Virginia, Maryland, and the District of Columbia--these jurisdictions would support each other in the event of a WMD incident. DOD treats Washington, D.C., and Arlington, Virginia, separately for the training and equipment segments of the program. Similar strike teams in other cities are designed to be integrated into the local emergency response and medical systems for that particular area. In response to comments by state and local officials, DOD began holding regional meetings to introduce the program. Nevertheless, each program city still receives its own training and equipment package. Cities may invite representatives from neighboring jurisdictions and state agencies, but classroom space is limited, and if the neighboring city is a program city, it will eventually receive its own on-site training. DOD could have used state structures to deliver its training. Some states have academies and institutes to train first responders and emergency managers. For example, California's Specialized Training Institute provides emergency management training to first responders statewide. In Texas, the Division of Emergency Management conducts training for local first responders, and fire protection training is provided through the Texas Engineering Extension Service. Under current circumstances, the individual cities whose personnel were trained as trainers are to ensure that the appropriate courses are delivered to rank-and-file emergency response personnel. Cities we visited were adapting the DOD courses differently and using different venues to deliver the training. Cities planned to deliver portions of the courses both directly and through their local academies. One delivery method that DOD could consider to reach large numbers of first responders while minimizing travel costs is distance learning. The U.S. Army Medical Research Institute of Infectious Diseases, for example, has used distance learning techniques through satellite-to-television links. The legislation authorizes DOD to lend rather than give or grant training equipment to each city. The loan agreement between DOD and the cities specifies that the loan is for 5 years and that the cities are to repair, maintain, and replace the equipment. The loan agreement terms have caused frustration and confusion among local officials. Some cities we visited viewed the acceptance of the equipment as tantamount to an unfunded federal mandate because DOD is providing no funds to sustain the equipment. At least two cities were reluctant to accept the equipment unless DOD would provide assurances that they could use it operationally and would not be asked to return it. Although such assurances conflict with the loan agreement terms, DOD officials acknowledged that cities could keep the equipment and use it operationally if necessary. DOD officials also pointed out that much of the equipment has no more than a 5-year useful life and is largely incompatible with standard military-specification equipment. Further, expectations have been raised among some local officials that the federal government may eventually provide funds to sustain the program and to provide even more equipment to meet cities' perceived operational requirements. DOD officials said that the equipment was intended only to support cities' training needs. Also, DOD wanted to encourage cities to share the burden of preparing for WMD terrorism by funding additional equipment needs themselves. However, no assessments have been undertaken as part of the Domestic Preparedness Program to help define equipment requirements for WMD over and above what is needed for an industrial hazardous materials incident response. Although the FBI and the intelligence community see growing interest in WMD by groups and individuals of concern, the intelligence community concluded that conventional weapons will continue to be the most likely form of terrorist attack over the next decade. Such threat information would be a factor in a threat or risk assessment process that could be used as a tool for determining equipment requirements. The Congress intended the Domestic Preparedness Program to be an interagency effort with DOD as lead agency. Under FEMA leadership, the Senior Interagency Coordination Group provided a forum for DOD and the other involved agencies to share information. However, in developing the program, some member agency officials stated that DOD did not always take advantage of the experience of agencies that were more accustomed to dealing with state and local officials and more knowledgeable of domestic emergency response structures. For example, some agency representatives said that they offered suggestions such as taking a metropolitan area approach and coordinating with state emergency management agencies instead of dealing directly and only with cities. DOD officials noted that because the group often did not react to DOD proposals or could not achieve consensus on issues, DOD moved forward with the program without consensus when necessary. According to participants, the group did influence two decisions. DOD initially planned to cover 20 cities in the first phase of the program, but the group raised the number to 27 so that 7 cities would be trained sooner than their population would otherwise warrant. The seven cities were raised in priority to account for geographical balance, special events, and distance from the continental United States. Also, concerned about DOD's methodology and cities' presumed negative perceptions, the group recommended that DOD abandon its plan to have cities conduct a formal self-assessment of their capabilities and needs. But the group did not press for an alternative assessment methodology, which resulted in the lack of any analytical basis for cities to determine their requirements for a prudent and affordable level of preparedness for WMD (a desired end state) or to guide DOD or the cities in defining individual cities' requirements or needs. The Senior Interagency Coordination Group did not resolve the issue of similar or potentially overlapping terrorism-related courses. A joint Department of Justice and FEMA 2-day basic concepts course on emergency response to terrorism was being developed at about the same time as the Domestic Preparedness Program, and FEMA teaches subjects applicable to WMD and terrorism in its Emergency Management Institute and the National Fire Academy. The Department of Justice and FEMA courses and the DOD courses were developed separately. Some local officials viewed the growing number of WMD consequence management training programs, including the Domestic Preparedness Program, the Department of Justice and FEMA courses, FEMA Emergency Management Institute courses, National Fire Academy courses, and the National Guard's National Interagency Counterdrug Institute course, as evidence of a fragmented and possibly wasteful federal approach toward combating terrorism. Similarly, multiple programs with equipment segments--such as the separate DOD and Public Health Service programs and the new Department of Justice equipment grant program are causing frustration and confusion at the local level and are resulting in further complaints that the federal government is unfocused and has no coordinated plan or defined end state for domestic preparedness. Both equipment portions of the program, which were designed and implemented separately, cover personal protection, decontamination, and detection equipment. The separation of the $300,000 worth of DOD equipment and the average $350,000 Public Health Service equipment and pharmaceuticals required local officials to deal with two federal agencies' requirements and procedures. It also required local officials to develop separate equipment lists and to ensure compatibility and interoperability of the equipment, optimize the available federal funding, and avoid unnecessary duplication. A truly joint, coordinated equipment program could have alleviated the administrative burden on city officials and lowered the level of confusion and frustration. Although the Public Health Service circulated cities' proposed equipment lists among the Domestic Preparedness interagency partners for comments, this coordination at the federal level did little to simplify the process for the cities. State and local officials and some national fire fighter organizations also raised concerns about the growing number of response elements being formed, including the new initiative to train and equip National Guard units. These officials did not believe specialized National Guard units would be of use because they could not be on site in the initial hours of an incident and because numerous support units within the military and other federal agencies already can provide backup assistance to local authorities as requested. Examples of existing support capabilities include the Army's Technical Escort Unit, the Marine Corps' Chemical Biological Incident Response Force, and the Public Health Services' National Medical Response Teams. State and local officials were more supportive of the traditional National Guard role to provide requested disaster support through the state governor. We are currently reviewing the proposed role of the National Guard and reserves in WMD consequence management. As noted in our December 1997 report and in our April 1998 testimony,the many and increasing number of participants, programs, and activities in the counterterrorism area across the federal departments, agencies, and offices pose a difficult management and coordination challenge to avoid program duplication, fragmentation, and gaps. We believe that the National Security Council's National Coordinator for Security, Infrastructure Protection, and Counter-Terrorism, established in May 1998 by Presidential Decision Directive 62, should review and guide the growing federal training, equipment, and response programs and activities. Just as the broadening scope of efforts to combat terrorism poses a serious challenge for the executive branch, it also can be a coordination and oversight challenge for the Congress. The current committee structure is aligned with an agency and functional focus for authorization, appropriations, and oversight, and multiagency crosscutting issues, such as combating terrorism, proliferation, and others, fall within the jurisdiction of many authorizing committees and appropriations subcommittees. Mr. Chairman, that concludes our prepared statement. 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Pursuant to a congressional request, GAO discussed its work and observations on the Nunn-Lugar-Domenici Domestic Preparedness Program and related issues, focusing on: (1) program objectives and costs; (2) the training the Department of Defense (DOD) is providing to local emergency response personnel; (3) issues GAO identified on the way the program is structured and designed; (4) the equipment segment of DOD's program; and (5) interagency coordination of this and other related programs. GAO noted that: (1) the Domestic Preparedness Program is aimed at enhancing domestic preparedness to respond and manage the consequences of potential terrorist weapons of mass destruction (WMD) incidents; (2) the authorizing legislation designated DOD as lead agency, and participating agencies include the Federal Emergency Management Agency (FEMA), the Federal Bureau of Investigation, the Public Health Service, the Department of Energy, and the Environmental Protection Agency; (3) DOD received $36 million in fiscal year (FY) 1997 to implement its part of the program, and the Public Health Service received an additional $6.6 million; (4) DOD's FY 1998 and 1999 budgets estimate that $43 million and $50 million will be needed to continue the program; (5) Domestic Preparedness Program training gives first responders a greater awareness of how to deal with WMD terrorist incidents; (6) by December 31, 1998, DOD expects to have trained about one-third of the 120 cities it selected for the program; (7) all training is to be complete in 2001; (8) DOD decided to select cities based on core city population, and it did not take into account a city's level of preparedness or financial need; (9) in implementing the Domestic Preparedness Program, DOD could leverage state emergency management structures, mutual aid agreements among local jurisdictions, or other collaborative arrangements for emergency response; (10) the legislation authorizes DOD to lend rather than give or grant training equipment to each city; (11) some cities GAO visited viewed the acceptance of the equipment as tantamount to an unfunded federal mandate because DOD is providing no funds to sustain the equipment; (12) in developing the program, some member agency officials stated that DOD did not always take advantage of the experience of agencies that were more accustomed to dealing with state and local officials and more knowledgeable of domestic emergency response structures; (13) the many and increasing number of participants, programs, and activities in the counterterrorism area across the federal departments, agencies, and offices pose a difficult management and coordination challenge to avoid program duplication, fragmentation, and gaps; and (14) GAO believes that the National Security Council's National Coordinator for Security, Infrastructure Protection and Counter-Terrorism, established in May 1998 by Presidential Decision Directive 62, should review and guide the growing federal training, equipment, and response programs and activities.

Congress established the Highway Trust Fund in 1956 to hold highway user taxes that fund various surface transportation programs. The primary revenue sources for the Highway Trust Fund are federal excise taxes on motor fuels (gasoline, diesel, and special fuels taxes) and truck-related taxes (truck and trailer sales, truck tire, and heavy-vehicle use taxes). Fuel taxes provide about 89 percent of the excise tax income to the Highway Trust fund. The Highway Trust Fund is divided into two separate accounts--Highway and Mass Transit Accounts. The Highway Account receives the majority (approximately 89 percent in fiscal year 2013) of the tax receipts allocated to the Highway Trust fund, including the majority of the fuel taxes. All truck-related taxes are also deposited into the Highway Account. The Highway Trust Fund primarily supports surface transportation programs administered by four DOT operating administrations--FHWA, FTA, FMCSA, and NHTSA. The Highway Account funds programs administered by FHWA, FMCSA, and NHTSA, and the Mass Transit Account funds FTA programs. For fiscal year 2013, MAP-21 authorized approximately $51 billion from the Highway Trust Fund to four DOT operating administrations, most of which was authorized to FHWA (see fig. 1). These agencies provide much of this funding directly to states, metropolitan-planning organizations, and transit agencies through formula and discretionary grants, and recipients select projects to be funded, subject to federal eligibility requirements. FHWA is primarily funded from the Highway Trust Fund.percent of FHWA's authorized funds are for the federal-aid highway program. FHWA oversees this program and distributes much of this funding to states through annual apportionments established by statutory formulas. Apportioned funds are available for states to obligate for construction, reconstruction, and improvement of highways and bridges on eligible federal-aid highway routes, as well as for other purposes authorized in law. While FHWA oversees and distributes funds to States, the responsibility for selecting specific highway projects generally rests with state DOTs and local-planning organizations, which have discretion in determining how to allocate available federal funds among various projects. Specifically, FHWA relies on its division offices--52 division offices located in each state, the District of Columbia, and Puerto Rico--to oversee projects funded through the federal-aid highway program and ensure these projects comply with federal requirements. However, FHWA is accountable for ensuring that the federal-aid highway program is delivered effectively, efficiently, and in compliance with established federal law. The remainder of FHWA's Highway Trust Fund funding (about 10 percent) is authorized for other programs including the Federal Lands Highway Program, which provides financial and engineering assistance for a network of public roads that serve the transportation needs of Federal and Indian Lands and FHWA's research and education activities. FHWA allocates Highway Trust funds to 28 agencies, such as the Department of Interior. See appendix II for additional information about FHWA's federal-aid highway and other spending. FTA receives funding from both the Mass Transit Account of the Highway Trust Fund for its Formula and Bus Grants and from the General Fund for its discretionary grants, which include the Capital Investment Grants programs. FTA distributes this funding to grant recipients for several activities, including financial and technical assistance to local and state public agencies to purchase, build, maintain, and operate transportation systems, and to support planning and operations for public transit systems, including bus, subway, and light rail. FTA works in partnership with states and other grant recipients to administer federal transit programs, provide financial assistance, policy direction, technical expertise, and some oversight. State and local governments are ultimately responsible for executing most federal transit programs by matching and distributing federal funds and by planning, selecting, and supervising infrastructure projects and safety programs in accordance with federal requirements. NHTSA receives funding from both the Highway Trust Fund and the General Fund. It administers and distributes Highway Trust Fund monies by formula to states through various federal highway-safety grants, such as the State and Community Highway Safety Grant Program, which is a formula grant. This funding supports programs that work to reduce accidents from speeding, encourage the proper use of seat belts and child seats, reduce accidents from driving while intoxicated, prevent and reduce accidents between motor vehicles and motorcycles, and improve law enforcement services in motor- vehicle accident prevention and traffic supervision, among other things. NHTSA also coordinates through federal-state partnerships, regulates and issues safety standards for passenger vehicles, and addresses compliance issues with safety standards by performing tests, inspections, and investigations. FMCSA receives funding for programs from the Highway Trust Fund. FMCSA is charged with establishing and enforcing standards for motor carrier vehicles and operations, hazardous materials, and the movement of household goods, among other things. FMCSA also conducts compliance reviews of motor carriers' operations at their places of business as well as roadside inspections of drivers and vehicles, and can assess a variety of penalties, including fines and orders for noncompliant motor carriers to cease interstate operations. The largest of the federal motor carrier safety-grant programs funded from the Highway Trust Fund--the Motor Carrier Safety Assistance Program Grants--provides funding to states to reduce crashes, fatalities, and injuries related to commercial motor vehicle transportation. MAP-21 also authorized Highway Trust Fund funds to be used for agency's administrative expenses. Currently, FHWA, FMCSA, and NHTSA all receive funding from the Highway Trust Fund for administrative expenses. FTA does not currently receive funding from the Highway Trust Fund for administrative expenses but requested such funding for fiscal year 2015. FHWA collects and reports information on activities funded with obligations from the Highway Trust Fund. FHWA tracks this data for individual projects segments or contracts, but does not collect and report aggregate spending data at the project level for the majority of projects on a routine basis. FTA also collects data on the activities that are funded with Highway Trust Fund obligations each year, while NHTSA and FMCSA collect and report data on obligations from the Highway Trust Fund by grant programs. FHWA, NHTSA, and FMCSA also receive funding from the Highway Trust Fund for administrative expenses. Information on administrative obligations is available in annual budget requests. In fiscal year 2013, FHWA obligated about $41 billion from the Highway Trust Fund, most of which (about $39 billion) was apportioned to states for activities to improve the nation's roadway and bridge infrastructure through the federal-aid highway program. Our analysis of fiscal year 2013 federal-aid highway program obligations shows that states obligated most of this funding for road and bridge improvements (47 percent for States roads in addition to 17 percent for bridges) (see fig. 2 below).obligated about 20 percent of Highway Trust Fund monies for project development activities including planning, engineering, and acquiring rights-of-way. Additionally, 9 percent was obligated for safety, enhancements and other improvements, including about 1 percent for sidewalks and bicycle trails. We further analyzed road and bridge improvements and found that about 90 percent of obligations went toward reconstruction, resurfacing, and rehabilitation activities, while about 10 percent went toward new construction. Additional information about road and bridge improvements and funding by program are available in appendix II. While FHWA collects information in FMIS on the type of activities funded with Highway Trust Fund monies, it does not currently collect and report aggregate spending data at the project level for the majority of projects on a routine basis.individual project segments or contracts, but not for an entire project. For example, as shown in figure 3, a new highway project generally has four stages: (1) planning, (2) preliminary design and environmental review, (3) final design and right-of-way acquisition and (4) construction. Each stage can include multiple project segments or contracts over many years with distinct obligations at any given time, and FHWA does not currently link all project segments or contracts associated with an entire project in FMIS. Although FHWA is able to collect and report federal obligations by individual contract, it is not able to aggregate this information to collect and report total federal obligations for an entire project. FTA collects and reports information on activities funded with obligations from the Highway Trust Fund. FTA, through its grant management system--the Transportation Electronic Award and Management system, reports information on federal obligations in its annual statistical summaries, and makes this information publicly available on its website. The statistical summaries provide information about federal funds obligated each fiscal year for each of FTA's grant programs by categories of activities, such as obligations for "bus purchases" or "fixed guideway modernization" (such as rail purchases). FTA obligated approximately $9 billion in fiscal year 2013 from the Mass Transit Account of the Highway Trust Fund through its Formula and Bus Grants programs. These grant programs provided funding for a range of activities, such as to modernize existing rail systems, to increase access to transportation in rural areas, and to restore, replace and acquire buses and other equipment. As shown in table 1, FTA obligated about $3 billion for activities to modernize or improve existing fixed guideway systems, which include among other things, purchases and rehabilitation of rail equipment, and station enhancements. FTA also obligated about $1.5 billion and $2 billion, respectively, for bus purchases and other bus activities in fiscal year 2013. FMCSA collects and reports obligations from the Highway Trust Fund at the grant program level, in its grant management data system, Grant Solutions, and Delphi, DOT's accounting system. As shown in table 2, FMCSA obligated about $298 million in fiscal year 2013, primarily through grants to states to improve commercial motor carrier vehicle safety, border enforcement, and vehicle license and information systems programs. The largest of FMCSA's grant programs, the Motor Carrier Safety Assistance Program (MCSAP), provided $213 million (about 71 percent of FMCSA's total federal obligations) to states to help develop or implement programs to reduce commercial motor vehicle-involved accidents, fatalities, and injuries, through safety activities such as inspections.enforcement ($32 million) and vehicle licensing and registration ($29 million) grant programs, as well as funding for investments in data programs such as the Performance and Registration Information System Management Grant Program ($5 million), among others. FMCSA collects other information about its grant programs as part of its oversight and monitoring responsibilities in other information systems. For example, FMCSA collects data on activities that were funded with MCSAP grants in its Analysis and Information Online Data Dashboard. Within DOT, FHWA, FMCSA, and NHTSA receive Highway Trust Fund monies for administrative expenses such as personnel salaries and benefits and rent. There is no standard definition within DOT of what is considered an administrative expense. According to DOT officials, MAP- 21 and appropriations language establish parameters for the types of activities that can be funded with Highway Trust Fund monies. For example, for FMCSA, administrative funds can be used for, among other things, personnel costs, administrative infrastructure, rent, information technology, programs for research, and such other expenses as may from time to time become necessary to implement statutory mandates of the Administration not funded from other sources. As shown in table 4, in fiscal year 2013, DOT agencies obligated a total of $752 million for administrative expenses funded from the Highway Trust Fund. This accounted for about 2 percent of Highway Trust Fund obligations by DOT's operating administrations. MAP-21 also authorized some of FHWA's Highway Trust Fund administrative expense funding to be used for specific programs including the Highway Use Tax Evasion Projects program and On-The-Job Training Support Services program. In fiscal year 2013, FHWA obligated $22 million for these programs. DOT agencies report information on administrative expenses paid from the Highway Trust Fund in their annual budget requests, which are publicly available. DOT operating administrations have limited flexibility with respect to how Highway Trust Fund monies can be used for administrative expenses and limited flexibility for reallocating full-time equivalents (FTE) funded from the Highway Trust Fund. For example, NHTSA allocates FTEs by program, and no individual NHTSA employee is paid out of both the Highway Trust Fund and the general fund. NHTSA does have some flexibility to fund FTEs from either the Highway Trust Fund or the General Fund with allocations made at the fund level based on the type of work assigned to the employee. Motor fuel taxes that support the Highway Trust Fund are eroding, resulting in fewer resources to fund surface transportation projects and requiring, in recent years, infusions of funding from general revenues. We have reported that continuing to fund the Highway Trust Fund through general revenues may not be sustainable given competing demands and the federal government's fiscal challenges, and that Congress and the Administration need to agree on a long-term plan for funding surface transportation. Given this situation, ensuring that Highway Trust Fund dollars are spent wisely and that its uses are transparent to Congress and the public is important. About $39 billion of FHWA's fiscal year 2013 Highway Trust Fund total obligations of $41 billion were distributed to states through the federal-aid highway program and FHWA is accountable for the efficient and effective use of these funds. In recent years, FHWA has taken some positive steps to collect and report aggregate spending data for its "major" projects, but does not currently collect and report aggregate spending data for other projects, which represented nearly 88 percent of all fiscal year 2013 federal-aid highway obligations. FHWA could collect and report aggregate spending data for all projects in FMIS since the database already has two existing data fields that could be used to collect this information. According to FHWA officials, collecting this data in FMIS could result in some increased costs to states; however, FHWA does not have an estimate of what the associated costs for tracking this information would be to states. FHWA would have to collect further information on the costs and resources required to make these data fields mandatory and would need to develop data collection procedures to ensure state users are entering and reporting consistent data. FHWA is currently in the process of modernizing its FMIS database system, which could provide FHWA with an opportunity to explore options for further refining FMIS to collect consistent aggregate spending data for all projects or other options for collecting this information. Improving FMIS to allow states to provide project-level data could aid FHWA in its risk-based oversight of federal- aid highway programs by allowing FHWA to more easily draw consistent data for its compliance assessment reviews. In addition, collecting project-level data could assist FHWA in tracking and reporting information to Congress and the public about how the majority of federal funds from the Highway Trust Fund are being used. To improve transparency and provide Congress and the public greater visibility into the types of highway activities funded with Highway Trust Fund monies, we recommend that the Secretary of Transportation direct the FHWA Administrator to explore the costs, feasibility, and options for collecting and publicly reporting consistent aggregate project-level spending data. We provided a draft of this report to DOT for its review and comment. DOT agreed with our recommendation and provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Secretary of Transportation. In addition, this report will be available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions 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 V. The objective of this report was to examine what is known about the types of projects, activities, and federal administrative functions and expenses supported by the Department of Transportation (DOT) using Highway Trust Fund monies in fiscal year 2013. To identify the types of projects, activities, and administrative expenses that have been undertaken using Highway Trust Fund monies in fiscal year 2013, we obtained and analyzed data from the Federal Highway Administration (FHWA), the Federal Transit Administration (FTA), the National Highway Traffic Safety Administration (NHTSA), and the Federal Motor Carrier Safety Administration (FMCSA) of fiscal year 2013 obligations for all programs and administrative expenses funded with Highway Trust Fund monies. According to DOT, these are the DOT agencies that can directly obligate funds from the Highway Trust Fund. For FHWA data, we obtained and analyzed data from FHWA's Fiscal Management Information System (FMIS) system, which is FHWA's major financial information system for tracking highway projects financed with federal-aid highway program funding. FHWA uses the information entered in FMIS for planning and executing program activities, evaluating program performance, and depicting financial trends and requirements relating to current and future funding. Specifically, we obtained FHWA data for projects with obligated funds in fiscal year 2013 (October 1, 2012, through September 30, 2013). For the purposes of our analysis, we included obligations for all 50 states, District of Columbia, and Puerto Rico, and excluded U.S. territories: American Samoa, Guam, Northern Mariana Islands, and the Virgin Islands from this total. The data set that FHWA provided us, included data for the following data fields: (1) State, (2) Project Number, (3) Fund Source, (4) Recode, (5) Improvement Type (6) Fiscal year 2013 Federal Funds, and (7) Major Project. We analyzed the data to determine the total obligated federal funds for 59 improvement We categorized these improvement types into 13 broader GAO types.categories and determined total federal obligations incurred for each of these categories. (See table 5). About $3.9 million of the entries in the FMIS database did not have an improvement type classification and for the purposes of our analysis, we classified these entries as 'other'. FHWA also provided us with fiscal year 2013 Highway Trust Fund obligations data for programs and administrative expenses not captured in FMIS. We also reviewed documents from and conducted interviews with FHWA officials to gather information about: (1) the capabilities of FHWA's FMIS database to track project-level data, (2) processes and protocols for tracking and entering project-level data in FMIS, and (3) extent to which FHWA uses FMIS data for project management and risk oversight purposes. To assess the reliability of data collected in FMIS, we reviewed available documentation and interviewed FHWA officials on the procedures used by FHWA and state Departments of Transportation (state DOT) to enter and verify financial information entered into FMIS. We also conducted electronic testing for duplicate entries and missing values in the data we extracted from FMIS. We found the FMIS data elements we used in our report to be sufficiently reliable for the purposes of reporting federal obligations for fiscal year 2013. For FTA we requested, obtained, and analyzed FTA data on Highway Trust Fund obligations for all programs in fiscal year 2013. FTA produced these data from its Transportation Electronic Award and Management (TEAM) system and provided us with total federal obligations by program and by 13 categories of activities that GAO reclassified into 9 categories of activities. We did not obtain administrative obligations data from FTA because FTA does not receive funding from the Highway Trust Fund for administrative expenses. Similarly, we requested, obtained, and analyzed NTHSA and FMCSA data on Highway Trust Fund obligations for all programs and administrative expenses during fiscal year 2013. Both agencies produced this data through Delphi, which is DOT's accounting system. We also reviewed publicly available information on FTA, NHTSA, and FMCSA fiscal year 2013 program and administrative obligations from the Highway Trust Fund. We interviewed officials from FTA, NHTSA, FMCSA, and obtained written information about steps taken to ensure the reliability of their data from TEAM and from the Delphi system. We determined that the data were sufficiently reliable for the purposes of this report. We reviewed relevant statutes, regulations, legislation, and other literature including prior GAO reports on Highway Trust Fund authorizations and the types of administrative expenses that can be funded with Highway Trust Fund dollars. We interviewed officials from the DOT, Office of Secretary of Transportation (OST) and the four DOT- operating administrations to obtain additional information on federal obligations from the Highway Trust Fund; the administration's process for tracking and monitoring these obligations; and the flexibility DOT and its operating administrations have to reallocate Highway Trust Fund dollars among offices and other functions. There is no standard definition of administrative expenses. However, for the purposes of our review, administrative expenses were defined as salaries, benefits, travel, and other service contracts. We conducted this performance audit from March 2014 to October 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 fiscal year 2013, FHWA spent $41 billion from the Highway Trust Fund. Of this amount, $39 billion was apportioned to states through the federal- aid highway program. FHWA also spent about $2 billion of its $41 billion from the Highway Trust Fund for other purposes, including transfers to other DOT and non-DOT federal agencies ($610 million), Federal Lands Transportation Program ($558 million), and research activities ($438 million), among others. In fiscal year 2013, FHWA allocated Highway Trust monies to 28 agencies (8 DOT and 20 non-DOT agencies), including DOT's Federal Railroad Administration and the Department of Interior, among others. Our analysis of FHWA FMIS data of fiscal year 2013 obligations showed that about 47 percent of total federal obligations went to road improvements, and 17 percent went to bridge improvements. The majority of both road and bridge projects went toward reconstruction, resurfacing, and rehabilitation activities versus new construction. Specifically: For roads, about 43 percent was dedicated to resurfacing and rehabilitation of roads with most of the remainder going toward reconstruction with increased or no added capacity. For bridges, about 59 percent was dedicated for bridge rehabilitation and replacement with no added capacity and most of the remainder went toward rehabilitation and replacement with increased capacity and other bridge improvements. (See figs. 4 and 5). In addition, about 29 percent of FHWA federal-aid highway program obligations from the Highway Trust Fund went toward project development, safety, and other improvements. Project development activities include funding for activities such as preliminary engineering activities, construction engineering, research, and other planning activities. Our analysis of this data showed that most of this funding went toward construction engineering (32 percent) and preliminary engineering (29 percent). (See fig. 6.) Safety, enhancements, and other improvements include safety, safety education for pedestrians and bicyclists, and highway crossing activities, among others. Our analysis of this data showed that most of this funding went to safety activities (67 percent). An additional 15 percent went toward facilities for pedestrians and bicycles. (See fig. 7) We also analyzed FHWA FMIS data of projects funded under each of FHWA's five core formula programs. These core programs account for $31 billion (about 76 percent) of the $41 billion that FHWA obligated from the Highway Trust Fund in fiscal year 2013. As discussed below, the types of activities funded under each of these programs varied widely. (See figs. 8-12). The National Highway Performance Program (about $17 billion) provides funding for improvements on the National Highway System such as construction, reconstruction, resurfacing, and rehabilitation of National Highway System segments. The majority of this funding was obligated for resurfacing and rehabilitation of roads (21 percent), project development activities (19 percent), and reconstruction of roads to increase capacity (18 percent). The Surface Transportation Program (approximately $11 billion) funds the federal share of projects that states and localities may carry out on federal-aid highway , including bridge projects, transit capital projects, and bus facilities. The majority of STP funding was obligated for resurfacing and rehabilitation of roads (26 percent), project development activities (20 percent), and reconstruction of roads with no added capacity (11 percent). The Highway Safety Improvement Program (approximately $2 billion) provides funding for activities that reduce the number of crashes, traffic fatalities, and serious injuries on public roads. Most of this funding was obligated for safety improvements (62 percent) and project development activities (20 percent). The Congestion Mitigation and Air Quality Improvement Program (about $1 billion) provides funding to state and local governments for transportation projects and programs to help meet the requirements of the Clean Air Act. About 21 percent of this funding was obligated to project development activities, and 24 percent was obligated to other activities, which included activities such as traffic management on high-occupancy vehicle lanes. The Transportation Alternatives program (approximately $111 million) provides funding for alternative transportation projects related to surface transportation, such as pedestrian and bicycle trails, community improvement activities, construction, planning, and design of infrastructure related projects and systems that provide safe routes for non-drivers. About 50 percent of this funding was obligated for sidewalks and bicycle trail activities, with most of the remainder obligated for project development (17 percent) and other (18 percent) activities. Our analysis of fiscal year 2013 federal-aid highway program obligations for "major" projects showed that over 40 percent of these funds were used for road resurfacing and rehabilitation (24 percent) and project development activities (19 percent). (See fig. 13.) About 6 percent of the funds were used for new construction of roads and bridges, while 7 percent were utilized for safety improvements. In addition to the contact named above, Steve Cohen, Assistant Director, Melissa Bodeau, Melinda Cordero, Tara Jayant, Mitchell Karpman, Leslie Locke, Maria Mercado, Sara Ann Moessbauer, Ruben Montes de Oca, and Crystal Wesco made key contributions to this report.

In recent years, dedicated revenues to the Highway Trust Fund have been eroding, resulting in fewer resources to fund surface transportation projects and requiring, between 2008 and 2014, transfers of over $50 billion in general revenues. Four operating administrations within DOT--FHWA, FTA, NHTSA, and FMCSA--receive funding from the Highway Trust Fund for programs administered by these agencies, and FHWA receives the largest share (81 percent of the agency's authorizations in fiscal year 2013). GAO was asked to review how Highway Trust Fund monies are being used to help ensure that sound choices and investment decisions about future funding are made. This report examines what is known about the types of projects, activities, and federal administrative functions and expenses supported by DOT using Highway Trust Fund monies in fiscal year 2013. To address this request, GAO obtained and analyzed fiscal year 2013 federal obligation data from DOT's operating administrations, reviewed relevant documentation, and interviewed FHWA, FTA, FMCSA, NHTSA, and DOT officials. In fiscal year 2013, operating administrations within the Department of Transportation (DOT) collected and reported some information on the types of activities and administrative expenses funded from the Highway Trust Fund, but did so with varying levels of detail. The Federal Highway Administration (FHWA) obligated about $41 billion in fiscal year 2013, most of which ($39 billion) was apportioned to states through the federal-aid highway program. FHWA tracks federal-aid highway program obligations in its Fiscal Management Information System (FMIS), for individual project segments or contracts. This process allows FHWA to collect and report information on the types of activities (such as obligations for the construction of new roads or bridges) funded with Highway Trust Fund monies. However, FHWA does not collect and report aggregate project-level data for the majority of projects on a routine basis. Aggregate project-level data would allow FHWA to track and report the total overall obligations of an entire project. While FHWA tracks and reports aggregate obligations for its "major projects" (projects with a total cost of $500 million or more), it does not collect and report aggregate obligations for other projects, which represented nearly 88 percent of all fiscal year 2013 spending. FHWA could collect and report aggregate obligations for all projects in FMIS, and FMIS has two existing data fields that could be used to collect this information. But according to FHWA officials, doing so would result in increased costs to FHWA and states. FHWA officials attributed increased costs to, among other things, programming costs to make changes to FMIS to track these data; however, FHWA has not completed a cost analysis to estimate what the associated costs would be. FHWA is currently in the process of modernizing its FMIS database system. Exploring the costs, feasibility, and options for collecting and reporting consistent aggregate project-level obligations could aid FHWA in its oversight efforts, including its ability to more easily draw consistent data for its compliance reviews and to report information to Congress and the public about how the majority of federal funds from the Highway Trust Fund are being used. The Federal Transit Administration (FTA), the National Highway Traffic Safety Administration (NHTSA), and the Federal Motor Carriers Safety Administration (FMCSA) also collect some information on activities funded with Highway Trust Fund monies. For example, FTA collects data on activities, such as obligations for bus and rail purchases, funded with Highway Trust Fund monies each year, and NHTSA and FMCSA collect and report data by grant program. In addition, within DOT, the FHWA, FMCSA, and NHTSA used Highway Trust Fund monies for a range of administrative expenses, such as personnel salaries and benefits and rent. FTA does not receive Highway Trust Fund monies for administrative expenses. GAO recommends that the Secretary of Transportation direct the FHWA Administrator to explore the costs, feasibility, and options for collecting and publicly reporting consistent aggregate project-level spending data. DOT agreed with our recommendation. DOT also provided technical comments, which we incorporated, as appropriate.

More than 10 years ago, Congress directed FAA to conceptualize and plan NextGen; FAA is now implementing key NextGen systems and capabilities. NextGen was envisioned as a major redesign of the air transportation system to increase efficiency, enhance safety, and reduce flight delays that would entail precision satellite navigation and surveillance; digital, networked communications; an integrated weather system; and more. Figure 1 provides examples of changes and benefits that are expected to come from NextGen. The transition to NextGen--which encompasses multiple programs, procedures, and systems at different levels of maturity--is a complex, incremental, multi-year process. Since 2006, we have monitored FAA's development of NextGen and identified a number of key challenges facing the agency's implementation efforts. The 2012 Act included several provisions that address some of the issues that we have identified in our work, including incentivizing aircraft operators to equip with NextGen technologies, developing performance measures, and involving stakeholders in NextGen development.progress in implementing NextGen has highlighted ongoing challenges in Our recent work on FAA's three areas: improving leadership, demonstrating near-term benefits, and balancing the needs of the current system while implementing NextGen systems. Our work has found that complex organizational transformations, such as NextGen, involving technology, systems, and retraining key personnel require substantial leadership commitment over a sustained period, and that leaders must be empowered to make critical decisions and held accountable for results. Transitions, inconsistent leadership, and unclear roles and responsibilities can weaken the effectiveness of the internal and external collaboration required for successful implementation. Both the magnitude of the multi-year transition, as well as the numerous efforts under way throughout the different offices and divisions in FAA to effectuate that transition, will require FAA's leaders to manage all aspects of NextGen in a strategic, timely, and coordinated fashion. FAA has struggled to have the leadership in place to manage and oversee NextGen implementation, but more recently, has begun to fill key positions. In June 2013, FAA appointed a new Deputy Administrator and designated a Chief NextGen Officer, in response to Section 204 of the 2012 Act. In addition, in September 2013, FAA appointed a new Assistant Administrator for NextGen--a position that had previously been vacant. Designating one leader--such as the Deputy Administrator's responsibility over NextGen--can be beneficial because it centralizes accountability and can speed decision-making. With these positions now filled, FAA should be in a better position to resolve its NextGen leadership challenges. However, as I have stated in other work, a number of offices oversee certain aspects of NextGen, not all of which report to the Assistant Administrator, and implementation will require successful collaboration between these offices. As these positions have only recently been filled, it is not yet clear how effective the changes resulting from the 2012 Act will be in achieving that collaboration. Another key development in NextGen management envisioned by Section 208 of the 2012 Act redesignated the Director of the Joint Planning and Development Office (JPDO) as an Associate Administrator reporting directly to the FAA Administrator and defined that administrator's responsibility for coordination and planning with FAA's partner agencies. This change has not been fully implemented by FAA. However, in the Consolidated Appropriations Act of 2014, Congress eliminated direct funding of JPDO, and subsumed JPDO in FAA's operations budget. At this point, it remains unclear whether a JPDO Director position will continue and, if not, how the roles and responsibilities of that office, particularly with respect to long-term planning and coordination of research and development efforts across partner agencies, will be redistributed within FAA. We will continue to monitor these issues in two studies requested by this committee--one examining the organizational and leadership structure of the NextGen effort, and one looking more in-depth at actions FAA has taken to streamline its organization. We have begun both of these examinations. To convince operators to make investments in NextGen equipment, FAA must continue to deliver systems, procedures, and capabilities that demonstrate near-term benefits and a return on an operator's investments. In particular, a large percentage of the current U.S. air carrier fleet is equipped to fly more precise performance-based navigation (PBN) procedures, such as following precise routes that use the Global Positioning System or glide descent paths, which can save airlines and other aircraft operators money through reduced fuel burn and flight time. However, aircraft operators have expressed concerns that FAA has been slow to produce new procedures for various reasons, and has not produced the most useful or beneficial PBN routes and procedures. The 2012 Act included a number of provisions aimed at accelerating the creation of PBN procedures. For example, Section 213 of the 2012 Act directed FAA to develop plans to identify beneficial PBN procedures and to prioritize their implementation at key airports. We reported in April of 2013 that FAA had made progress in focusing its PBN efforts at seven priority metroplexes with airport operations that have a large effect on the overall efficiency of the NAS. More recently, FAA reports that it is considering recommendations from the NextGen Advisory Committee (NAC) regarding revalidation of the criteria used to prioritize these metroplexes, and that recent efforts have been diverted to metroplexes where the deployment of the new En Route Automation Management (ERAM) system is complete, in order not to interfere with ERAM deployment at those locations where it is ongoing. Our work also found that FAA does not have a system for tracking the use of existing PBN procedures. As a result, FAA is unable to assure that investment in these routes is worthwhile or that they justify the cost to develop and maintain them. Further, in the absence of data on the use of existing PBN routes, airlines and other stakeholders remain unconvinced that the investments needed for the full implementation of NextGen will be justified. Such data could help the agency demonstrate the value of PBN technologies and any resulting benefits, as well as allow the agency to identify routes that need to be revised to increase their use. We made recommendations to FAA to develop a system to track the use of PBN procedures and a process to proactively identify new PBN procedures based on NextGen goals and targets. We will continue to monitor FAA's progress in implementing these recommendations. The 2012 Act also included two other key provisions to accelerate the creation of PBN procedures. The first was a categorical exclusion from environmental review for PBN procedures that if implemented could demonstrate measurable reductions in fuel consumption, carbon dioxide emissions, and noise, on a per-flight basis, as compared to aircraft operations that follow existing procedures. However, our April 2013 report found that, according to FAA, potential noise impacts are measured cumulatively for all flights and that FAA has not yet identified an approach for per-flight assessments. FAA officials stated that no currently available methodology resolves the technical problems involved in making such a determination, so the agency has not applied this new categorical exclusion. Second, the 2012 Act called for the agency to establish a program for qualified third parties to develop, test, and maintain flight procedures. FAA has made some progress in this area by awarding a $2.8-million contract to GE's Naverus and a partner to develop two PBN procedures each at five mid-sized airports. The contractors are to design, evaluate, and maintain these procedures and be responsible for providing environmental data and analysis to FAA to support categorical exclusions and for drafting any required National Environmental Policy Act reviews, for review and approval by FAA. As of January 2014, PBN procedures had been implemented at two of the five selected airports. NextGen represents a transition from existing ATC systems and facilities to new systems, potentially necessitating changes to or consolidation of existing facilities. We have reported over the years that various investment and policy decisions, including what existing ATC systems and facilities will remain in the NAS during the transition and for how long, have yet to be made. For the systems and facilities that remain, FAA will have to monitor and maintain their performance and condition while the agency implements the NextGen transition. Decisions about the number of existing systems and facilities that will remain in operation during the transition have implications for FAA's capital and operations budgets going forward. If aging systems and associated facilities are not retired, FAA will miss potential opportunities to reduce its overall maintenance costs at a time when resources needed to maintain both systems and facilities may become scarcer. The 2012 Act contained a number of provisions aimed at accelerating the implementation of NextGen systems. However, we found in August 2013 that FAA's budget planning does not fully account for the potential impact of NextGen systems that will be deployed and the need for continued operations and maintenance of existing systems and facilities. In the 2012 Act, Congress also expressed concern regarding the condition of FAA facilities and mandated that we study their condition. In our September 2013 report, we noted that FAA estimates its staffed facilities like towers and Terminal Radar Approach Control (TRACON) facilities have about $260 million in deferred maintenance; unstaffed facilities, such as shelters and communication towers that house and support NAS equipment, had an estimated $446 million in deferred maintenance in 2012. These, and other cost estimates for maintaining existing systems and facilities, along with implementing NextGen exceed anticipated funding levels. However, we concluded that FAA's imprecise facility-condition data do not facilitate agency-wide priority assessments, which, in turn, could hinder the agency's ability to target its limited resources on those projects in greatest need of repair and that are most critical to the NAS. In addition, section 804 of the 2012 Act directed FAA to complete a study on the consolidation and realignment of FAA services and facilities to support the transition to NextGen. However, FAA has yet to identify which facilities would be consolidated or realigned, and according to FAA officials, the study will continue through 2014. In our August 2013 report we recommended improvements to FAA's budget-planning and infrastructure-condition data, improvements that FAA is currently considering. Improved budget planning and accurate and reliable data on infrastructure condition could help Congress better understand the funding requirements of existing systems and facilities and facilitate FAA's efforts to support the agency's mission of continuing to safely operate the NAS along with the longer-term goal of transitioning to NextGen. We will continue to monitor FAA's progress in implementing these recommendations. The U.S. air transportation system remains one of the safest in the world. As part of FAA's efforts to maintain and improve the safety of the system, FAA issues certificates and approvals for new air operators, new aircraft, and aircraft parts and equipment, and grants approvals for changes to air operations and aircraft based on FAA's interpretation of federal standards (see fig. 2). These certificates and approvals 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 NAS. However, our previous work has highlighted FAA's inconsistent regulatory interpretation of certification standards. In 2010, we found that variation in FAA's interpretation of standards for certification and approval decisions was a long-standing issue and made recommendations to improve those processes. Subsequently, the 2012 Act required FAA to work with industry to assess the certification process, including reviewing our previous work and developing recommendations to address the concerns that we and others have raised. As required by Section 312 of the 2012 Act, FAA, in consultation with representatives of the aviation industry, made recommendations to the director of FAA's Aircraft Certification Service regarding streamlining and reengineering the certification process. These recommendations, which we found to be relevant, clear, and actionable, called for FAA to: 1. improve the effectiveness of its delegation programs, 2. update certification procedures to reflect a systems approach to 3. review operational safety and rulemaking processes, and 4. implement efficiency reforms, among others. In July 2013, FAA released its plan to implement these recommendations. The plan included 14 initiatives and programs that FAA either had under way or intended to start to improve efficiency and reduce costs related to certifications. We found these initiatives were generally relevant to the recommendations and were clear and measurable. However, we found that FAA's plans do not contain some of the elements essential to a performance measurement process. For example, FAA has developed milestones for each initiative and deployed a tracking system to monitor the implementation of all certification-related initiatives, but it has not yet developed performance measures to track the success of most of the initiatives and programs. According to an FAA official, the agency has started discussions with industry stakeholders to identify key goals related to performance measurement. Because industries' goals and FAA's goals may be different with respect to the certification process, developing meaningful performance measures is a complex task that the agency plans to continue in 2014. The Committee recently asked us to examine in more detail FAA's progress and any challenges experienced in implementing the recommendations and making improvements to its certification processes, and will be tracking FAA's efforts going forward. Also resulting from issues found in our 2010 report on certification, section 313 of the Act directed FAA to establish an advisory panel to address inconsistencies in the interpretation of regulations by the certification offices. Consistent with issues raised in our 2010 report, this committee identified three root causes of inconsistent interpretation of regulations: (1) unclear regulatory requirements; (2) inadequate and nonstandard FAA and industry training in developing regulations, applying standards, and resolving disputes; and (3) a culture that includes a general reluctance by both industry and FAA to work issues of inconsistent regulatory application through to a final resolution and a "fear of retribution." To address these root causes, the committee made six recommendations, including developing a master source of guidance and developing instructions for FAA staff with policy development responsibility. We found that the advisory committee took a reasonable approach in identifying the root causes and that its recommendations were relevant, actionable, and clear. The committee also considered the feasibility of the recommendations by identifying modifications to existing efforts and programs and prioritizing the recommendations. FAA reported in January 2014 that it was still determining the feasibility of implementing these recommendations. The agency told us that it expected to publish an action plan to address the recommendations and metrics to measure implementation by late June 2014, more than six months after FAA's initial target. We note that while measuring implementation may be useful, FAA is not intending to measure outcomes, a measurement that could help in understanding if an action is having the intended effect. UAS are aircraft and associated equipment that do not carry a pilot aboard, but instead operate on pre-programmed routes or are manually controlled by pilot-operated ground stations. Although current non- military, domestic uses of UAS are limited to activities such as law enforcement, forensic photography, border security, and scientific data collection, UAS have a wide range of other potential commercial uses-- including vehicular traffic monitoring, crop dusting, and pipeline inspections--and the market for UAS use is expected to grow. Concerned with the pace of integrating UAS into the NAS, Congress established specific requirements and set deadlines for FAA in the 2012 Act. FAA has several efforts under way to satisfy the 2012 Act's requirements, most of which must be achieved by December 2015. In January 2013 we reported that of the seven deadlines that had passed, FAA had completed two items. However, since that time, FAA has satisfied a number of additional milestones (see app. III for an update of all the 2012 Act's requirements with respect to UAS). Of particular note: JPDO and FAA released a UAS Comprehensive Plan and a UAS Roadmap, respectively, in November 2013 to outline the nation's UAS goals and objectives and the tasks necessary to achieve UAS integration. In late December 2013, FAA selected the six locations for its UAS test site program. FAA established permanent Arctic areas where small UAS can operate for research and commercial purposes and the first flight took place in the fall of 2013. While progress has been made implementing some of the key milestones established in the 2012 Act, integrating UAS into the NAS continues to challenge FAA leading to uncertainty about when UAS integration will be achieved. For example, while FAA announced the six locations for its UAS test site program, FAA has not yet defined what operational, safety, and performance data it needs from the test sites and how that data will be collected and analyzed. We previously reported that use of these data would be important in developing safety, reliability, and performance standards, which are needed to guide and validate the supporting research and development efforts. FAA and industry stakeholders have stated that data and other information generated by the test sites will be important in helping FAA answer key research questions related to UAS operations and developing regulations and operational procedures for future commercial and civil use of UAS. Finally, to increase collaboration and provide stable organizational leadership, and focus on UAS integration efforts, FAA created the UAS Integration Office in 2013. While the office did not have an operations budget, as of January 2014, the office has 33 full time employees, and FAA is still finalizing agreements and other arrangements related to the reorganization, and it remains unclear what resources the office will have available to fulfill its role. Moving forward, FAA has a number of important milestones it must meet to ensure UAS integration into the NAS. A key next step, according to FAA officials and industry stakeholders, will be to adopt a final rule for small UAS operations. Although FAA has had efforts under way since 2008 supporting a rulemaking on small UAS, it is unlikely that FAA will meet the August 2014 final rule deadline required by the 2012 Act. For example, FAA has not yet issued a Notice of Proposed Rulemaking for small UAS, and recently estimated that one will not be released until November 2014. Further, FAA must develop standards--and determine what data are necessary to inform that process--to facilitate safe UAS integration into the NAS. More broadly, to achieve UAS integration, FAA faces the challenge of ensure that all of the various efforts supporting these integration issues within its own agency, as well as across federal agencies and other entities, align and converge in a timely fashion. We have begun additional work on UAS that will be looking specifically at collaboration between federal agencies responsible for UAS integration into the NAS and the research and development priorities in the area of research and development to support UAS integration. In closing, FAA has made some progress in implementing various parts of the 2012 Act, and is seeking to address some of the key challenges it faces. Going forward, we will continue to monitor FAA's progress, highlight the key challenges that remain, and the steps FAA and industry can take to find a way forward on the issues covered in this statement as well as other issues facing the industry. For example as previously mentioned, we have work underway to examine organizational and leadership issues with NextGen, and to examine, in greater detail, FAA's certification processes and progress made with respect to UAS. In addition, for this Committee we will be examining issues related to funding airport development, including passenger facility charges, airport improvement program grants, and the potential for greater private sector investment through public-private partnerships. Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. NextGen Air Transportation System: FAA Has Made Some Progress in Midterm Implementation, but Ongoing Challenges Limit Expected Benefits. GAO-13-264. Washington. D.C.: April 8, 2013. Next Generation Air Transportation System: FAA Faces Implementation Challenges. GAO-12-1011T. Washington, D.C.: September 12, 2012. Air Traffic Control Modernization: Management Challenges Associated with Program Costs and Schedules Could Hinder NextGen Implementation. GAO-12-223. Washington, D.C.: February 16, 2012. Next Generation Air Transportation System: FAA Has Made Some Progress in Implementation, but Delays Threaten to Impact Costs and Benefits. GAO-12-141T. Washington, D.C.: October 5, 2011. Integration of Current Implementation Efforts with Long-term Planning for the Next Generation Air Transportation System. GAO-11-132R. Washington, D.C.: Nov. 22, 2010. NextGen Air Transportation System: FAA's Metrics Can Be Used to Report on Status of Individual Programs, but Not of Overall NextGen Implementation or Outcomes. GAO-10-629. Washington, D.C.: July 27, 2010. Aviation Safety, Status of Recommendations to Improve FAA's Certification and Approval Processes. GAO-14-142T. Washington, D.C.: Oct. 30, 2013. Aviation Safety: FAA Efforts Have Improved Safety, but Challenges Remain in Key Areas. GAO-13-442T. Washington, D.C.: April 16. 2013. Aviation Safety: Additional FAA Efforts Could Enhance Safety Risk Management. GAO-12-898. Washington, D.C.: September 12, 2012. Aviation Safety: Certification and Approval Processes Are Generally Viewed as Working Well, but Better Evaluative Information Needed to Improve Efficiency. GAO-11-14. Washington, D.C.: October 7, 2010. Unmanned Aircraft Systems: Continued Coordination, Operational Data, and Performance Standards Needed to Guide Research and Development. GAO-13-346T. Washington, D.C.: February 15, 2013. Unmanned Aircraft Systems: Measuring Progress and Addressing Potential Privacy Concerns Would Facilitate Integration into the National Airspace System. GAO-12-981. Washington, D.C.: Sept. 14, 2012. A "mishandled baggage" report is a report filed with a carrier by or on behalf of a passenger who claims loss, delay, damage, or pilferage of baggage. A mishandled- baggage report may represent one or more mishandled bags. handling processes; however, data limitations impeded further analysis. We described DOT's options for and the impact of implementing minimum compensation standards for delayed baggage, which included (1) keeping current regulations, which, among other things, require compensation for reasonable expenses that result because of delay in the delivery of baggage; (2) reimbursing passengers for the checked baggage fee if the bag is delayed; and (3) implementing compensation standards based on the length of delay. Air Traffic Collegiate Training Initiative (CTI). We found that the cost- effectiveness of the CTI schools depends on a number of cost elements that are currently unknown, including the upfront cost of developing new curriculums and how FAA implements training through the CTI schools, among other factors. In addition, we were not able to determine the potential effect of the alternative air-traffic- controller-training approach through CTI schools on controller trainees; the concept would need further development before comparisons can be made about performance outcomes for such trainees under the current approach through the FAA Academy and the alternative approach through the CTI schools. FAA facility condition. While FAA has mechanisms to identify and mitigate safety deficiencies at FAA facilities and has taken actions to strengthen its capital planning process to help ensure its facilities are in good condition, our analysis of FAA's statistical model for estimating the condition of uninspected terminal facilities found the model to be imprecise; it uses one variable--age of the facility--to estimate the facility's condition. Furthermore, inaccuracies in FAA's real-estate management database undermine its usefulness as a management tool to manage its real estate portfolio. We recommended that FAA take action to improve the precision of the methods it uses to estimate the conditions of uninspected terminal facilities and implement a plan to improve its database for tracking its inventory of real property assets, consistent with sound data- collection practices. National Mediation Board. We found that the National Mediation Board, which facilitates labor relations and oversees union elections in two key transportation sectors--railroads and airlines--through mediation and arbitration of labor disputes and overseeing union elections, has adapted to challenges presented by large union elections resulting from airline mergers and has implemented improvements such as online voting. However, the board lacks some controls in key management areas that could risk its resources and its success such as having a formal mechanism for tracking resolution of findings and recommendations. We made a number of recommendations to improve the board's planning and make the most effective use of its limited resources and also noted that Congress should consider authorizing an appropriate federal agency's Office of Inspector General to provide additional oversight. Airport-intercity passenger rail connectivity. Most major U.S. airports have some degree of physical proximity to intercity passenger rail stations; however, air-rail connectivity remains limited due to a variety We found that connectivity between these two modes may of factors. provide a range of mobility, economic, and environmental benefits, and while strategies exist to improve connectivity, the costs and trade- offs of enhancing connectivity could be substantial. GAO, Intermodal Transportation: A Variety of Factors Influence Airport-Intercity Passenger Rail Connectivity, GAO-13-691 (Washington, D.C.: Aug. 2, 2013). Appendix III: Status of Requirements for UAS Integration under the 2012 Act as of January 2014 Deadline 05/14/2012 Enter into agreements with appropriate government agencies to simplify the FAA Modernization and Reform Act of 2012 requirement process for issuing Certificates of waiver or authorizations (COAs) or waivers for public UAS. Status of action In process-memorandum of agreement (MOA) with the Department of Defense (DOD) signed September of 2013; MOA with Department of Justice (DOJ) signed March 2013; MOA with National Aeronautics and Space Administration (NASA) in final coordination; MOA with Department of Interior (DOI) and National Oceanic and Atmospheric Administration (NOAA) are still in draft. 08/12/2012 Establish a program to integrate UAS into the national airspace at six test ranges. This program is to terminate 5 years after date of enactment. 08/12/2012 Develop an Arctic UAS operation plan and initiate a process to work with relevant federal agencies and national and international communities to designate permanent areas in the Arctic where small unmanned aircraft may operate 24 hours per day for research and commercial purposes. 08/12/2012 Determine whether certain UAS can fly safely in the national airspace before the completion of the Act's requirements for a comprehensive plan and rulemaking to safely accelerate the integration of civil UAS into the national airspace or the Act's requirement for issuance of guidance regarding the operation of public UAS including operating a UAS with a COA or waiver. 11/10/2012 Expedite the issuance of a COA for public safety entities 11/10/2012 Develop a comprehensive plan to safely accelerate integration of civil UAS into Issue guidance regarding operation of civil UAS to expedite COA process; provide a collaborative process with public agencies to allow an incremental expansion of access into the national airspace as technology matures and the necessary safety analysis and data become available and until standards are completed and technology issues are resolved; facilitate capability of public entities to develop and use test ranges; provide guidance on public entities' responsibility for operation. 02/12/2013 Make operational at least one project at a test range. 02/14/2013 Approve and make publically available a 5-year roadmap for the introduction of civil UAS into national airspace, to be updated annually. 02/14/2013 Submit to Congress a copy of the comprehensive plan. 08/14/2014 Publish in the Federal Register the Final Rule on small UAS. 08/14/2014 Publish in the Federal Register a Notice of Proposed Rulemaking to implement recommendations of the comprehensive plan. 08/14/2014 Publish in the Federal Register an update to the Administration's policy statement on UAS in Docket No. FAA-2006-25714. 09/30/2015 Achieve safe integration of civil UAS into the national airspace. Status of action None to date of the comprehensive plan. 12/31/2015 Develop and implement operational and certification requirements for public UAS 02/14/2017 Report to Congress on the test ranges. 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; Mike Armes, Martha Chow; Geoff Hamilton; Dave Hooper; Daniel Hoy; Eric Hudson; Bert Japikse; Heather Krause, Sara Ann Moessbauer; Faye Morrison; Nalylee Padilla; Melissa Swearingen; 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.

The U.S. air transportation system is the busiest and among the safest in the world. Even so, maintaining and improving the extraordinary level of connectivity and mobility the system affords us, and the safety record that has been achieved to date requires continued attention and effort. In the 2012 Act, Congress directed FAA to take various actions to improve the safety and efficiency of the current NAS while transitioning to NextGen. In addition, given the potential and opportunities afforded by new UAS technologies, the 2012 Act included several provisions with respect to FAA safely integrating UAS into the NAS. Based on work GAO has conducted for this Committee since the passage of the 2012 Act, this testimony discusses FAA's challenges and progress in 1) implementing NextGen, 2) improving aviation safety, and 3) integrating UAS into the national airspace system. This statement is drawn from several GAO reports completed since the 2012 Act, as well as additional reports from prior to the 2012 Act on these topics. To update information in those reports, GAO conducted interviews with officials from FAA and industry, and reviewed agency documents. The FAA Modernization and Reform Act of 2012 (the 2012 Act) contained several provisions related to implementing the Next Generation Air Transportation System (NextGen)--a complex, long-term initiative to incrementally modernize and transform the national airspace system (NAS). GAO's recent work on NextGen has highlighted three key implementation issues: Improving NextGen Leadership: Complex transformations, such as NextGen, require substantial leadership commitment over a sustained period, and leaders must both be empowered to make critical decisions and be held accountable for results. The 2012 Act created a Chief NextGen Officer that FAA appointed in June 2013, and FAA has recently filled other key NextGen leadership positions. With these positions filled, FAA should be in a better position to resolve its NextGen leadership challenges. Demonstrating Near-Term Benefits: The 2012 Act included a number of provisions aimed at accelerating the creation of performance-based navigation (PBN) procedures, such as following precise routes that use the Global Positioning System, which can save airlines and other aircraft operators money through reduced fuel burn and flight time. FAA must continue to deliver PBN capabilities and begin to demonstrate a return on operator's investments. As of January 2014, FAA has implemented PBN procedures at two of the five airports selected for early deployment. Balancing the Needs of the Current Air-Traffic Control System and NextGen: While the 2012 Act contained a number of provisions aimed at accelerating NextGen implementation, GAO found that FAA's budget planning does not fully account for the impact on the agency's operating costs of the NextGen systems that will be deployed in future years, along with the need for continued operation and maintenance of existing systems and facilities. Cost estimates for maintaining existing systems and facilities coupled with implementing NextGen exceed anticipated funding levels. GAO recommended improvements to FAA's budget-planning and infrastructure-condition data, which FAA is working to implement. Safety in the aviation industry is achieved in part through adherence to various certification standards. The 2012 Act required FAA to work with industry to assess the certification process. GAO's work has found that while FAA has made progress developing its plan to implement these recommendations, FAA continues to lack performance measures to track its progress. For unmanned aircraft systems (UAS), FAA has implemented 7 of the 17 requirements established in the 2012 Act, representing progress since GAO's last update in January 2013. However, FAA continues to experience challenges implementing the provisions in the 2012 Act and integrating UAS into the NAS. For example, although FAA has had efforts under way since 2008 supporting a rulemaking on small UAS, it is unlikely that FAA will meet the August 2014 final rule deadline required by the 2012 Act since it has not yet issued a Notice of Proposed Rulemaking. In addition, while FAA created the UAS Integration Office in 2013 to lead UAS integration, as of January 2014, the program lacks an operations budget.

The Army Workload and Performance System (AWPS) is intended to resolve long-standing systemic problems in the Army's civilian manpower requirements determination process. It is an information and reporting system that draws production and manpower data from other existing programs, including the Army's Standard Depot System. Its main purpose is to provide decision support tools for linking workload demands to manpower requirements and the budget process. The system was initially installed at Corpus Christi Army Depot, Texas, in June 1996. Since then, it has been put into operation at the Army's four other maintenance depots--Anniston, Letterkenny, Red River, and Tobyhanna. In 1999, the Assistant Secretary of the Army certified the system as fully operational for the maintenance mission at the five maintenance depots. The Army is moving forward with the installation of AWPS at all of its logistics and industrial activities. To date the system is being used as a decision-making tool in other functional areas, including ammunition logistics, base operations, materials usage, working capital fund budgets, and reporting of net operating results. The Secretary of the Army has directed that AWPS be used throughout the Army as the standard Armywide mechanism for determining manpower requirements for all of its logistics and industrial activities. The first AWPS master plan, submitted to Congress in April 1999, described the Army's progress and future plans for developing and implementing the system. In our November 1999 report regarding that master plan, we pointed out that the information it contained was limited, and we recommended that the Army develop a more substantial master plan that incorporated all applications for which the system was to be implemented, along with their priorities, costs and benefits, and proposed schedules. We also recommended that the Army make improvements in the existing management and oversight structures. The House Report to the National Defense Authorization Act for Fiscal Year 2001 required the Army to submit a revised master plan, incorporating our recommendations, by February 2001. Subsequently, section 346 of the National Defense Authorization Act for Fiscal Year 2002 required the Army to submit an annual progress report on its implementation of the revised master plan. Section 346 also required that these reports specifically address any changes made to the master plan since the previous report. In December 1999, the Army contracted with the Computer Sciences Corporation to create the Logistics Modernization Program, which is a new information system for managing the Army's supply, maintenance, and transportation functions. This system, initially called the Wholesale Logistics Modernization Program, will replace the existing Standard Depot System and many other source data systems, several of which provide data to AWPS. The Logistics Modernization Program is designed to improve readiness and logistics support to the war fighter by (1) reducing requisition response times, (2) improving the availability of supplies, (3) optimizing the use of inventory, and (4) responding more quickly to changing customer requirements. The milestones to the first deployment of the Logistics Modernization Program are shown in table 1. Once the Logistics Modernization Program becomes operational at the maintenance depots, the Army plans to shut down many of the old information systems that currently support AWPS and it will become the primary source for the data that AWPS needs to function. As a result, section 346 of the National Defense Authorization Act for Fiscal Year 2002 encouraged the Army to set up a process that would permit or enhance data sharing between the two systems. To ensure that the Army's AWPS capabilities remained intact, section 346 also mandated that the Army retain AWPS as its standard servicewide manpower system, under the Secretary of the Army's supervision and management. This mandate was further underscored in a letter dated August 9, 2001, from several congressional representatives to the Commander of the U.S. Materiel Command, which further requested that the Army refrain from incorporating the new system into the Logistics Modernization Program. The Army's May 2002 report on its workload and performance system does not contain the information that Congress needs to assess the Army's progress in implementing the system. In response to the requirement for a progress report, as specified in section 346 of the Fiscal Year 2002 National Defense Authorization Act, the Army submitted an updated version of its May 2001 master plan. This updated version did not identify or explain the changes that the Army had made to the master plan since the May 2001 version. In addition, the Army's report did not contain certain cost, schedule, and performance information that would normally be expected. Moreover, the Army's report did not fully discuss the potential duplication and overlap in functions performed by the Logistics Modernization Program and the workload and performance system. Although required by section 346, the Army's 2002 report did not address the changes made to the milestones or tasks set out in the May 2001 AWPS master plan. Appendixes II and III provide tables showing the milestones and tasks identified in both the 2001 and 2002 reports. In comparing the two reports, we found that several milestones had been changed, but the 2002 report did not identify these changes nor did it provide a detailed discussion of the reasons for these changes or their significance. For example, in its 2001 report the Army had scheduled Corpus Christi Army Depot as the first site to prototype the Net Operating Result capability, beginning in August 2001. We found, however, that in the 2002 report this task was set back by 1 year--to the fourth quarter of fiscal year 2002. The same task was also scheduled to be prototyped at one of the ammunition sites by March 2002, but this milestone was later delayed by about 1 year until sometime between January and March 2003. In each case, the 2002 report did not provide an analysis or explanation for the scheduling change. We also found discrepancies between the two reports related to the phasing of certain tasks involved in implementing the new system. Some tasks that were assigned to a specific phase in the 2001 report were moved to a different phase in the 2002 report, and there was no discussion of why these changes were made or what their impact on the overall implementation schedule might be. For example, phase 1 of the 2001 report involved only the consolidation of ongoing implementation actions, whereas in the 2002 report phase 1 also included non-Army Material Command maintenance activities. The 2002 report, however, does not clearly address the status of tasks previously listed under phase 1. The Army's 2002 plan does not contain the cost, schedule, and performance data that might normally be expected. For example, according to the Department of Defense's (DOD) Regulation 5000.2-R, progress reports related to the acquisition of major new automated information systems should contain detailed information on such key parameters as cost, schedule, and performance. Army officials stated that the scope and cost of the AWPS system does not meet the minimum threshold to be considered a major information system and, thus, the regulation does not apply to it. While we agree that the AWPS system does not meet the threshold requirements of the regulation, we believe certain criteria in the regulation would provide Congress with the necessary information to properly evaluate the AWPS system and should therefore be addressed in the Army's progress reports. Consequently, we have analyzed the AWPS report using criteria from the regulation. Additionally, the Clinger-Cohen Act of 1996 requires agencies to have investment management processes and information to help ensure that information technology projects are being implemented at an acceptable cost and within a reasonable and expected time frame. In effect, these requirements and guidance recognize that one cannot manage what one cannot measure. Finally, in our November 1999 report on the Army's original master plan for AWPS, we identified several shortcomings, including the lack of detailed information on costs and expenditures, milestones, and performance. We recommended in that report that the Army develop a more substantive master plan that included priorities, costs and benefits, and schedules. In our analysis of the Army's 2002 plan, we found that, while it addresses some of these elements, it does not provide the detailed or complete data that is needed to adequately assess the Army's progress in implementing the workload and performance system. As table 2 shows, the 2002 plan contained information on a few parameters identified in DOD's guidance, including direct costs; dates for certain events, such as reaching initial operating capabilities; and objectives for operational requirements. However, it did not include information on a large number of parameters, such as total procurement costs, critical schedule dates, and measures of performance. In addition, the 2002 report did not contain necessary cost, scheduling, and performance data for the individual tasks that the Army has assigned to each implementation phase. Phase 1, implementation of the workload and performance system at non-Army Materiel Command maintenance depots; phase 2, expansion of the system into nonmaintenance missions (e.g., base operations, medical); and phase 3, development of decision- support tools for use at the major command and headquarters levels (e.g., working capital fund budget, links to depot maintenance operational system, and cross-organizational activities). As table 3 illustrates, the Army's report contained cost, scheduling, and performance information for only a small number of these tasks. Furthermore, we could only identify specific costs for one of the tasks and, in most cases, the milestones and performance measures were too broad and did not include interim measures and specific performance targets to measure progress. While the Army's May 2002 report provided some estimated funding requirements for AWPS for fiscal years 2004 through 2006, it did not contain the detailed information that could be used to assess the costs of implementing the system thus far and the costs of expanding it into other functional areas in the future. According to the Army Materiel Command, the total estimated costs for the AWPS program were about $44.8 million for fiscal years 1996 through 2002, and the estimated program costs for fiscal year 2003 are about $8.9 million. The primary source for this funding has been the Army's working capital fund. These figures and the funding sources, however, were not included in the Army's report. In addition, the Army's report did not identify the extent to which actual expenditures relate to the budgeted amounts. The report also did not provide any cost estimates for funding the Army's plan to expand AWPS to other nonmaintenance activities, such as base operations support. According to Army officials, these expansion plans will require funding through the Army's appropriated operations and maintenance accounts. In its report, the Army estimated that it would need about $20.1 million over the next 3 fiscal years (2004 through 2006), to ensure that the remaining tasks are implemented. Table 4 shows the Army's projected costs for fiscal years 2004 through 2006, which were included in its May 2002 report. According to the report, these future year costs are unfunded and the Army has not yet identified funding sources for them. These officials stated that, other than the funding that has been provided through the working capital fund, the department has not adequately funded the AWPS expansion effort in recent years and that this lack of funding has hampered their ability to plan and implement further expansions. As table 4 indicates, the Army did not provide a detailed cost analysis regarding the historical and projected costs for AWPS, nor did it provide a complete summary of the estimated costs to complete the tasks listed for each phase. Specifically, the table includes cost estimates for additional system implementation (phase 1) and for the development of decision support tools (phase 3), but it provides no specific estimates for expanding the system into other functional areas (phase 2). Additionally, the Army did not include the associated costs to support the development of all the specific tasks required to complete each phase. The Army's May 2002 report contained only limited information on the milestones established to implement the new system and no data on whether earlier milestones had been reached, thereby making it difficult to assess the progress of the system's development and implementation. Specifically, the report lacked schedules that include implementation and completion dates and interim milestones. For example, the Army is updating the Workload and Performance System applications from the original programming language to a more up-to-date programming language. According to the Army, this upgrade has been installed at all five maintenance depots and will be installed at other installations between May 2002 and May 2003. However, specific dates for implementing or completing this upgrade were not included in the May 2002 report. In another example, the Army indicates that it intends to install AWPS at other nonmaintenance activities outside the Army Materiel Command, but it does not provide specific milestones for each location or the specific tasks associated with the development and installation process. As shown in appendix III, the Army has established expected completion dates for some of the AWPS applications, but the completion dates for other long- term applications have not yet been set. The Army's May 2002 report also did not provide milestones for completing the interface between AWPS and the Logistics Modernization Program. Instead, it simply stated that between May 2002 and February 2003 the system has to accept, and operate with, data from the Logistics Modernization Program. The original date (July 2001) set to operationalize the interface at the first site, the Tobyhanna Army Depot, had changed by about 18 months. In addition, the report noted that the Operations Support Command is scheduled to transition to the Logistics Modernization Program 1 year after the Communications and Electronics Command, which is approximately January 2004. This date is about 2 years beyond the original date of October 2000. The Army's May 2002 report does not address in detail the extent to which AWPS is providing the Army with the capability to match manpower requirements and workload for which it was initially intended. While the report states that the implementation of AWPS in several mission areas within the Army Materiel Command has shown that the system can efficiently draw data from other existing systems and manipulate this information to link personnel needs with projected workloads, the Army has not demonstrated that AWPS has improved its ability to support its long-term forecasting of civilian personnel requirements based on projected workload. Because the Army did not provide supporting evidence for the statement in its May 2002 report that the system has led to increased operational efficiencies, the extent of the improvements is unclear. We did not independently review the effectiveness of the AWPS system at the depots we visited. The Army's report also fails to discuss the potential overlap and duplication that exists between AWPS and the Logistics Modernization Program. Although these two systems were designed to serve different functions, Army and contractor officials point out that there is some potential overlap and redundancy in the systems' capabilities. For example, the capability of the performance measurement and control module in the AWPS software also exists in the Logistics Modernization Program software configuration. This module allows the user to compare actual resource expenditures against production plans, scheduled workload, and related budgets for specific projects in order to determine the likelihood of completing a project within its estimated time frame and budget. In addition, because the Logistics Modernization Program is not complete, the Army cannot be certain what other capabilities may be duplicated. Army officials at the Tobyhanna Army Depot expressed concerns that the need to operate and maintain both systems could lead to higher costs and duplication of efforts. A second module in AWPS, however, the strategic planning and forecasting module, is unique to AWPS and does not currently exist within the software configuration for the Logistics Modernization Program. This module provides the user with the capability to forecast manpower and capacity requirements based on future projected workload. More specifically, this module allows the Army the ability to conduct "what if" analyses for manpower and capacity requirements based on future workload projections at each of its maintenance activities. Contractor officials stated that although this capability could be built into the Logistics Modernization Program, it would have to be modified to be compatible with the current software configuration. By incorporating this capability into the Logistics Modernization Program, the Army could eliminate the need to operate and maintain two separate systems. Computer Sciences Corporation submitted a formal proposal to the Army in August 2001 to incorporate all of the capabilities of AWPS into the Logistics Modernization Program for an estimated contract price increase of about $2 million. Contractor officials told us in May 2002, however, that because of the amount of work they have dedicated to building the interface between the two systems, this cost estimate is no longer valid. Although the Army has begun developing an interface between AWPS and the Logistics Modernization Program, it has not sufficiently tested the interface to ensure that data can be shared between the two systems and that the AWPS capability will not be adversely affected. Once the Logistics Modernization Program is implemented, the Army plans to shut down several systems, including the Standard Depot System, that currently provide data for AWPS. However, the Army has not demonstrated that the Logistics Modernization Program databases will be able to supply AWPS with the data that it needs to continue to function. Until the Army has placed the interface in operation at several sites, it will be too early to assess its effectiveness. The Army's contract with the Computer Sciences Corporation to develop and field the Logistics Modernization Program required that the contractor would create an interface between the two systems, and this work started in 1999. In February 2002, Army and contractor officials developed an interface control document that identified the data elements that AWPS would need from the Logistics Modernization Program databases to maintain its current capabilities. Since that time, contractor personnel have been working to locate the sources within the Logistics Modernization Program databases for each data element and determine the most expedient way to move that data into AWPS. According to Army and contractor officials, about 90 percent of the data elements had been located by May 2002. While initial testing of the interface began in August 2002, it will be tested at only one of the five Army depots by February 2003 when the Logistics Modernization Program is scheduled to come on line. Specifically, the Army will be testing the interface at Tobyhanna Army Depot between August 2002 and February 2003, and expects that the interface will be fully functional by the time the Logistics Modernization Program is deployed at the depot in February 2003. Subsequently, the Army plans to install the Logistics Modernization Program and the AWPS interface at the four remaining Army maintenance depots, along with the Army's ammunition maintenance facilities. According to the May 2002 report, the Army expects to shut down the current information systems that support AWPS at the same time as it turns on the Logistics Modernization Program. As a result, there will be no transition period during which the current information systems and the Logistics Modernization Program are in operation at the same time. The Army's May 2002 report to Congress on the development and implementation of AWPS has a number of significant limitations. The report does not contain key information regarding the changes to the program since the submission of the May 2001 master plan, and it does not provide adequate information on the costs, schedule, and performance of the system. As a result, the report is of limited use to Congress in evaluating whether the AWPS project is still in line with its original cost, schedule, and performance objectives. The Army has not demonstrated to Congress how well the system has helped it thus far to determine future civilian workload requirements based on projected workloads. Moreover, the report does not contain the information that Congress needs to determine how much funding will be required to complete the initial implementation of the system and expand it into other functional areas. AWPS provides the Army with a capability for strategic planning and forecasting at its maintenance facilities that currently does not exist within the Logistics Modernization Program. The interface that is being developed between the two systems is intended to allow the workload and performance system to maintain its current capabilities, including its strategic planning and forecasting module. Because each system offers the Army certain unique capabilities, a rationale for operating both systems at the same time exists. However, because the two systems may develop some overlap and redundant capabilities in the future, there is some potential for increased costs or other inefficiencies. In order to improve the quality of the Army's annual progress reports to Congress on the implementation of AWPS and to enhance the efficiency and effectiveness of the system, we recommend that the Secretary of Defense direct the Secretary of the Army to: submit to Congress annual progress reports on the implementation of AWPS that contain a complete description of any changes to the master plan since the submission of the previous report and a detailed explanation of the status of the AWPS program in relation to the costs, milestones, and performance data contained in the previous report; ensure that these progress reports contain detailed cost, schedule, and performance information to allow Congress to fully assess the status of the Army's implementation of the workload and performance system and its interface with the Logistics Modernization Program, and the extent to which the system is providing the Army with the capability to match manpower and workload requirements; undertake a review of the interface between AWPS and the Logistics Modernization Program, once it has been successfully installed at the Army's five maintenance depots, to ensure that it is the most efficient and cost-effective use of these two systems; and ensure that the data-sharing mechanisms between the Logistics Modernization Program and AWPS are complete and allow for full functionality of AWPS before turning off the information systems that currently support AWPS. The Department of Defense fully concurred with our finding and recommendations. In response to our recommendation that the Army ensure that future progress reports contain cost, schedule, and performance information as specified in relevant Defense regulations and other congressional guidance, DOD will implement the recommendation in its February 2003 report. However, DOD noted that the workload and performance system is not a major automated information system and, therefore, is not required to strictly adhere to the requirements of Department of Defense Regulation 5000.2-R. We agree that the workload and performance system does not meet the minimum threshold to be considered a major system. However, we believe that the parameters outlined in this regulation provide an appropriate management framework for the types of information that should be included in future progress reports. DOD also informally provided other suggested revisions to address certain technical and factual information in the text of the draft report. We reviewed these suggested revisions and made changes where appropriate. We are sending copies of this report to interested congressional committees, the Secretaries of Defense and the Army, and the Director, Office of Management and Budget. 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. Workload and workforce have been combined as the strategic planning and forecasting module. This phase is not included in May 2002 plan. First phase of the plan is to cover non-Army Materiel Command maintenance activities. Base operations at ammunition logistics activities is not included. This is the first phase in May 2002 plan. Second phase of the plan is expansion into nonmaintenance missions. This phase is categorized into three parts. Does not include any information on where mission indirect will be installed. Does not include any information on the status of the Next generation-AWPS. Does not include any information on the status of the Base operations-Next generation. . No date provided No date provided No date provided No date provided No date provided Installed at maintenance depots and will be installed at other sites over the course of the year. Completion February 2003 at Tobyhanna and other commodity commands at about 3-month intervals. As of October 2001, AWPS has been operational at all five maintenance depots, ammunition logistics, ammunition manufacturing (Crane and McAlester), and base operations at all maintenance depots. To determine whether the Army's May 2002 master plan contains adequate information to assess the Army's progress in implementing AWPS, we reviewed the Army's May 2001 and May 2002 master plans. We compared the contents of these plans to the key requirements set forth in section 346 of the National Defense Authorization Act for Fiscal Year 2002. In addition, we reviewed the May 2002 master plan to determine the extent to which it addressed the recommendations outlined in our November 1999 report.We also examined the Department of Defense's regulation outlining the mandatory procedures for the acquisition of major automated information systems to determine specific criteria required for a progress report. We compared the contents of the May 2002 master plan to the criteria outlined in this regulation. Although this regulation does not specifically apply to the development of the AWPS system, we believe that sound management practices support the need to address these parameters in the Army's progress reports. We also met with officials at the Headquarters, Department of the Army; Headquarters, Army Material Command; and the Operations Support Command in Rock Island, Illinois, to discuss the development and implementation of the AWPS system. In addition, we discussed the benefits and problems that the depots have experienced with AWPS with officials at Tobyhanna Army Depot, Tobyhanna, Pennsylvania; and Corpus Christi Army Depot, Corpus Christi, Texas. We did not, however, independently review the effectiveness of the AWPS system at the depots we visited. Lastly, we relied on prior work done in connection with the implementation of AWPS. To identify the measures the Army has taken to ensure appropriate coordination and data sharing between AWPS and the Logistics Modernization Program, we reviewed the February 2002 Interface Control Document developed jointly by the Department of the Army and the Computer Sciences Corporation, and discussed the related interface initiatives with appropriate Army and contractor officials. We also reviewed the actions the Army had taken to facilitate the interface and data sharing between the two systems to identify what additional actions were needed before the Army could be assured that the AWPS system would remain fully operational during the transition period. Specifically, we met with officials at the Headquarters, Department of the Army; Headquarters, Army Materiel Command; the Army's Operations Support Command in Rock Island, Illinois; the Logistics Modernization Project Office in Moorestown, New Jersey; and Tobyhanna Army Depot and Corpus Christi Army Depot. Because the interface between the two systems is still being developed and has not been fully tested, we were unable to assess its effectiveness. We conducted our review between March 2002 and August 2002 in accordance with generally accepted government auditing standards.

At the direction of the House Committee on National Security, the Army began developing the Army Workload and Performance System (AWPS) in 1996. This automated system was intended to address a number of specific weaknesses highlighted in several GAO and Army studies since 1994 regarding the Army's inability to support its civilian personnel requirements by using an analytically based workload forecasting system. Army's May 2002 report on AWPS does not provide Congress with adequate information to assess the Army's progress in implementing the system. Specifically, the 2002 plan does not include (1) a detailed summary of all costs that the Army has incurred, or the expenditures that it anticipates in the future, to develop and implement the system; (2) a list of the milestones that the Army has, or has not, achieved in the previous year and a list of milestones that are projected for the future; and (3) an evaluation of how well the system has performed to date in fulfilling its primary function--that is, of matching manpower needs with depot workloads. Although the Army has begun developing an interface between AWPS and the Logistics Modernization Program, it has not sufficiently tested the interface to ensure that data can be shared between the two systems and that the capability of the workload and performance system will not be adversely affected.

Factors, such as shortcomings in BIA's management and additional factors generally outside of BIA's management responsibilities--such as a complex regulatory framework, tribes' limited capital and infrastructure, and varied tribal capacity--have hindered Indian energy development. Specifically, according to some of the literature we reviewed and several stakeholders we interviewed, BIA's management has three key shortcomings. First, BIA does not have the data it needs to verify ownership of some oil and gas resources, easily identify resources available for lease, or easily identify where leases are in effect, inconsistent with Interior's Secretarial Order 3215, which calls for the agency to maintain a system of records that identifies the location and value of Indian resources and allows for resource owners to obtain information regarding their assets in a timely manner. The ability to account for Indian resources would assist BIA in fulfilling its federal trust responsibility, and determining ownership is a necessary step for BIA to approve leases and other energy-related documents. However, in some cases, BIA cannot verify ownership because federal cadastral surveys--the means by which land is defined, divided, traced, and recorded--cannot be found or are outdated. It is additionally a concern that BIA does not know the magnitude of its cadastral survey needs or what resources would be needed to address them. We recommended in our June 2015 report that the Secretary of the Interior direct the Director of the BIA to take steps to work with BLM to identify cadastral survey needs. In its written comments on our report, Interior did not concur with our recommendation. However, in an August 2015 letter to GAO after the report was issued, Interior stated that it agrees this is an urgent need and reported it has taken steps to enter into an agreement with BLM to identify survey-related products and services needed to identify and address realty and boundary issues. In addition, the agency stated in its letter that it will finalize a data collection methodology to assess cadastral survey needs by October 2016. In addition, BIA does not have an inventory of Indian resources in a format that is readily available, such as a geographic information system (GIS). Interior guidance identifies that efficient management of oil and gas resources relies, in part, on GIS mapping technology because it allows managers to easily identify resources available for lease and where leases are in effect. According to a BIA official, without a GIS component, identifying transactions such as leases and ROW agreements for Indian land and resources requires a search of paper records stored in multiple locations, which can take significant time and staff resources. For example, in response to a request from a tribal member with ownership interests in a parcel of land, BIA responded that locating the information on existing leases and ROW agreements would require that the tribal member pay $1,422 to cover approximately 48 hours of staff research time and associated costs. In addition, officials from a few Indian tribes told us that they cannot pursue development opportunities because BIA cannot provide the tribe with data on the location of their oil and gas resources--as called for in Interior's Secretarial Order 3215. Further, in 2012, a report from the Board of Governors of the Federal Reserve System found that an inventory of Indian resources could provide a road map for expanding development opportunities. Without data to verify ownership and use of resources in a timely manner, the agency cannot ensure that Indian resources are properly accounted for or that Indian tribes and their members are able to take full advantage of development opportunities. To improve BIA's efforts to verify ownership in a timely manner and identify resources available for development, we recommended in our June 2015 report that Interior direct BIA to take steps to complete GIS mapping capabilities. In its written comments in response to our report, Interior stated that the agency is developing and implementing applications that will supplement the data it has and provide GIS mapping capabilities, although it noted that one of these applications, the National Indian Oil and Gas Evaluation Management System (NIOGEMS), is not available nationally. Interior stated in its August 2015 letter to GAO that a national dataset composed of all Indian land tracts and boundaries with visualization functionality is expected to be completed within 4 years, depending on budget and resource availability. Second, BIA's review and approval is required throughout the development process, including the approval of leases, ROW agreements, and appraisals, but BIA does not have a documented process or the data needed to track its review and response times. In 2014, an interagency steering committee that included Interior identified best practices to modernize federal decision-making processes through improved efficiency and transparency. The committee determined that federal agencies reviewing permits and other applications should collect consistent data, including the date the application was received, the date the application was considered complete by the agency, the issuance date, and the start and end dates for any "pauses" in the review process. The committee concluded that these dates could provide agencies with greater transparency into the process, assist agency efforts to identify process trends and drivers that influence the review process, and inform agency discussions on ways to improve the process. However, BIA does not collect the data the interagency steering committee identified as needed to ensure transparency and, therefore, it cannot provide reasonable assurance that its process is efficient. A few stakeholders we interviewed and some literature we reviewed stated that BIA's review and approval process can be lengthy. For example, stakeholders provided examples of lease and ROW applications that were under review for multiple years. Specifically, in 2014, the Acting Chairman for the Southern Ute Indian Tribe testified before this committee that BIA's review of some of its energy-related documents took as long as 8 years. In the meantime, the tribe estimates it lost more than $95 million in revenues it could have earned from tribal permitting fees, oil and gas severance taxes, and royalties. According to a few stakeholders and some literature we reviewed, the lengthy review process can increase development costs and project times and, in some cases, result in missed development opportunities and lost revenue. Without a documented process or the data needed to track its review and response times, BIA cannot ensure transparency into the process and that documents are moving forward in a timely manner, or determine the effectiveness of efforts to improve the process. To address this shortcoming, we recommended in our June 2015 report that Interior direct BIA to develop a documented process to track its review and response times and enhance data collection efforts to ensure that the agency has the data needed to track its review and response times. In its written comments, Interior did not fully concur with this recommendation. Specifically, Interior stated that it will use NIOGEMS to assist in tracking review and response times. However, this application does not track all realty transactions or processes and has not been deployed nationally. Therefore, while NIOGEMS may provide some assistance to the agency, it alone cannot ensure that BIA's process to review energy-related documents is transparent or that documents are moving forward in a timely manner. In its August 2015 letter to GAO, Interior stated it will try to implement a tracking and monitoring effort by the end of fiscal year 2017 for oil and gas leases on Indian lands. The agency did not indicate if it intends to improve the transparency of its review and approval process for other energy-related documents, such as ROW agreements and surface leases--some of which were under review for multiple years. Third, some BIA regional and agency offices do not have staff with the skills needed to effectively evaluate energy-related documents or adequate staff resources, according to a few stakeholders we interviewed and some of the literature we reviewed. For instance, Interior officials told us that the number of BIA personnel trained in oil and gas development is not sufficient to meet the demands of increased development. In another example, a BIA official from an agency office told us that leases and other permits cannot be reviewed in a timely manner because the office does not have enough staff to conduct the reviews. We are conducting ongoing work for this committee that will include information on key skills and staff resources at BIA involved with the development of energy resources on Indian lands. According to stakeholders we interviewed and literature we reviewed, additional factors, generally outside of BIA's management responsibilities, have also hindered Indian energy development, including a complex regulatory framework consisting of multiple jurisdictions that can involve significantly more steps than the development of private and state resources, increase development costs, and add to the timeline for development; fractionated, or highly divided, land and mineral ownership interests; tribes' limited access to initial capital to start projects and limited opportunities to take advantage of federal tax credits; dual taxation of resources by states and tribes that does not occur on private, state, or federally owned resources; perceived or real concerns about the political stability and capacity of some tribal governments; and limited access to infrastructure, such as transmission lines needed to carry power generated from renewable sources to market and transportation linkages to transport oil and gas resources to processing facilities. A variety of factors have deterred tribes from pursuing TERAs. Uncertainty associated with Interior's TERA regulations is one factor. For example, TERA regulations authorize tribes to assume responsibility for energy development activities that are not "inherently federal functions," but Interior officials told us that the agency has not determined what activities would be considered inherently federal because doing so could have far-reaching implications throughout the federal government. According to officials from one tribe we interviewed, the tribe has repeatedly asked Interior for additional guidance on the activities that would be considered inherently federal functions under the regulations. According to the tribal officials, without additional guidance on inherently federal functions, tribes considering a TERA do not know what activities the tribe would be assuming or what efforts may be necessary to build the capacity needed to assume those activities. We recommended in our June 2015 report that Interior provide additional energy development-specific guidance on provisions of TERA regulations that tribes have identified as unclear. Additional guidance could include examples of activities that are not inherently federal in the energy development context, which could assist tribes in identifying capacity building efforts that may be needed. Interior agreed with the recommendation and stated it is considering further guidance but did not provide additional details regarding issuance of the guidance. In addition, the costs associated with assuming activities currently conducted by federal agencies and a complex application process were identified by literature we reviewed and stakeholders we interviewed as other factors that have deterred any tribe from entering into a TERA with Interior. Specifically, through a TERA, a tribe assuming control for energy development activities that are currently conducted by federal agencies does not receive federal funding for taking over the activities from the federal government. Several tribal officials we interviewed told us that the tribe does not have the resources to assume additional responsibility and liability from the federal government without some associated support from the federal government. In conclusion, our review identified a number of areas in which BIA could improve its management of Indian energy resources and enhance opportunities for greater tribal control and decision-making authority over the development of their energy resources. Interior stated it intends to take some steps to implement our recommendations, but we believe Interior needs to take additional actions to address data limitations and track its review process. We look forward to continuing to work with this committee in overseeing BIA and other federal programs to ensure that they are operating in the most effective and efficient manner. Chairman Barrasso, Ranking Member Tester, 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. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Christine Kehr (Assistant Director), Alison O'Neill, Jay Spaan, and Barbara Timmerman made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Indian energy resources hold significant potential for development, but according to a 2014 Interior document, these resources are underdeveloped relative to surrounding non-Indian resources. Development of Indian energy resources is a complex process that may involve federal, tribal, and state agencies. Interior's BIA has primary authority for managing Indian energy development and generally holds final decision-making authority for leases and other permits required for development. The Energy Policy Act of 2005 provided the opportunity for interested tribes to pursue TERAs--agreements between a tribe and Interior that allow the tribe to enter into energy leases and agreements without review and approval by Interior. However, no tribe has entered into a TERA. This testimony highlights the key findings of GAO's June 2015 report (GAO-15-502). It focuses on factors that have (1) hindered Indian energy development and (2) deterred tribes from pursuing TERAs. For the June 2015 report, GAO analyzed federal data; reviewed federal, academic, and other literature; and interviewed tribal, federal and industry stakeholders. In its June 2015 report, GAO found that Bureau of Indian Affairs' (BIA) management shortcomings and other factors--such as a complex regulatory framework, limited capital and infrastructure, and varied tribal capacity--have hindered Indian energy development. Specifically, BIA's management has the following shortcomings: BIA does not have the data it needs to verify ownership of some Indian oil and gas resources, easily identify resources available for lease, or identify where leases are in effect, as called for in Secretarial Order 3215. GAO recommended that Interior direct BIA to identify land survey needs and enhance mapping capabilities. In response, Interior stated it will develop a data collection tool to identify the extent of the survey needs in fiscal year 2016, and enhance mapping capabilities by developing a national dataset composed of all Indian land tracts and boundaries in the next 4 years. BIA's review and approval is required throughout the development process, but BIA does not have a documented process or the data needed to track its review and response times, as called for in implementation guidance for Executive Order 13604. According to a tribal official, BIA's review of some of its energy-related documents, which can include leases, right-of-way agreements, and appraisals, took as long as 8 years. In the meantime, the tribe estimates it lost more than $95 million in revenues it could have earned from tribal permitting fees, oil and gas severance taxes, and royalties. GAO recommended that Interior direct BIA to develop a documented process to track its review and response times. In response, Interior stated it will try to implement a tracking and monitoring mechanism by the end of fiscal year 2017 for oil and gas leases. However, it did not indicate whether it intends to track and monitor the review of other energy-related documents that must be approved before development can occur. Without comprehensive tracking and monitoring of its review process, it cannot ensure that documents are moving forward in a timely manner, and lengthy review times may continue to contribute to lost revenue and missed development opportunities. Some BIA regional and agency offices do not have staff with the skills needed to effectively evaluate energy-related documents or adequate staff resources. GAO is conducting ongoing work on this issue. GAO also found in its June 2015 report that a variety of factors have deterred tribes from seeking tribal energy resource agreements (TERA). These factors include uncertainty about some TERA regulations, costs associated with assuming activities historically conducted by federal agencies, and a complex application process. For instance, one tribe asked Interior for additional guidance on the activities that would be considered inherently federal functions--a provision included in Interior's regulations implementing TERA. Interior did not provide the clarification requested. Therefore, the tribe had no way of knowing what efforts may be necessary to build the capacity needed to assume those activities. GAO recommended that Interior provide clarifying guidance. In response, Interior officials stated that the agency is considering further guidance, but it did not provide a timeframe for issuance. In its June 2015 report, GAO recommended that Interior take steps to address data limitations, track its review process, and provide clarifying guidance. In an August 2015 letter to GAO after the issuance of the report, Interior generally agreed with the recommendations and identified some steps it intends to take to implement them.

The United States prefers to conduct operations as part of a coalition when possible. In prosecuting the Global War on Terrorism, the United States, through the U. S. Central Command (CENTCOM), has acted in concert with a number of other countries as part of a coalition to conduct Operation Enduring Freedom in Afghanistan and Operation Iraqi Freedom in Iraq. Most of these countries have sent officers to CENTCOM headquarters--located at MacDill Air Force Base in Tampa, Florida--to act as liaisons between their countries and CENTCOM commanders and assist in planning and other operational tasks. As coalition liaison officers began arriving to assist in Operation Enduring Freedom, CENTCOM officials established a secure area with trailers outfitted as offices for the officers to use. As the coalition expanded and Operation Iraqi Freedom started, the number of liaison officers grew, as did the need for more trailers and administrative support. CENTCOM officials initially paid for the support from Combatant Commander's Initiative Funds earmarked for short-term initiatives identified by the commander. However, as the coalitions for both operations grew and were expected to continue into fiscal year 2003, CENTCOM requested that Congress allow the command to use funds from its budget to pay for the support provided to the liaison officers. Congress responded in the fiscal year 2003 National Defense Authorization Act by authorizing the Secretary of Defense to provide administrative services and support to those liaison officers of countries involved in a coalition with the United States and to pay the travel, subsistence, and personal expenses of those liaison officers from developing countries. This legislation expires September 30, 2005. The legislation does not direct us to assess whether it should be renewed and we did not do so. Although it is the responsibility of the Secretary of Defense to formulate general defense policy and policy related to all matters of direct and primary concern to DOD, we could find no evidence of guidance issued by DOD to combatant commanders on how to implement the legislation allowing DOD to provide support to coalition liaison officers. Also, we could not identify any office within DOD that has responsibility for implementing the legislation and, therefore, may have promulgated guidance on the legislation. Guidance for issues that affect all the components originates at the DOD level. Typically, DOD will issue a directive--a broad policy document containing what is required to initiate, govern, or regulate actions or conduct by DOD components. This directive establishes a baseline policy that applies across the combatant commands, services, and DOD agencies. DOD may also issue an instruction, which implements the policy or prescribes the manner or a specific plan or action for carrying out the policy, operating a program or activity, and assigning responsibilities. In our opinion, this guidance is important for consistent implementation of a program across DOD. To determine what guidance has been provided to the commands, we contacted offices within DOD, the Office of the Secretary of Defense, and the Joint Staff to determine which office has responsibility for implementing this legislation. After calls to the Offices of Legislative Affairs and Comptroller within the Office of the Secretary of Defense, as well as the Joint Staff's Plans and Policy Directorate and Comptroller, neither we nor the DOD Inspector General, our focal point within DOD, were able to locate any office having this responsibility. In the data collection instrument we sent to the combatant commands, we asked whether the commands had received any guidance on how to implement the legislation. All commands replied that they had received no guidance from any office within DOD. Although the legislation was inspired by the needs of the coalition assembled for the Global War on Terrorism, its authority is available through the Secretary of Defense to all combatant commanders. However, according to the results of our research, the awareness of and need to use the legislation by combatant commands vary widely. To determine the extent to which the combatant commands are aware of and using this legislation, we created a data collection instrument and e-mailed it to representatives at each combatant command. In responding to this instrument, representatives from Northern Command, Southern Command, European Command, Transportation Command, and Strategic Command stated that they were not aware of nor did they have a need to use the legislation, while representatives of Joint Forces Command, Special Operations Command, and Pacific Command were aware of, but had no need to use, the legislation. CENTCOM and one of its subordinate commands were the only commands both aware of and using the legislation. CENTCOM is providing administrative services and support to more than 300 foreign coalition liaison officers from over 60 countries fighting the Global War on Terrorism with the United States. In addition, CENTCOM is paying travel, subsistence, and personal expenses to over 70 liaison officers from more than 30 developing countries that are included in the larger number. In the absence of guidance from the Office of the Secretary of Defense or the Joint Staff, CENTCOM officials established internal operating procedures to provide the administrative and travel related support that the foreign coalition liaison officers needed. These procedures are not written, but they are based on existing criteria defining developing countries, federal regulations governing travel, economies of scale, and what appears to be prudent fiscal management. In providing administrative services and support, CENTCOM officials determined that each country's delegation (limited to no more than five foreign coalition liaison officers) would be provided a trailer for office space with furniture, telephone, computer, printer, copier, and shredder. Some of the smaller delegations share office space. CENTCOM pays for the furniture, shredders, copiers, telephones, and part of the custodial expense. MacDill Air Force Base, which is host to CENTCOM, pays for trailer leases, utilities, external security, and part of the custodial expense. These trailers are located on MacDill property in a fenced compound with security guards on duty. We toured some of the trailers and determined that CENTCOM was providing the space and equipment typical of a small office for the coalition officers. However, CENTCOM officials told us that some countries have spent their own funds to upgrade the office space provided. In determining how to pay the travel, subsistence, and personal expenses for coalition liaison officers from developing countries, CENTCOM officials told us they used existing criteria and federal regulations to guide their decisions. Absent a DOD or Department of State list of what would be considered developing countries, CENTCOM officials told us they use a list of countries generated by the Organization of Economic Cooperation and Development, an international organization to which the United States belongs, and defined by that organization as "Least Developed: Other Low Income and Lower Middle Income." According to the officials, this list is recognized by the Joint Staff. To determine the appropriate amounts to provide for travel, subsistence, and personal expenses, CENTCOM officials use the Joint Federal Travel Regulations. CENTCOM officials established some basic standards for authorizing travel, subsistence, and personal expenses for the coalition liaison officers from developing countries. CENTCOM pays for one round-trip airplane ticket from an officer's country of origin to Tampa, Florida, where CENTCOM is headquartered, and return during a tour of duty. Other trips home are at an officer's or his or her country's expense. Meals and incidental expenses are based on the Joint Federal Travel Regulations' rate for Tampa ($42 per day in fiscal year 2003) paid monthly based on the number of days the officer actually spends in Tampa. CENTCOM provides housing for foreign coalition liaison officers through contracts it has negotiated with gated apartment complexes offering on-site security. Because of the number of officers needing housing (including those officers not from developing countries, who pay for their own housing), CENTCOM officials told us that they were able to negotiate rates for housing between $58 and $65 per day, which are less than Joint Federal Travel Regulations' per diem rate for the Tampa area ($93 per day in fiscal year 2003). CENTCOM does not pay any expenses incurred for family members of the coalition liaison officer who might accompany the officer to the United States. In fiscal year 2002, the first year the coalition was formed, coalition liaison officers had to find their own housing, which was more expensive than the contracts currently in place. CENTCOM officials also told us that they rent cars for the coalition liaison officers from the General Services Administration at a cost of $350 per car per month, which is less expensive than renting from a commercial car leasing company at a cost of $750 per month. Again, because there are so many officers who require transportation, CENTCOM was able to negotiate a lower rate. Officers are allowed one car for each three members of a delegation. The officer whose name is on the car rental agreement is allowed $60 per month for gas. The officers assigned to the car must pay for any additional gas. CENTCOM and MacDill Air Force Base spent a total of almost $30 million between fiscal year 2002 and 2003 to support coalition liaison officers (see table 1). In fiscal year 2002, CENTCOM and MacDill Air Force Base spent $12.4 million to provide the administrative services and support and pay travel, subsistence, and personal expenses for the coalition liaison officers assigned to CENTCOM headquarters. The money came from Combatant Commander's Initiative Funds and MacDill Air Force Base funds. The amount spent in fiscal year 2003--nearly $17.1 million--included $898,000 in Commander's Initiative Funds to pay for travel, subsistence, and personal expenses, which was used until the legislation to provide support to coalition liaison officers was passed and the funds became available. The remaining amount came from CENTCOM and MacDill funds. In addition to CENTCOM, the Coalition Joint Task Force-Horn of Africa, a CENTCOM subordinate operating command, reported spending over $300,000 to provide administrative support and pay travel, subsistence, and personal expenses to 13 liaison officers assigned to the task force headquarters. No other subordinate operating command or component command reported spending funds to support coalition liaison officers. CENTCOM officials stated that this legislation has benefited the coalition by providing maximum communication and coordination for the deployment of those forces committed to fighting the Global War on Terrorism. They also stated that without the presence of the liaison officers at CENTCOM, they could not accomplish the coalition integration planning and coordination important to the Global War on Terrorism as effectively or efficiently as they are doing. CENTCOM officials stated that the legislation's authority to pay for travel, subsistence, and personal expenses for developing countries' liaison officers also has given the command a tool to use in negotiating with developing countries for their participation in the coalition force. DOD-wide guidance provides uniform direction throughout the department on how to implement programs and policies. While CENTCOM has developed procedures for managing support to coalition liaison officers and has taken steps to provide the support authorized by the legislation in the least costly way, in the absence of DOD-wide guidance, there can be no assurance that prudent procedures will always be followed. Moreover, without DOD guidance, should other commands choose to use the authority granted by this legislation, there is no assurance that they will implement it in a uniform and prudent manner. As of January 2004, there was no DOD office responsible for the implementation of the legislative authority allowing commands to pay for support for coalition liaison officers and no DOD-wide guidance on its use. We recommend that the Secretary of Defense take the following two actions: (1) designate an office within DOD to take responsibility for this legislation and (2) direct this designated office to promulgate and issue guidance to the combatant commands and their component and subordinate commands on how to implement this legislation. In official oral comments on a draft of this report, DOD concurred with the report. DOD stated that it would designate the Joint Staff as the office responsible for implementing the legislation and issuing appropriate guidance. We are sending copies of this report to interested congressional committees; the Secretary of Defense; and the Director, Office of Management and Budget. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please contact me on (757) 552-8100 or by e-mail at [email protected]. Major contributors to this report were Steven Sternlieb, Ann Borseth, Madelon Savaides, David Mayfield, and Renee McElveen.

In the National Defense Authorization Act for Fiscal Year 2003, Congress authorized the Secretary of Defense to provide administrative services and support to foreign coalition liaison officers temporarily assigned to the headquarters of a combatant command or any of its subordinate commands. Congress required GAO to assess the implementation of this legislation. Specifically, GAO's objectives were to determine (1) what guidance the Department of Defense (DOD) has provided on the implementation of this legislation, (2) the extent to which the commands are aware of and are using this legislation, and (3) the level of support being provided by commands using this legislation and the benefits derived from it. GAO could find no evidence that DOD had issued any guidance to combatant commanders on how to implement this legislation. In addition, GAO was unable to identify an office within DOD that has responsibility for implementing this legislation. The DOD Office of the Inspector General, as GAO's focal point within DOD, was also unable to identify a responsible office. Although the legislation was inspired by the needs of the coalition assembled for the Global War on Terrorism, its authority is available through the Secretary of Defense to all combatant commanders. According to the results of GAO's research, the combatant commands' awareness of and need to use the legislation varied widely with Central Command being the only command using the authority to support liaison officers. Central Command, spent $17 million in fiscal year 2003 to provide administrative services and support to more than 300 coalition liaison officers from over 60 countries. As allowed by the legislation, the command also paid the travel, subsistence, and personal expenses of over 70 of these officers from more than 30 developing countries. Central Command officials stated that they could not accomplish the coalition integration planning and coordination important to the Global War on Terrorism as effectively or efficiently as they are doing without the liaison officers. They also commented that the legislation helps facilitate the participation of a developing country in the coalition if the command can pay for travel and subsistence.

DOJ awards federal financial assistance to state and local governments, for-profit and nonprofit organizations, tribal jurisdictions, and educational institutions, to help prevent crime, assist victims of crime, and promote innovative law enforcement efforts. Federal financial assistance programs provide funding pursuant to statutory authorization and annual appropriations through formula grants, discretionary grants, cooperative agreements, and other payment programs, but are all generally referred to as grants. From fiscal year 2005 through fiscal year 2012, approximately $33 billion has been appropriated to support the more than 200 grants programs that DOJ manages. DOJ administers its grant programs through three granting agencies--the Office of Justice Programs (OJP), the Office on Violence Against Women (OVW), and the Community Oriented Policing Services (COPS) Office. OJP is the largest of DOJ's granting agencies, and its mission to develop the nation's capacity to prevent and control crime, administer justice, and assist crime victims is broader than that of OVW or the COPS Office. OJP's bureaus and offices administer grant programs that address victim assistance, technology and forensics, and juvenile justice, among other things. One such grant program is the BVP program, which was created following enactment of the Bulletproof Vest Partnership Grant Act of 1998, and provides grants on a competitive basis to state and local law enforcement agencies to assist in their purchasing of ballistic-resistant and stab-resistant body armor. The COPS Office grant programs focus on advancing community policing, which generally involves cooperation between police departments and community residents in identifying and developing solutions to crime problems. OVW administers grant programs related to domestic violence, dating violence, sexual assault, and stalking. DOJ and Treasury both operate asset forfeiture programs that are designed to prevent and reduce crime through the seizure and forfeiture of assets that represent the proceeds of, or were used to facilitate, federal crimes. Each department also maintains a separate fund that is the receipt account for the deposit of forfeitures. Over the years, a series of laws has been enacted that has expanded forfeiture from drug offenses to money laundering, financial crimes, and terrorism-related offenses. In addition to depriving criminals of property used or acquired through illegal activities, these programs are designed to enhance cooperation among foreign, federal, state, and local law enforcement agencies through the equitable sharing of assets recovered through the program, and, as a by- product, produce revenues in support of future law enforcement investigations and related forfeiture activities. A number of federal law enforcement organizations participate in DOJ's Assets Forfeiture Fund (AFF), including the U.S. Marshals Service, which serves as the primary custodian of seized and forfeited property for the program. Once property is forfeited to the government, it is subsequently sold, put into official use, destroyed, or transferred to another agency. Cash and monetary instruments that have been forfeited and property that has been forfeited and sold are subsequently deposited in the forfeiture fund. In fiscal year 2012, the value of total assets in the AFF was approximately $5.97 billion. Money collected in the funds is used to pay for expenses related to the asset forfeiture program and for other law enforcement initiatives. DOJ, the Department of Homeland Security (DHS), and the Office of National Drug Control Policy (ONDCP) operate or support, through grant funding or personnel, five types of field-based information-sharing entities that may collect, process, analyze, or disseminate information in support of law enforcement and counterterrorism-related efforts, as shown in table 1. In general, the five types of entities in our review were established under different authorities and have distinct missions, roles, and responsibilities. As of January 2013 there were a total of 268 of these field-based entities located throughout the United States, and DOJ, DHS, and ONDCP provided an estimated $129 million in fiscal year 2011 to support three of the five types of entities. In July 2012, we reported that DOJ's more than 200 grant programs overlapped across 10 key justice areas, and that this overlap contributed to the risk of unnecessarily duplicative grant awards for the same or similar purposes. We also recognized that overlapping grant programs across programmatic areas result in part from authorizing statutes. Further, we recognized that overlap among DOJ's grant programs may be desirable because such overlap can enable DOJ's granting agencies to leverage multiple funding streams to serve a single justice purpose. However, we found that the existence of overlapping grant programs is an indication that agencies should increase their ability to monitor where their funds are going and coordinate to ensure that any resulting duplication in grant award funding is purposeful rather than unnecessary, and we made recommendations to reflect these needed improvements. In addition, we found that OJP, OVW, and the COPS Office did not routinely share lists of current and potential awardees to consider both the current and planned dispersion and purposes of all DOJ grant funding before finalizing new award decisions. Our work found instances where DOJ made multiple grant awards to applicants for the same or similar purposes without being aware of the potential for unnecessary duplication or whether funding from multiple streams was warranted. We also reported that OJP, OVW, and the COPS Office had not established policies and procedures requiring consistent coordination and information sharing among its granting agencies. Further, we found that OJP and OVW used a separate grants management system than the COPS Office, limiting their ability to share information on the funding they have awarded or are preparing to award to a recipient. officials, its mission and grant management processes are different enough to necessitate a separate system. However, OJP officials told us that its system has been and can be modified with minimal investment to accommodate different grant processes. We included some of these related findings in GAO, 2012 Annual Report: Opportunities to Reduce Duplication, Overlap, and Fragmentation, Achieve Savings, and Enhance Revenue, GAO-12-342SP (Washington, D.C.: Feb. 28, 2012). concurred with all eight of our recommendations. Five of the recommendations specifically relate to ways in which DOJ can improve program efficiency and resource management, and these are that DOJ conduct an assessment to better understand the extent to which the department's grant programs overlap with one another and determine if grant programs may be consolidated; coordinate within and among granting agencies on a consistent basis to review potential or recent grant awards from grant programs that DOJ identifies as overlapping, before awarding grants; require its grant applicants to report all federal grant funding, including all DOJ funding, that they are currently receiving or have recently applied for in their grant applications; provide appropriate OJP, COPS Office, and OVW staff access to both grant management systems; and ensure its comprehensive study of DOJ grant management systems assesses the feasibility, costs, and benefits of moving to a single grants management system, including the steps needed to harmonize DOJ grant processes, so that any variation in how granting agencies manage their portfolios is not an encumbrance to potential system unification. DOJ has taken steps to partially address these recommendations. Specifically, DOJ has formed an assessment team, composed of OJP, OVW, and COPS Office representatives, to review all of the department's fiscal year 2012 grant program solicitations, or announcements, and categorize them by several elements. These elements include program type, eligible grant funding recipients (e.g., states, localities, tribes, and law enforcement agencies), target grant award beneficiaries (e.g., victims and juveniles), allowable uses of the funds, and locations funded. The assessment team is also developing criteria to identify potentially duplicative programs and then plans to assign risk levels of potential duplication to those that have multiple solicitations addressing similar key components. According to DOJ officials, the assessment team plans to conclude its work later in 2013. In addition, OJP has granted read-only access of its grants management system to OVW and the COPS Office to allow pertinent staff in those offices to access the most up-to-date OJP grant information. Further, OJP officials said that they are exploring ways in which more data systems may be used for coordinating grants. DOJ officials anticipate that eventually, agencies can leverage the information in these systems during the preaward process to avoid funding potentially overlapping and duplicative grant activities; however, DOJ's plans rest upon completion of the assessment team's work. Officials told us that upon receipt of the assessment team's findings, they plan to work to develop and support a targeted and strategic approach to reviewing applications across all three granting agencies before making grant award decisions. DOJ officials noted that as part of this approach, DOJ plans to establish policies and procedures to govern coordination efforts. Thus, completion of this assessment could better position DOJ to take more systemic actions-- such as improved coordination and potential consolidation of its programs--to limit overlap and mitigate the risk of unnecessary duplication. DOJ has also initiated a feasibility study of moving to a single grants management system that includes the identification of the steps needed to harmonize grant processes, among other factors such as return on investment. Since this study--like DOJ's other efforts to address all of our recommendations--is still under way, it is too soon to tell whether the department's actions will fully address each of the recommendations. We have also previously reported on and made recommendations related to DOJ's BVP grant program. In February 2012, we reported that DOJ had designed several controls for the BVP program to ensure grantee compliance with program requirements, among other things, but could take additional action to further reduce management risk. For example, we found that from fiscal years 2002 to 2009, the BVP program had awarded about $27 million in BVP grants to grant recipients who did not ultimately seek reimbursement. Since the grant terms for each of these grantees had ended, the grantees were no longer eligible for reimbursement and DOJ could deobligate these funds. To improve DOJ's resource management, we recommended that DOJ deobligate undisbursed funds from grants in the BVP program whose terms have ended. Further, we noted that since the BVP program received about $24 million in fiscal year 2012, deobligating this $27 million could have significant benefits. For example, deobligating this funding could enable the department to apply the amounts to new awards or reduce requests for future budgets. The department concurred with this recommendation and has since deobligated $2 million. In early April 2013, DOJ officials stated that they expect to complete the deobligation process before the end of April 2013. They also said the process is time-intensive because it has involved reconciliation among multiple data and financial management systems. DOJ officials stated that they plan to use the deobligated funds toward fiscal year 2014 BVP awards. In September 2012, we found that DOJ and Treasury had made limited progress to consolidate their asset forfeiture property management activities. Specifically, the departments had made limited progress in sharing storage facilities or contracts, and they had not fully explored the possibility of coordinating or consolidating the management of their assets to achieve greater efficiencies, effectiveness, and cost savings. As a result, each department maintained separate asset-tracking systems, separate contracts, and separate storage facilities, which we found to be potentially duplicative. For example, DOJ and Treasury maintain four separate asset-tracking systems--DOJ maintains one system and Treasury maintains three--to support their respective asset forfeiture program activities, and these four tracking systems have similar functionalities.developing, maintaining, and overseeing their four asset-tracking systems in fiscal year 2011 totaled $16.2 million for DOJ's asset-tracking system and $10.4 million for the three Treasury asset-tracking systems combined. Further, we found that in some cases, storage facilities are located in the same geographic area. For example, both the U.S. Marshals Service--the primary custodian of DOJ's seized assets--and According to DOJ and Treasury data, the cost of Treasury maintain vehicle storage facilities, 40 percent of which are within 20 miles of each other. DOJ and Treasury officials noted that when Congress passed a law establishing the Treasury Forfeiture Fund in 1992, it recognized the differences in the programs' missions, which warranted creating separate programs, and this encouraged independent operational decisions that eventually created additional differences between the two programs. Both programs are designed to reduce and prevent crime. DOJ's asset forfeiture program represents the interests of law enforcement components within its department as well as several components outside the department, while Treasury's program represents the interests of We recognized the separate legal Treasury and DHS components.authorities of the two funds, but noted that those legal authorities did not preclude enhanced coordination within programs. Thus, we recommended that DOJ and Treasury conduct a study to determine the feasibility of consolidating potentially duplicative asset management activities including, but not limited to, the use of asset-tracking systems and the sharing of vendor and contract resources. The departments concurred with this recommendation. As of March 2013, DOJ officials reported that DOJ and Treasury representatives had met several times in the fall of 2012 and thereafter agreed upon an approach to conduct the study and assess potential costs. DOJ officials noted that they would continue to meet with their Treasury partners to execute their plan. Since work remains under way, it is too soon to tell whether the departments' actions will fully address the recommendation. In July 2012, we reported on the growth of revenues and expenses in DOJ's AFF from fiscal years 2003 to 2011, and the need for transparency in DOJ's process for carrying over funds from one fiscal year to the next. Each year, DOJ earns revenue from the proceeds of the forfeited assets it collects. It then pays its expenses, which include payments to victims and the costs of storing and maintaining forfeited assets. DOJ uses any balance to help cover anticipated expenses in the next fiscal year that may not be covered by that year's revenues, and this is known as carrying over funds. For example, at the end of fiscal year 2003, DOJ carried over approximately $365 million to cover expenditures in the next fiscal year. In contrast, at the end of fiscal year 2011, DOJ carried over $844 million to cover expenses into fiscal year 2012. After DOJ reserves funds to cover needed expenses, DOJ declares any remaining funds to be an excess unobligated balance and has the authority to use these funds for any of the department's authorized purposes. In recent years, DOJ also used these excess unobligated balances to cover rescissions. For example, in fiscal year 2011, DOJ used excess unobligated balances to help cover a $495 million AFF program rescission. Also, in fiscal year 2012, DOJ used $151 million of the remaining AFF funds identified at the end of the fiscal year to acquire the Thomson Correctional Center in Thomson, Illinois. At the time of our review, when determining the amounts to carryover, DOJ officials reviewed historical data on past program expenditures, analyzed known future expenses such as salaries and contracts, and estimated the costs of any potential new expenditures. However, as we concluded on the basis of our findings in July 2012, without a clearly documented and transparent process, it was difficult to determine whether DOJ's conclusions regarding the amounts that need to be carried over each year were well founded. We recommended that DOJ clearly document how it determined the amount of funds that it would need to be carried over for the next fiscal year, a recommendation with which DOJ concurred. DOJ officials stated that they plan to include information on the basis for its decisions concerning the amount of funds to be carried over in future Congressional Budget Justifications, but as of March 2013, the decision on how to present the information was still pending. Since this information has not yet been made available, it is too soon to tell whether it will fully address the recommendation. In April 2013, we identified overlap in some activities of five types of field- based information-sharing entities and concluded that DOJ, DHS, and ONDCP could improve coordination among the entities to help reduce unnecessary overlap in activities. In general, the five types of entities in our review were established under different authorities and have distinct missions, roles, and responsibilities. We reviewed their activities in eight urban areas and found overlap as each carried out its respective missions, roles, and responsibilities. Specifically, we identified 91 instances of overlap in analytical activities and services, with more instances of overlap involving a fusion center and a Field Intelligence Group (54 of the 91 instances) compared with the other three types of entities. For example, we found that in five of the eight urban areas, the fusion center, Regional Information Sharing Systems center, and the Field Intelligence Group disseminated information on all crimes--which can include terrorism and other high-risk threats as well as other types of crimes--for federal, state, and local customers including state and local police departments. In addition, we found 32 instances of overlap in investigative support activities across the eight urban areas reviewed, with more instances of overlap involving a Regional Information Sharing Systems center and a fusion center (18 of the 32 instances) compared with the other three entities. For example in one urban area, the Regional Information Sharing Systems center and the fusion center both conducted tactical analysis, target deconfliction, and event deconfliction within the same mission area for federal, state, and local customers. We reported that overlap, in some cases, can be desirable. In particular, overlap across analytical activities and services can be beneficial if it validates information or allows for competing or complementary analysis. Nevertheless, overlap can also lead to inefficiencies if, for example, it burdens law enforcement customers with redundant information. To promote coordination, we recommended two actions. First, we recommended that the Attorney General, the Secretary of Homeland Security, and the Director of ONDCP collaborate to develop a mechanism that would allow them to hold field-based information-sharing entities accountable for coordinating and monitor and evaluate the coordination results achieved. Second, we recommended that the Attorney General, the Secretary of Homeland Security, and the Director of ONDCP work together to assess opportunities where practices that enhance coordination can be further applied. DHS and ONDCP concurred with both recommendations. DOJ generally concurred with both recommendations, but asserted that it was already actively promoting coordination and routinely seeking to identify efficiency gains. For example, DOJ cited its participation in summits with other agencies, including DHS, and the colocation of certain field-based entities as evidence in support of this. While these efforts are positive steps for sharing information and coordinating, we noted and continue to believe that they do not fully address the recommendations. We maintain that an accountability mechanism to ensure coordination could add valuable context to any existing interagency discussions while encouraging entities to engage in coordination activities, such as leveraging resources to avoid unnecessary overlap. Further, our recommendation calls for DOJ, DHS, and ONDCP to collectively assess opportunities to enhance coordination through whatever effective means they identify. Chairman Sensenbrenner, Ranking Member Scott, and members of the subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this statement, please contact David C. Maurer, Director, Homeland Security and Justice Issues, 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. In addition to the contact named above, the following individuals also made contributions to this testimony: Joy Booth, Assistant Director; Sylvia Bascope; Michele Fejfar; Heather May; Lara Miklozek; Linda Miller; and Janet Temko. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In fiscal year 2012, DOJ's $27 billion budget funded a broad array of national security, law enforcement, and criminal justice system activities. GAO has examined a number of key programs where DOJ has sole responsibility or works with other departments and recommended actions to improve program efficiency and resource management. This statement summarizes findings and recommendations from recent GAO work in the following five areas: (1) overlap and potential duplication in DOJ grant programs; (2) DOJ's management of undisbursed funds from BVP grant awards whose terms have ended; (3) potential duplication in DOJ and Treasury asset forfeiture programs; (4) DOJ's management of asset forfeiture funds; and (5) overlap among DOJ and other federally funded field-based information sharing entities. This statement is based on prior products GAO issued from February 2012 through April 2013, along with selected updates obtained from April 2012 through April 2013. For the selected updates on DOJ's progress in implementing recommendations, GAO analyzed information provided by DOJ officials on taken and planned actions. In July 2012, GAO reported that the Department of Justice's (DOJ) more than 200 grant programs overlapped across 10 key justice areas, and that this overlap contributed to the risk of unnecessarily duplicative grant awards for the same or similar purposes. GAO has recommended, among other steps, that DOJ conduct an assessment to better understand the extent of grant program overlap and determine if consolidation is possible. DOJ has begun taking related actions, but it is too early to assess their impact. In February 2012, GAO reported that DOJ's Bulletproof Vest Partnership (BVP) Program--a source of funding for law enforcement ballistic- and stab-resistant body armor--had not taken steps to deobligate about $27 million in unused funds from grant awards whose terms had ended. GAO recommended that DOJ deobligate these funds and, for example, apply the amounts to new awards or reduce requests for future budgets. DOJ officials have since deobligated $2 million and plan to deobligate the rest by the end of April 2013. DOJ officials plan to apply the funds toward fiscal year 2014 BVP grants. In September 2012, GAO reported that DOJ and the Department of the Treasury (Treasury) conducted potentially duplicative asset management activities related to the seizure and forfeiture of assets associated with federal crimes. For example, GAO reported that each agency maintains separate tracking systems for seized and forfeited property. GAO recommended that DOJ and Treasury conduct a study to determine the feasibility of consolidating their asset management activities. In March 2013, DOJ officials reported that DOJ and Treasury had agreed upon an approach to conduct the study and assess potential costs, but that meetings between the departments were still ongoing and the study had not been finalized. In July 2012, GAO reported that annual revenues from DOJ's Assets Forfeiture Fund exceeded annual expenditures, allowing DOJ to carryover $844 million at the end of fiscal year 2011, in part to reserve funds for the next fiscal year. However, DOJ does not clearly document how it determines the amounts that need to be carried over. GAO recommended that DOJ more clearly document how it determines the carryover amounts. DOJ officials reported that they plan to provide this information, but as of March 2013, had not yet determined how to present the information. In April 2013, GAO reported on overlap in activities and services across field-based entities operated or supported by DOJ, the Department of Homeland Security, and the Office of National Drug Control Policy that may share terrorism-related information, among other things. GAO identified 91 instances of overlap in some analytical activities, such as disseminating information on similar issue areas, such as terrorism. GAO recommended, in part, that the federal agencies collaborate to hold the entities accountable for coordination and assess where practices that enhance coordination could be applied. DOJ generally agreed with the intent of the recommendations, but stated that DOJ has already taken steps to promote coordination. The steps, however, do not establish an accountability mechanism for monitoring coordination or assessing practices. GAO has made several recommendations to DOJ in prior reports to help improve program efficiency and resource management. DOJ generally concurred with these recommendations and is taking actions to address them.

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 (WTI) 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 cash 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, which participants cannot modify. 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. Options give the purchaser the right, but not the obligation, to buy or sell a specific quantity of a commodity or financial asset at a designated price. Swaps are privately negotiated contracts that involve an ongoing exchange of one or more assets, liabilities, or payments for a specified time period. Like futures, options can be traded on an exchange designated by CFTC as a contract market. Both swaps and options can be traded off-exchange if the transactions involve qualifying commodities and the participants satisfy statutory requirements. Options and futures are used to buy and sell a wide range of energy, agricultural, financial, and other commodities for future delivery. 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 can serve the same function. 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. 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. Price discovery is facilitated 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, use the futures market strictly 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. Both derivatives and physical markets experienced a substantial amount of change from 2002 through 2006. These changes have been occurring simultaneously, and the specific effect of any one of these changes on energy prices is unclear. Several recent trends in the futures markets have raised concerns among some market observers that these conditions may have contributed to higher physical energy prices. Specifically from January 2002 to July 2006, the futures markets experienced higher prices, relatively higher volatility, increased trading volume, and growth in some types of traders. During this period, monthly average spot prices for crude oil, gasoline, and heating oil increased by over 200 percent, and natural gas spot prices increased by over 140 percent. At the same time that spot prices were increasing, the futures prices for these commodities showed a similar pattern, with a sharp and sustained increase. For example, the price of crude oil futures increased from an average of $22 per barrel in January 2002 to $74 in July 2006. At the same time, the annual historical volatilities--measured using the relative change in daily prices of energy futures--between 2000 and 2006 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. We also observed that at the same time that prices were rising and that volatility was generally above or near long-term averages, futures markets saw an increase in the number of noncommercial traders such as managed money traders, including hedge funds. The trends in prices and volatility made the energy derivatives markets attractive for the growing number of traders that were looking to either 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 1, 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 preliminary 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. Another notable trend, but one that is much more difficult to quantify, was the apparently 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. While the Bank for International Settlements publishes data on worldwide OTC derivative trading volume for broad groupings of commodities, this format can be used only as a rough proxy for trends in the trading volume of OTC energy derivatives. According to these data, the notional amounts outstanding of OTC commodity derivatives excluding precious metals, such as gold, grew by over 850 percent from December 2001 to December 2005. In the year from December 2004 to December 2005 alone, the notional amount outstanding increased by more than 200 percent to over $3.2 trillion. Despite the lack of comprehensive energy-specific data on OTC derivatives, the recent experience of individual trading facilities further reveals the growth of energy derivatives trading outside of futures exchanges. For example, according to its annual financial statements, the volume of non-futures energy contracts traded on the Intercontinental Exchange, also known as ICE, including financially settled derivatives and physical contracts, increased by over 400 percent to over 130 million contracts in 2006. 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). That is, our preliminary view of these data suggests that managed money traders as a whole were more or less evenly divided in their expectations about future prices than they had been in the past. We found that views were mixed about whether these trends had 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. Contrary to this viewpoint, 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 of time. The developments in the derivatives markets in recent years have not occurred in isolation. Conditions in the physical markets were also undergoing changes that could help explain increases in both derivative and physical commodity prices. As we have 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 that are reflected in futures prices in anticipation of an oil shortage and expected higher prices in the future. Conversely, news about a new oil discovery that would increase world oil supply could result in lower futures prices. In other words, futures traders' expectations of what may happen to world oil supply and demand influence their price bids. According to the Energy Information Administration (EIA), world oil demand has grown from about 59 million barrels per day in 1983 to more than 85 million barrels per day in 2006 (fig. 2). While the United States accounts for about a quarter of this demand, rapid economic growth in Asia has also stimulated a strong demand for energy commodities. For example, EIA data shows that from 1983 to 2004, 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 3, 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 5.6 million barrels a day as recently as 2002. Major weather and political events can also 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 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 may also 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. However, others noted a different trend for crude oil inventories. That is, prices have remained high despite patterns of higher levels of oil in inventory. In addition to the supply and demand factors that generally apply to all energy commodities, specific developments can affect particular commodities. For instance, the growth of special gasoline blends--so- called "boutique fuels"--can affect the price of gasoline. As we have reported, it is generally agreed that the higher costs associated with supplying special gasoline blends contributed to higher gasoline prices, either because of more frequent or more severe supply disruptions or because the costs were likely passed on, at least in part, to consumers. Like the futures market, the physical market has undergone substantial changes that could affect prices. But market participants and other observers disagree about the impact of these changes on increasing energy prices. Some observers believe that higher energy prices were solely the result of supply and demand fundamentals, while others believe that increased futures trading activity contributed to higher prices. Another consideration is that the value of the U.S. dollar on open currency markets could also 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 are also 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. The relative effect of each of these changes remains unclear, however, because all of the changes were occurring simultaneously. Monitoring these trends and patterns in the future will be important in order to better understand their effects, protect the public, and ensure market integrity. Energy products are traded on multiple markets, some of which are subject to varying levels of CFTC oversight and some of which are not. This difference in oversight has caused some market observers to question whether CFTC needs broader oversight authority. As we have seen, under the CEA CFTC's regulatory authority is focused on overseeing futures exchanges, protecting the public, and ensuring market integrity. But in recent years two additional venues for trading energy futures contracts that are not subject to direct CFTC oversight have grown and become increasingly important--exempt commercial markets and OTC markets. However, traders in these markets are subject to the CEA's antimanipulation and antifraud provisions, which CFTC has the authority to enforce. Also, exempt commercial markets must provide CFTC with data for certain contracts. Futures exchanges such as NYMEX are subject to direct CFTC regulation and oversight. CFTC generally focuses on fulfilling three strategic goals related to these exchanges. First, to ensure the economic vitality of the commodity futures and options markets, CFTC conducts its own direct market surveillance and also reviews the surveillance efforts of the exchanges. Second, to protect market users and the public, CFTC promotes sales practice and other customer protection rules that apply to futures commission merchants and other registered intermediaries. Finally, to ensure the market's financial integrity, CFTC reviews the audit and financial surveillance activities of self-regulatory organizations. CFTC conducts regular market surveillance and oversight of energy trading on NYMEX and other futures exchanges. Oversight activities include: detecting and preventing disruptive practices before they occur and keeping the CFTC commissioners informed of possible manipulation or abuse; monitoring NYMEX's compliance with CFTC reporting requirements and its enforcement of speculative position limits; investigating traders with large open positions; and documenting cases of improper trading. In contrast to the direct oversight it provides to futures exchanges, CFTC does not have general oversight authority over exempt commercial markets, where qualified entities may trade through an electronic trading facility. According to CFTC officials, these markets have grown in prominence in recent years. Some market observers have questioned their role in the energy markets and the lack of transparency about their trading activities. Trading energy derivatives on exempt commercial markets is permissible only for eligible commercial entities--a category of traders broadly defined in the CEA to include firms with a commercial interest in the underlying commodity--as well as other sophisticated investors such as hedge funds. These markets are not subject to CFTC's general direct oversight but are required to maintain communication with CFTC. Among other things, an exempt commercial market must notify CFTC that it is operating as an exempt commercial market and must comply with certain CFTC informational, record-keeping, and other requirements. Energy derivatives also may be traded OTC rather than via an electronic trading facility. OTC derivatives are private transactions between sophisticated counterparties, and there is no requirement for parties involved in these transactions to disclose information about their transactions. Derivatives transactions in both exempt commercial markets and OTC markets are bilateral contractual agreements in which each party is subject to and assumes the risk of nonperformance by its counterparty. These agreements differ from derivatives traded on an exchange where a central clearinghouse stands behind every trade. While some observers have called for more oversight of OTC derivatives, most notably for CFTC to be given greater oversight authority over this market, others consider such action unnecessary. Supporters of more CFTC oversight authority believe that more transparency and accountability would better protect the regulated markets and consumers from potential abuse and possible manipulation. Some question how CFTC can be assured that trading on the OTC market is not adversely affecting the regulated markets and ultimately consumers, given the lack of information about OTC trading. However, in 1999 the President's Working Group on Financial Markets concluded that OTC derivatives generally were not subject to manipulation because contracts were settled in cash based on a rate or price determined in a separate highly liquid market and did not serve a significant price discovery function. Moreover, the market is limited to professional counterparties that do not need the protections against manipulation that CEA provides to retail investors. Finally, the group has recently noted that if there are concerns about CFTC's authority, CFTC's enforcement actions against energy companies are evidence that the CFTC has adequate tools to combat fraud and manipulation when it is detected. The lack of reported data about off-exchange markets makes addressing concerns about the function and effect of these markets on regulated markets and entities challenging. CFTC officials have said that while they have reason to believe these off-exchange activities can affect prices determined on a regulated exchange, they also generally believe that the commission has sufficient authority over OTC derivatives and exempt energy markets. However, CFTC has recently begun to take steps to clarify its authority to obtain information about pertinent off-exchange transactions. In a June 2007 proposed rulemaking, 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 any other disruptions to the integrity of the regulated futures markets. According to CFTC officials, the commission has also proposed amendments to clarify its authority under the CEA to collect information and to bring fraud actions in principal-to-principal transactions in these markets, enhancing CFTC's ability to enforce antifraud provisions of CEA. In closing, our work to date shows that the derivatives and physical markets have both undergone substantial change and evolution. Given the changes in both markets, causality is unclear, and the situation warrants ongoing review and analysis. We commend the Subcommittee's efforts in this area. Along with the overall concern about rising prices, questions have also been raised about CFTC's authority to protect investors from fraudulent, manipulative, and abusive practices. CFTC generally believes that the commission has sufficient authority over OTC derivatives and exempt energy markets. However, CFTC has taken an important step by clarifying its authority to obtain information about pertinent off-exchange transactions. 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 John Wanska (Assistant Director), Kevin Averyt, Ross Campbell, Emily Chalmers, John Forrester, and Paul Thompson. 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.

Energy prices for crude oil, heating oil, unleaded gasoline, and natural gas have risen substantially since 2002, generating questions about the reasons for the increase. Some observers believe that the higher energy prices were solely due to supply and demand fundamentals while others believe that increased futures trading activity may also have contributed to higher prices. This testimony highlights GAO's preliminary findings related to (1) trends and patterns in the futures and physical energy markets and the effect of these trends on energy prices and (2) the Commodity Futures Trading Commission's (CFTC) regulatory and enforcement authority over derivatives markets. GAO analyzed futures and large trader reporting data; trading data obtained from the New York Mercantile Exchange (NYMEX) for crude oil, heating oil, unleaded gasoline, and natural gas; and various other sources of energy-related data. GAO also analyzed relevant academic and other studies on the subject and interviewed market participants, experts, and officials at relevant federal agencies. Rising energy prices have been attributed to a variety of factors, and recent trends in the futures and physical markets highlight the changes that have occurred in both markets from 2002 through 2006. Specifically: (1) inflation-adjusted energy prices in both the futures and physical markets increased by over 200 percent during this period for three of the four commodities we reviewed; (2) volatility (a measurement of the degree to which prices fluctuate over time) in energy futures prices generally remained above historic averages during the beginning of the time period but declined through 2006 for three of the four commodities we reviewed; and (3) the number of noncommercial participants in the futures markets including hedge funds, has grown; along with the volume of energy futures contracts traded; and the volume of energy derivatives traded outside traditional futures exchanges. At the same time these changes were occurring in the futures markets for energy commodities, tight supply and rising demand in the physical markets pushed prices higher. For example, while global demand for oil has risen at high rates, spare oil production capacity has fallen since 2002, and increased political instability in some of the major oil-producing countries has threatened the supply of oil. Refining capacity also has not expanded at the same pace as the demand for gasoline. The individual effect of these collective changes on energy prices is unclear, as many factors have combined to affect energy prices. Monitoring these changes will be important to protect the public and ensure market integrity. Based on its authority under the Commodity Exchange Act (CEA), CFTC primarily focuses its oversight on the operations of traditional futures exchanges, such as NYMEX, where energy futures are traded. However, energy derivatives are also traded on other markets, namely exempt commercial markets and over-the-counter (OTC) markets--both of which have experienced increased volumes in recent years. Exempt commercial markets are electronic trading facilities that trade exempt commodities between eligible participants, and OTC markets involve eligible parties that can enter into contracts directly off-exchange. Both of these markets are exempt from general CFTC oversight, but they are subject to the CEA's antimanipulation and antifraud provisions and CFTC enforcement of those provisions. Because of these varying levels of CFTC oversight, some market observers question whether CFTC needs broader authority over all derivative markets. CFTC generally believes that the commission has sufficient authority over OTC derivatives and exempt energy markets. However, CFTC has recently taken additional actions to clarify its authority to obtain information about pertinent off-exchange transactions.

The federal government is likely to invest more than $89 billion on IT in fiscal year 2017. However, as we have previously reported, investments in federal IT too often result in failed projects that incur cost overruns and schedule slippages, while contributing little to the desired mission-related outcomes. For example: The Department of Veterans Affairs' Scheduling Replacement Project was terminated in September 2009 after spending an estimated $127 million over 9 years. The tri-agency National Polar-orbiting Operational Environmental Satellite System was stopped in February 2010 by the White House's Office of Science and Technology Policy after the program spent 16 years and almost $5 billion. The Department of Homeland Security's Secure Border Initiative Network program was ended in January 2011, after the department obligated more than $1 billion to the program, because it did not meet cost-effectiveness and viability standards. The Office of Personnel Management's Retirement Systems Modernization program was canceled in February 2011, after spending approximately $231 million on the agency's third attempt to automate the processing of federal employee retirement claims. The Department of Veterans Affairs' Financial and Logistics Integrated Technology Enterprise program was intended to be delivered by 2014 at a total estimated cost of $609 million, but was terminated in October 2011 due to challenges in managing the program. The Department of Defense's Expeditionary Combat Support System was canceled in December 2012 after spending more than a billion dollars and failing to deploy within 5 years of initially obligating funds. These and other failed IT projects often suffered from a lack of disciplined and effective management, such as project planning, requirements definition, and program oversight and governance. In many instances, agencies had not consistently applied best practices that are critical to successfully acquiring IT investments. Federal IT projects have also failed due to a lack of oversight and governance. Executive-level governance and oversight across the government has often been ineffective, specifically from chief information officers (CIO). For example, we have reported that not all CIOs had the authority to review and approve the entire agency IT portfolio and that CIOs' authority was limited. Recognizing the severity of issues related to government-wide management of IT, FITARA was enacted in December 2014. The law was intended to improve agencies' acquisitions of IT and enable Congress to monitor agencies' progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes specific requirements related to seven areas. Federal data center consolidation initiative (FDCCI). Agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing the data centers (to include planned cost savings), and quarterly updates on progress made. The law also requires OMB to develop a goal for how much is to be saved through this initiative, and provide annual reports on cost savings achieved. Enhanced transparency and improved risk management. OMB and agencies are to make detailed information on federal IT investments publicly available, and agency CIOs are to categorize their IT investments by level of risk. Additionally, in the case of major IT investments rated as high risk for 4 consecutive quarters, the law requires that the agency CIO and the investment's program manager conduct a review aimed at identifying and addressing the causes of the risk. Agency CIO authority enhancements. Agency CIOs are required to (1) approve the IT budget requests of their respective agencies, (2) certify that OMB's incremental development guidance is being adequately implemented for IT investments, (3) review and approve contracts for IT, and (4) approve the appointment of other agency employees with the title of CIO. Portfolio review. Agencies are to annually review IT investment portfolios in order to, among other things, increase efficiency and effectiveness and identify potential waste and duplication. In establishing the process associated with such portfolio reviews, the law requires OMB to develop standardized performance metrics, to include cost savings, and to submit quarterly reports to Congress on cost savings. Expansion of training and use of IT acquisition cadres. Agencies are to update their acquisition human capital plans to address supporting the timely and effective acquisition of IT. In doing so, the law calls for agencies to consider, among other things, establishing IT acquisition cadres or developing agreements with other agencies that have such cadres. Government-wide software purchasing program. The General Services Administration is to develop a strategic sourcing initiative to enhance government-wide acquisition and management of software. In doing so, the law requires that, to the maximum extent practicable, the General Services Administration should allow for the purchase of a software license agreement that is available for use by all executive branch agencies as a single user. Maximizing the benefit of the federal strategic sourcing initiative. Federal agencies are required to compare their purchases of services and supplies to what is offered under the federal strategic sourcing initiative. OMB is also required to issue related regulations. In June 2015, OMB released guidance describing how agencies are to implement FITARA. OMB's guidance is intended to, among other things: assist agencies in aligning their IT resources with statutory establish government-wide IT management controls that will meet the law's requirements, while providing agencies with flexibility to adapt to unique agency processes and requirements; clarify the CIO's role and strengthen the relationship between agency CIOs and bureau CIOs; and strengthen CIO accountability for IT cost, schedule, performance, and security. The guidance identified several actions that agencies were to take to establish a basic set of roles and responsibilities (referred to as the common baseline) for CIOs and other senior agency officials, which are needed to implement the authorities described in the law. For example, agencies were required to conduct a self-assessment and submit a plan describing the changes they intended to make to ensure that common baseline responsibilities are implemented. Agencies were to submit their plans to OMB's Office of E-Government and Information Technology by August 15, 2015, and make portions of the plans publicly available on agency websites no later than 30 days after OMB approval. As of November 2016, all agencies had made their plans publicly available. In addition, in August 2016, OMB released guidance intended to, among other things, define a framework for achieving the data center consolidation and optimization requirements of FITARA. The guidance includes requirements for agencies to: maintain complete inventories of all data center facilities owned, operated, or maintained by or on behalf of the agency; develop cost savings targets due to consolidation and optimization for fiscal years 2016 through 2018 and report any actual realized cost savings; and measure progress toward meeting optimization metrics on a quarterly basis. The guidance also directs agencies to develop a data center consolidation and optimization strategic plan that defines the agency's data center strategy for fiscal years 2016, 2017, and 2018. This strategy is to include, among other things, a statement from the agency CIO stating whether the agency has complied with all data center reporting requirements in FITARA. Further, the guidance indicates that OMB is to maintain a public dashboard that will display consolidation-related costs savings and optimization performance information for the agencies. In February 2015, we introduced a new government-wide high-risk area, Improving the Management of IT Acquisitions and Operations. This area highlights several critical IT initiatives in need of additional congressional oversight, including (1) reviews of troubled projects; (2) efforts to increase the use of incremental development; (3) efforts to provide transparency relative to the cost, schedule, and risk levels for major IT investments; (4) reviews of agencies' operational investments; (5) data center consolidation; and (6) efforts to streamline agencies' portfolios of IT investments. We noted that implementation of these initiatives has been inconsistent and more work remains to demonstrate progress in achieving IT acquisitions and operations outcomes. Further, in our February 2015 high-risk report, we identified actions that OMB and the agencies need to take to make progress in this area. These include implementing FITARA, as well as implementing at least 80 percent of our recommendations related to the management of IT acquisitions and operations within 4 years. As noted in that report, we made multiple recommendations to improve agencies' management of IT acquisitions and operations, many of which are discussed later in this statement. Specifically, between fiscal years 2010 and 2015, we made 803 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations, including many to improve the implementation of the recent initiatives and other government-wide, cross-cutting efforts. As of October 2016, OMB and the agencies had fully implemented about 46 percent of these recommendations. This is a 23 percent increase compared to the percentage we reported as being fully implemented in 2015. Figure 1 summarizes the progress that OMB and the agencies have made in addressing our recommendations, as compared to the 80 percent target. In addition, in fiscal year 2016, we made 202 new recommendations, thus further reinforcing the need for OMB and agencies to address the shortcomings in IT acquisitions and operations. Agencies have taken steps to improve the management of IT acquisitions and operations by implementing key FITARA initiatives. However, agencies would be better positioned to fully implement the law, and thus realize additional management improvements, if they addressed the numerous recommendations we have made aimed at improving data center consolidation, increasing transparency via OMB's IT Dashboard, and incremental development. One of the key initiatives to implement FITARA is data center consolidation. OMB established FDCCI in February 2010 to improve the efficiency, performance, and environmental footprint of federal data center activities. In a series of reports over the past 5 years, we determined that while data center consolidation could potentially save the federal government billions of dollars, weaknesses existed in several areas, including agencies' data center consolidation plans and OMB's tracking and reporting on cost savings. In total, we have made 111 recommendations to OMB and agencies to improve the execution and oversight of the initiative. Most agencies agreed with our recommendations or had no comments. In March 2016, we reported that the 24 agencies participating in FDCCI collectively had made progress on their data center closure efforts. Specifically, as of November 2015, these agencies had identified a total of 10,584 data centers, of which they reported closing 3,125 through fiscal year 2015. Notably, the Departments of Agriculture, Defense, the Interior, and the Treasury accounted for 84 percent of these total closures. Further, the agencies have reported that they are planning to close additional data centers by the end of fiscal year 2019. In addition, we noted that 19 of the 24 agencies had reported achieving an estimated $2.8 billion in cost savings and avoidances from their data center consolidation and optimization efforts from fiscal years 2011 through 2015. The Departments of Commerce, Defense, Homeland Security, and the Treasury accounted for about $2.4 billion (or about 86 percent) of the total. Further, 21 agencies collectively reported planning an additional $5.4 billion in cost savings and avoidances, for a total of approximately $8.2 billion, through fiscal year 2019. Figure 2 summarizes agencies' reported achieved and planned cost savings and avoidances from fiscal years 2011 through 2019. To better ensure that federal data center consolidation and optimization efforts improve governmental efficiency and achieve cost savings, we recommended that 10 of the 24 agencies take actions to complete their planned data center cost savings and avoidance targets for fiscal years 2016 through 2018. We also recommended that 22 of the 24 agencies take actions to improve optimization progress, including addressing any identified challenges. Fourteen agencies agreed with our recommendations, 4 did not state whether they agreed or disagreed, and 6 stated that they had no comments. To facilitate transparency across the government in acquiring and managing IT investments, OMB established a public website--the IT Dashboard--to provide detailed information on major investments at 26 agencies, including ratings of their performance against cost and schedule targets. Among other things, agencies are to submit ratings from their CIOs, which, according to OMB's instructions, should reflect the level of risk facing an investment relative to that investment's ability to accomplish its goals. In this regard, FITARA includes a requirement for CIO's to categorize their major IT investment risks in accordance with OMB guidance. Over the past 6 years, we have issued a series of reports about the IT Dashboard that noted both significant steps OMB has taken to enhance the oversight, transparency, and accountability of federal IT investments by creating its IT Dashboard, as well as issues with the accuracy and reliability of data. In total, we have made 47 recommendations to OMB and federal agencies to help improve the accuracy and reliability of the information on the IT Dashboard and to increase its availability. Most agencies agreed with our recommendations or had no comments. Most recently, in June 2016, we determined that agencies had not fully considered risks when rating their major investments on the IT Dashboard. Specifically, our assessments of risk for 95 investments at 15 selected agencies matched the CIO ratings posted on the Dashboard 22 times, showed more risk 60 times, and showed less risk 13 times. Figure 3 summarizes how our assessments compared to the selected investments' CIO ratings. Aside from the inherently judgmental nature of risk ratings, we identified three factors which contributed to differences between our assessments and the CIO ratings: Forty of the 95 CIO ratings were not updated during the month we reviewed, which led to more differences between our assessments and the CIOs' ratings. This underscores the importance of frequent rating updates, which help to ensure that the information on the Dashboard is timely and accurately reflects recent changes to investment status. Three agencies' rating processes spanned longer than 1 month. Longer processes mean that CIO ratings are based on older data, and may not reflect the current level of investment risk. Seven agencies' rating processes did not focus on active risks. According to OMB's guidance, CIO ratings should reflect the CIO's assessment of the risk and the investment's ability to accomplish its goals. CIO ratings that do no incorporate active risks increase the chance that ratings overstate the likelihood of investment success. As a result, we concluded that the associated risk rating processes used by the agencies were generally understating the level of an investment's risk, raising the likelihood that critical federal investments in IT are not receiving the appropriate levels of oversight. To better ensure that the Dashboard ratings more accurately reflect risk, we recommended that the 15 agencies take actions to improve the quality and frequency of their CIO ratings. Twelve agencies generally agreed with or did not comment on the recommendations and three agencies disagreed. OMB has emphasized the need to deliver investments in smaller parts, or increments, in order to reduce risk, deliver capabilities more quickly, and facilitate the adoption of emerging technologies. In 2010, it called for agencies' major investments to deliver functionality every 12 months and, since 2012, every 6 months. Subsequently, FITARA codified a requirement that agency CIOs certify that IT investments are adequately implementing OMB's incremental development guidance. In May 2014, we reported that 66 of 89 selected investments at five major agencies did not plan to deliver capabilities in 6-month cycles, and less than half of these investments planned to deliver functionality in 12-month cycles. We also reported that only one of the five agencies had complete incremental development policies. Accordingly, we recommended that OMB develop and issue clearer guidance on incremental development and that the selected agencies update and implement their associated policies. Four of the six agencies agreed with our recommendations or had no comments; the remaining two agencies partially agreed or disagreed with the recommendations. More recently, in August 2016, we reported that agencies had not fully implemented incremental development practices for their software development projects. Specifically, we noted that, as of August 31, 2015, 22 federal agencies had reported on the IT Dashboard that 300 of 469 active software development projects (approximately 64 percent) were planning to deliver usable functionality every 6 months for fiscal year 2016, as required by OMB guidance. Regarding the remaining 169 projects (or 36 percent) that were reported as not planning to deliver functionality every 6 months, agencies provided a variety of explanations for not achieving that goal. These included project complexity, the lack of an established project release schedule, or that the project was not a software development project. Table 1 lists the total number and percent of federal software development projects for which agencies reported plans to deliver functionality every 6 months for fiscal year 2016. In reviewing seven selected agencies' software development projects, we determined that 45 percent of the projects delivered functionality every 6 months for fiscal year 2015 and 55 percent planned to do so in fiscal year 2016. However, significant differences existed between the delivery rates that the agencies reported to us and what they reported on the IT Dashboard. For example, in four cases (Commerce, Education, HHS, and Treasury), the percentage of delivery reported to us was at least 10 percentage points lower than what was reported on the IT Dashboard. These differences were due to (1) our identification of fewer software development projects than agencies reported on the IT Dashboard and (2) the fact that information reported to us was generally more current than the information reported on the IT Dashboard. Figure 4 compares the software development projects' percentage of planned delivery every 6 months reported on the IT Dashboard and to us. We concluded that by not having on the IT Dashboard up-to-date information about whether the project is a software development project and the extent to which projects are delivering functionality, these seven agencies were at risk that OMB and key stakeholders may make decisions regarding the agencies' investments without the most current and accurate information. Finally, while OMB has issued guidance requiring agency CIOs to certify that each major IT investment's plan for the current year adequately implements incremental development, only three agencies (the Departments of Commerce, Homeland Security, and Transportation) had defined processes and policies intended to ensure that the department CIO certifies that major IT investments are adequately implementing incremental development. Officials from three other agencies (the Departments of Education, Health and Human Services, and the Treasury) reported that they were in the process of updating their existing incremental development policy to address certification, while the Department of Defense's policies that address incremental development did not include information on CIO certification. We concluded that until all of the agencies we reviewed define processes and policies for the certification of the adequate use of incremental development, they will not be able to fully ensure adequate implementation of, or benefit from, incremental development practices, as required by FITARA. To improve the reporting of incremental data on the IT Dashboard and policies for CIO certification of adequate incremental development, we made 12 recommendations to seven agencies and OMB. Five agencies agreed with our recommendations. In addition, the Department of Defense partially agreed with one recommendation and disagreed with another, OMB did not agree or disagree, and the Department of the Treasury did not comment on the recommendations. In summary, with the enactment of FITARA, the federal government has an opportunity to improve the transparency and management of IT acquisitions and operations, and to strengthen the authority of CIOs to provide needed direction and oversight. To their credit, agencies have taken steps to improve the management of IT acquisitions and operations by implementing key FITARA initiatives, including data center consolidation, efforts to increase transparency via OMB's IT Dashboard, and incremental development; and they have continued to address recommendations we have made over the past several years. However, additional improvements are needed, and further efforts by OMB and federal agencies to implement our previous recommendations would better position them to fully implement FITARA. To help ensure that these efforts succeed, continued congressional oversight of OMB's and agencies' implementation of FITARA is essential. In addition, we will continue to monitor agencies implementation of our previous recommendations. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staffs have any questions about this testimony, please contact me at (202) 512-9286 or at [email protected]. Individuals who made key contributions to this testimony are Kevin Walsh (Assistant Director), Chris Businsky, Rebecca Eyler, and Bradley Roach (Analyst in Charge). Information Technology Reform: Agencies Need to Increase Their Use of Incremental Development Practices, GAO-16-469. Washington, D.C.: August 16, 2016. IT Dashboard: Agencies Need to Fully Consider Risks When Rating Their Major Investments, GAO-16-494. Washington, D.C.: June 2, 2016. Data Center Consolidation: Agencies Making Progress, but Planned Savings Goals Need to Be Established . GAO-16-323. Washington, D.C.: March 3, 2016. High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015. Data Center Consolidation: Reporting Can Be Improved to Reflect Substantial Planned Savings. GAO-14-713. Washington, D.C.: September 25, 2014. Information Technology: Agencies Need to Establish and Implement Incremental Development Policies. GAO-14-361. Washington, D.C.: May 1, 2014. IT Dashboard: Agencies Are Managing Investment Risk, but Related Ratings Need to Be More Accurate and Available. GAO-14-64. Washington, D.C.: December 12, 2013. Data Center Consolidation: Strengthened Oversight Needed to Achieve Cost Savings Goal. GAO-13-378. Washington, D.C.: April 23, 2013. Information Technology Dashboard: Opportunities Exist to Improve Transparency and Oversight of Investment Risk at Select Agencies. GAO-13-98. Washington, D.C.: October 16, 2012. Data Center Consolidation: Agencies Making Progress on Efforts, but Inventories and Plans Need to Be Completed. GAO-12-742. Washington, D.C.: July 19, 2012. IT Dashboard: Accuracy Has Improved, and Additional Efforts Are Under Way to Better Inform Decision Making. GAO-12-210. Washington, D.C.: November 7, 2011. Data Center Consolidation: Agencies Need to Complete Inventories and Plans to Achieve Expected Savings. GAO-11-565. Washington, D.C.: July 19, 2011. Federal Chief Information Officers: Opportunities Exist to Improve Role in Information Technology Management. GAO-11-634. Washington, D.C.: September 15, 2011. Information Technology: OMB Has Made Improvements to Its Dashboard, but Further Work Is Needed by Agencies and OMB to Ensure Data Accuracy. GAO-11-262. Washington, D.C.: March 15, 2011. Information Technology: OMB's Dashboard Has Increased Transparency and Oversight, but Improvements Needed. GAO-10-701. Washington, D.C.: July 16, 2010. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The federal government is likely to invest more than $89 billion on IT in fiscal year 2017. Historically, these investments have frequently failed, incurred cost overruns and schedule slippages, or contributed little to mission-related outcomes. Accordingly, in December 2014, IT reform legislation was enacted, aimed at improving agencies' acquisitions of IT. Further, in February 2015, GAO added improving the management of IT acquisitions and operations to its high-risk list. Between fiscal years 2010 and 2015, GAO made about 800 recommendations related to this high-risk area to OMB and agencies. This statement summarizes agencies' progress in improving the management of IT acquisitions and operations. To do so, we reviewed and summarized GAO's prior and recently published work on (1) data center consolidation, (2) risk levels of major investments as reported on OMB's IT Dashboard, and (3) implementation of incremental development practices. Consolidating data centers. In an effort to reduce the growing number of data centers, OMB launched a consolidation initiative in 2010. GAO reported in March 2016 that agencies had closed 3,125 of the 10,584 total data centers and achieved $2.8 billion in cost savings and avoidances through fiscal year 2015. Agencies are planning a total of about $8.2 billion in savings and avoidances through fiscal year 2019. GAO recommended that the agencies take actions to meet their cost savings targets and improve optimization progress related to their data center consolidation and optimization efforts. Most agencies agreed with the recommendations or had no comment. Enhancing transparency. OMB's IT Dashboard provides detailed information on major investments at federal agencies, including ratings from Chief Information Officers (CIO) that should reflect the level of risk facing an investment. GAO reported in June 2016 that agencies had not fully considered risks when rating their major investments on the IT Dashboard. In particular, of the 95 investments reviewed, GAO's assessments of risks matched the CIO ratings 22 times, showed more risk 60 times, and showed less risk 13 times. Several issues contributed to these differences, such as CIO ratings not being updated frequently. GAO recommended that agencies improve the quality and frequency of their ratings. Most agencies generally agreed with or did not comment on the recommendations. Implementing incremental development. A key reform initiated by OMB has emphasized the need for federal agencies to deliver investments in smaller parts, or increments, in order to reduce risk and deliver capabilities more quickly. Since 2012, OMB has required investments to deliver functionality every 6 months. In August 2016, GAO reported that 22 agencies had reported that 64 percent of 469 active software development projects planned to deliver usable functionality every 6 months for fiscal year 2016. Further, for 7 selected agencies, GAO identified significant differences in the percentages of software projects reported to GAO as delivering functionality every 6 months, compared to what was reported on the IT Dashboard. This was due to, among other things, inconsistencies in agencies' reporting on non-software development projects, and the timing of reporting data. GAO made 12 recommendations to 7 agencies and OMB to improve the reporting of incremental data on the IT Dashboard and the policies for CIO certification of adequate incremental development. Most agencies agreed or did not comment on our recommendations, and OMB did not agree or disagree. GAO has previously made numerous recommendations to OMB and federal agencies to improve the oversight and execution of the data center consolidation initiative, the accuracy and reliability of the IT Dashboard, and incremental development policies. Most agencies agreed with GAO's recommendations or had no comments. GAO will continue to monitor agencies' implementation of these recommendations.

An effective military medical surveillance system needs to collect reliable information on (1) the health care provided to service members before, during, and after deployment; (2) where and when service members were deployed; (3) environmental and occupational health threats or exposures during deployment (in theater) and appropriate protective and counter measures; and (4) baseline health status and subsequent health changes. This information is needed to monitor the overall health condition of deployed troops, inform them of potential health risks, as well as maintain and improve the health of service members and veterans. In times of conflict, a military medical surveillance system is particularly critical to ensure the deployment of a fit and healthy force and to prevent disease and injuries from degrading force capabilities. DOD needs reliable medical surveillance data to determine who is fit for deployment; to prepare service members for deployment, including providing vaccinations to protect against possible exposure to environmental and biological threats; and to treat physical and psychological conditions that resulted from deployment. DOD also uses this information to develop educational measures for service members and medical personnel to ensure that service members receive appropriate care. Reliable medical surveillance information is also critical for VA to carry out its missions. In addition to VA's better known missions--to provide health care and benefits to veterans and medical research and education-- VA has a fourth mission: to provide medical backup to DOD in times of war and civilian health care backup in the event of disasters producing mass casualties. As such, VA needs reliable medical surveillance data from DOD to treat casualties of military conflicts, provide health care to veterans who have left active duty, assist in conducting research should troops be exposed to environmental or occupational hazards, and identify service-connected disabilities and adjudicate veterans' disability claims. Investigations into the unexplained illnesses of service members and veterans who had been deployed to the Gulf uncovered the need for DOD to implement an effective medical surveillance system to obtain comprehensive medical data on deployed service members, including Reservists and National Guardsmen. Epidemiological and health outcome studies to determine the causes of these illnesses have been hampered due to incomplete baseline health data on Gulf War veterans, their potential exposure to environmental health hazards, and specific health data on care provided before, during, and after deployment. The Presidential Advisory Committee on Gulf War Veterans' Illnesses' and IOM's 1996 investigations into the causes of illnesses experienced by Gulf War veterans confirmed the need for more effective medical surveillance capabilities. The National Science and Technology Council, as tasked by the Presidential Advisory Committee, also assessed the medical surveillance system for deployed service members. In 1998, the council reported that inaccurate recordkeeping made it extremely difficult to get a clear picture of what risk factors might be responsible for Gulf War illnesses. It also reported that without reliable deployment and health assessment information, it was difficult to ensure that veterans' service-related benefits claims were adjudicated appropriately. The council concluded that the Gulf War exposed many deficiencies in the ability to collect, maintain, and transfer accurate data describing the movement of troops, potential exposures to health risks, and medical incidents in theater. The council reported that the government's recordkeeping capabilities were not designed to track troop and asset movements to the degree needed to determine who might have been exposed to any given environmental or wartime health hazard. The council also reported major deficiencies in health risk communications, including not adequately informing service members of the risks associated with countermeasures such as vaccines. Without this information, service members may not recognize potential side effects of these countermeasures and promptly take precautionary actions, including seeking medical care. In response to these reports, DOD strengthened its medical surveillance system under Operation Joint Endeavor when service members were deployed to Bosnia-Herzegovina, Croatia, and Hungary. In addition to implementing departmentwide medical surveillance policies, DOD developed specific medical surveillance programs to improve monitoring and tracking environmental and biomedical threats in theater. While these efforts represented important steps, a number of deficiencies remained. On the positive side, the Assistant Secretary of Defense (Health Affairs) issued a health surveillance policy for troops deploying to Bosnia. This guidance stressed the need to (1) identify health threats in theater, (2) routinely and uniformly collect and analyze information relevant to troop health, and (3) disseminate this information in a timely manner. DOD required medical units to develop weekly reports on the incidence rates of major categories of diseases and injuries during all deployments. Data from these reports showed theaterwide illness and injury trends so that preventive measures could be identified and forwarded to the theater medical command regarding abnormal trends or actions that should be taken. DOD also established the U.S. Army Center for Health Promotion and Preventive Medicine--a major enhancement to DOD's ability to perform environmental monitoring and tracking. For example, the center operates and maintains a repository of service members' serum samples for medical surveillance and a system to integrate, analyze, and report data from multiple sources relevant to the health and readiness of military personnel. This capability was augmented with the establishment of the 520th Theater Army Medical Laboratory--a deployable public health laboratory for providing environmental sampling and analysis in theater. The sampling results can be used to identify specific preventive measures and safeguards to be taken to protect troops from harmful exposures and to develop procedures to treat anyone exposed to health hazards. During Operation Joint Endeavor, this laboratory was used in Tuzla, Bosnia, where most of the U.S. forces were located, to conduct air, water, soil, and other environmental monitoring. Despite the department's progress, we and others have reported on DOD's implementation difficulties during Operation Joint Endeavor and the shortcomings in DOD's ability to maintain reliable health information on service members. Knowledge of who is deployed and their whereabouts is critical for identifying individuals who may have been exposed to health hazards while deployed. However, in May 1997, we reported that the inaccurate information on who was deployed and where and when they were deployed--a problem during the Gulf War--continued to be a concern during Operation Joint Endeavor. For example, we found that the Defense Manpower Data Center (DMDC) database--where military services are required to report deployment information--did not include records for at least 200 Navy service members who were deployed. Conversely, the DMDC database included Air Force personnel who were never actually deployed. In addition, we reported that DOD had not developed a system for tracking the movement of service members within theater. IOM also reported that the location of service members during the deployments were still not systematically documented or archived for future use. We also reported in May 1997 that for the more than 600 Army personnel whose medical records we reviewed, DOD's centralized database for postdeployment medical assessments did not capture 12 percent of those assessments conducted in theater and 52 percent of those conducted after returning home. These data are needed by epidemiologists and other researchers to assess at an aggregate level the changes that have occurred between service members' pre- and postdeployment health assessments. Further, many service members' medical records did not include complete information on in-theater postdeployment medical assessments that had been conducted. The Army's European Surgeon General attributed missing in-theater health information to DOD's policy of having service members hand carry paper assessment forms from the theater to their home units, where their permanent medical records were maintained. The assessments were frequently lost en route. We have also reported that not all medical encounters in theater were being recorded in individual records. Our 1997 report identified that this problem was particularly common for immunizations given in theater. Detailed data on service members' vaccine history are vital for scheduling the regimen of vaccinations and boosters and for tracking individuals who received vaccinations from a specific lot in the event health concerns about the vaccine lot emerge. We found that almost one-fourth of the service members' medical records that we reviewed did not document the fact that they had received a vaccine for tick-borne encephalitis. In addition, in its 2000 report, IOM cited limited progress in medical recordkeeping for deployed active duty and reserve forces and emphasized the need for records of immunizations to be included in individual medical records. Responding to our and others' recommendations to improve information on service members' deployments, in-theater medical encounters, and immunizations, DOD has continued to revise and expand its policies relating to medical surveillance, and the system continues to evolve. In addition, in 2000, DOD released its Force Health Protection plan, which presents its vision for protecting deployed forces. This vision emphasizes force fitness and health preparedness and improving the monitoring and surveillance of health threats in military operations. However, IOM criticized DOD's progress in implementing its medical surveillance program and the failure to implement several recommendations that IOM had made. In addition, IOM raised concerns about DOD's ability to achieve the vision outlined in the Force Health Protection plan. We have also reported that some of DOD's programs designed to improve medical surveillance have not been fully implemented. IOM's 2000 report presented the results of its assessment of DOD's progress in implementing recommendations for improving medical surveillance made by IOM and several others. IOM stated that, although DOD generally concurred with the findings of these groups, DOD had made few concrete changes at the field level. For example, medical encounters in theater were still not always recorded in individuals' medical records, and the locations of service members during deployments were still not systematically documented or archived for future use. In addition, environmental and medical hazards were not yet well integrated in the information provided to commanders. The IOM report notes that a major reason for this lack of progress is no single authority within DOD has been assigned responsibility for the implementation of the recommendations and plans. IOM said that because of the complexity of the tasks involved and the overlapping areas of responsibility involved, the single authority must rest with the Secretary of Defense. In its report, IOM describes six strategies that in its view demand further emphasis and require greater efforts by DOD: Use a systematic process to prospectively evaluate non-battle-related risks associated with the activities and settings of deployments. Collect and manage environmental data and personnel location, biological samples, and activity data to facilitate analysis of deployment exposures and to support clinical care and public health activities. Develop the risk assessment, risk management, and risk communications skills of military leaders at all levels. Accelerate implementation of a health surveillance system that completely spans an individual's time in service. Implement strategies to address medically unexplained symptoms in populations that have deployed. Implement a joint computerized patient record and other automated recordkeeping that meets the information needs of those involved with individual care and military public health. DOD guidance established requirements for recording and tracking vaccinations and automating medical records for archiving and recalling medical encounters. While our work indicates that DOD has made some progress in improving its immunization information, the department faces numerous challenges in implementing an automated medical record. In October 1999, we reported that DOD's Vaccine Adverse Event Reporting System, which relies on medical personnel or service members to provide needed vaccine data, may not have included information on adverse reactions because DOD did not adequately inform personnel on how to provide this information. Additionally, in April 2000, we testified that vaccination data were not consistently recorded in paper records and in a central database, as DOD requires. For example, when comparing records from the database with paper records at four military installations, we found that information on the number of vaccinations given to service members, the dates of the vaccinations, and the vaccine lot numbers were inconsistent at all four installations. At one installation, the database and records did not agree 78 to 92 percent of the time. DOD has begun to make progress in implementing our recommendations, including ensuring timely and accurate data in its immunization tracking system. The Gulf War revealed the need to have information technology play a bigger role in medical surveillance to ensure that the information is readily accessible to DOD and VA. In August 1997, DOD established requirements that called for the use of innovative technology, such as an automated medical record device for documenting inpatient and outpatient encounters in all settings and that can archive the information for local recall and format it for an injury, illness, and exposure surveillance database. Also, in 1997, the President, responding to deficiencies in DOD's and VA's data capabilities for handling service members' health information, called for the two agencies to start developing a comprehensive, lifelong medical record for each service member. As we reported in April 2001, DOD's and VA's numerous databases and electronic systems for capturing mission-critical data, including health information, are not linked and information cannot be readily shared. DOD has several initiatives under way to link many of its information systems--some with VA. For example, in an effort to create a comprehensive, lifelong medical record for service members and veterans and to allow health care professionals to share clinical information, DOD and VA, along with the Indian Health Service (IHS), initiated the Government Computer-Based Patient Record (GCPR) project in 1998. GCPR is seen as yielding a number of potential benefits, including improved research and quality of care, and clinical and administrative efficiencies. However, our April 2001 report describes several factors-- including planning weaknesses, competing priorities, and inadequate accountability--that made it unlikely that DOD and VA would accomplish GCPR or realize its benefits in the near future. To strengthen the management and oversight of GCPR, we made several recommendations, including designating a lead entity with a clear line of authority for the project and creating comprehensive and coordinated plans for sharing meaningful, accurate, and secure patient health data. For the near term, DOD and VA have decided to reconsider their approach to GCPR and focus on allowing VA to view DOD health data. However, under the interim effort, physicians at military medical facilities will not be able to view health information from other facilities or from VA--now a potentially critical information source given VA's fourth mission to provide medical backup to the military health system in times of national emergency and war. Recent meetings with officials from the Defense Health Program and the Army Surgeon General's Office indicate that the department is working on issues we have reported on in the past, including the need to improve the reliability of deployment information and the need to integrate disparate health information systems. Specifically, these officials informed us that DOD is in the process of developing a more accurate roster of deployed service members and enhancing its information technology capabilities. For example, DOD's Theater Medical Information Program (TMIP) is intended to capture medical information on deployed personnel and link it with medical information captured in the department's new medical information system, now being field tested. Developmental testing for TMIP is about to begin and field testing is expected to begin next spring, with deployment expected in 2003. A component system of TMIP-- Transportation Command Regulating and Command and Control Evacuation System--is also under development and aims to allow casualty tracking and provide in-transit visibility of casualties during wartime and peacetime. Also under development is the Global Expeditionary Medical System, which DOD characterizes as a stepping stone to an integrated biohazard surveillance and detection system. Clearly, the need for comprehensive health information on service members and veterans is very great, and much more needs to be done. However, it is also a very difficult task because of uncertainties about what conditions may exist in a deployed setting, such as potential military conflicts, environmental hazards, and frequency of troop movements. While progress is being made, DOD will need to continue to make a concerted effort to resolve the remaining deficiencies in its surveillance system. Until such a time that some of the deficiencies are overcome, VA's ability to perform its missions will be affected. For further information, please contact Stephen P. Backhus at (202) 512- 7101. Individuals making key contributions to this testimony included Ann Calvaresi Barr, Karen Sloan, and Keith Steck.

The Departments of Defense (DOD) and Veterans Affairs (VA) are establishing a medical surveillance system for the health care needs of military personnel and veterans. The system will collect and analyze information on deployments, environmental health threats, disease monitoring, medical assessments, and medical encounters. GAO has identified weaknesses in DOD's medical surveillance capability and performance during the Gulf War and Operation Joint Endeavor. Investigations into the unexplained illnesses of Gulf War veterans uncovered many deficiencies in DOD's ability to collect, maintain, and transfer accurate data on the movement of troops, potential exposures to health risks, and medical incidents during deployment. DOD has several initiatives under way to improve the reliability of deployment information and to enhance its information technology capabilities, though some initiatives are several years away from full implementation. The VA's ability to serve veterans and provide backup to DOD in times of war will be enhanced as DOD increases its medical surveillance capability.

VA provides health care services to more than 5 million patients annually. This care includes mental health services to veterans in inpatient and outpatient settings in a variety of VA health care facilities including medical centers, CBOCs, and Vet Centers. Mental health services are provided for a range of conditions such as depression, PTSD, and substance abuse disorders. Resources for these and other health care services are allocated by VA headquarters through a general resource allocation system--the Veterans Equitable Resource Allocation (VERA) system--to its 21 health care networks. Although the VERA system is used to allocate funds, it does not designate funds for specific purposes or prescribe how those funds are to be used. In November 2004, the Secretary of VA approved the mental health strategic plan. This mental health strategic plan contained recommended initiatives for improving VA mental health services by addressing a range of issues, including, for example, improving awareness about mental illness and filling gaps in access to mental health services. Some of the service gaps identified were in treating veterans with serious mental illness, female veterans, and veterans returning from combat in Iraq and Afghanistan. Within VA, the Office of Mental Health Services (OMHS) is responsible for coordinating with the networks and medical centers on the overall implementation of the mental health strategic plan. This includes formulating strategies for allocating funds to medical centers and certain offices for plan initiatives. Such strategies include, for example, the use of RFPs to decide how the mental health strategic plan funds are to be allocated to medical centers. VA headquarters allocated $88 million of the $100 million that VA officials said would be used for mental health strategic plan initiatives in fiscal year 2005 by using several approaches. About $53 million was allocated directly to medical centers and certain offices and $35 million was allocated through its general resource allocation system to its health care networks, according to VA officials. The remaining $12 million of the $100 million was not allocated by any approach, headquarters officials said, because there was not enough time during the fiscal year to allocate the funds. Officials we interviewed at 7 medical centers in 4 networks reported using allocated funds to provide new mental health services and to provide more of existing services. However, some medical center officials reported that they did not use all allocated funds for plan initiatives by the end of the fiscal year, due in part to the length of time it took to hire new staff. VA headquarters allocated about $53 million directly to medical centers and certain offices based on proposals submitted for funding and other approaches targeted to specific initiatives related to the mental health strategic plan in fiscal year 2005. VA headquarters developed and solicited submissions from networks for specific initiatives to be carried out at their individual medical centers through requests for proposals (RFPs). VA made resources available through these RFPs and other targeted approaches to medical centers for plan initiatives to support a range of specific mental health services based, in part, on the priorities of VA leadership and legislation for programs related to PTSD, substance abuse, and other mental health areas, according to VA headquarters officials. Nearly $20 million of the $53 million allocated by using RFPs and other targeted approaches was for mental health services related to legislation, according to VA officials. Most of the approximately $53 million allocated--about $48 million--went to VA medical centers. PTSD services and OEF/OIF veterans' mental health care received an allocation of about $18 million, with Compensated Work Therapy (CWT) receiving the second highest total--nearly $10 million. Other initiatives receiving funding included substance abuse services, mental health services in nursing homes, domiciliary expansion, and psychosocial rehabilitation for veterans with serious mental illness. VA headquarters issued five RFPs from October 2004 to January 2005 that described the specific types of services for which mental health strategic plan funding was available. Review panels headed by mental health experts within VA reviewed the proposals, ranked them, and provided their rankings to VA's leadership. Once funding decisions were made, VA allocated funding directly to the medical centers for the mental health strategic plan initiatives. VA also used other funding approaches targeted to specific initiatives. For example, headquarters officials allocated funding to medical centers to expand mental health services at CBOCs that had fewer mental health visits than a standard VA identified for this purpose. VA also used other targeted funding approaches to determine which medical centers would receive some of the funds for PTSD, OIF and OEF veterans', and substance abuse services. In addition, VA targeted funds to mental health initiatives in Polytrauma Centers--centers within certain VA medical centers that provide specialized treatment for veterans of OIF and OEF who have complex rehabilitation needs. VA headquarters officials said that allocations made for initiatives in fiscal year 2005 through RFPs and other approaches targeted to specific initiatives would be made for a total of 2 to 3 fiscal years. These officials said they anticipated that medical centers would hire permanent staff whose positions would need to be funded for more than 1 year. The expectation of VA leadership was that after funds allocated through these approaches were no longer available, medical centers would continue to support these programs using their general operating funds received through VA's general resource allocation system. VA allocated $35 million for mental health strategic plan initiatives in fiscal year 2005 through its general resources allocation system to its health care networks, according to VA headquarters officials. The decision to allocate these resources to VA's networks for mental health strategic plan initiatives was retrospective and VA did not notify networks and medical centers of this decision. Although VA headquarters made fiscal year 2005 general resource allocations to the networks in December 2004, the decision that $35 million of the funds allocated at that time were for mental health strategic plan initiatives was not finalized until April 2005, several months after the general allocation had been made. VA headquarters officials said that they made the decision to allocate $35 million from the general resource allocation system because these resources would be more rapidly allocated than if they had been allocated through RFPs. However, other VA headquarters officials told us that the decision was also made, in part, because VA did not have sufficient unallocated funds remaining after the December 2004 general allocation to fund $100 million for mental health strategic plan initiatives through RFPs and other targeted approaches. VA headquarters officials, as well as network and medical center officials, indicated that there was no guidance to the networks and medical centers instructing them to use specific amounts from their general fiscal year allocation for mental health strategic plan initiatives. Network and medical center officials we spoke with were unaware that any specific portion of their general allocation was to be used for mental health strategic plan initiatives. Several VA medical center officials noted, however, that some of the funds in their general allocation were used to support their mental health programs generally, as part of their routine operations. However, because network and medical center officials we interviewed did not know that funds had been allocated for mental health strategic plan initiatives through VA's general resource allocation system, nor did VA headquarters notify networks and medical centers throughout VA of this retroactive allocation, it is likely that some of these funds were not used for plan initiatives. VA did not allocate the approximately $12 million remaining of the $100 million planned for mental health strategic plan initiatives in fiscal year 2005 because, according to VA headquarters officials, there was not enough time during the fiscal year to allocate the funds through the RFP process or other approaches targeted to specific initiatives. Officials said that when resources were allocated later in the fiscal year through an RFP rather than at the beginning, the amount allocated was only a portion of the annualized cost. The full annualized cost could be supported in the next fiscal year. For example, if a project with an annual cost of $4 million was allocated mid way through the fiscal year, only half the annual cost was allocated at that time---$2 million. The expectation was that the full $4 million would be available for the project over 12 months in the next fiscal year. The $12 million that VA did not allocate for fiscal year 2005 was intended for certain mental health strategic plan initiatives based on an allocation plan developed by VA for the $65 million it planned to allocate through RFPs and other approaches. VA headquarters officials said that funds not allocated for mental health strategic plan initiatives were allocated for other health care purposes. Officials we interviewed from seven medical centers in four networks reported using funds allocated to them for mental health strategic plan initiatives through RFPs and other targeted approaches, but they said that some of these funds were not used for plan initiatives in fiscal year 2005. Officials said they used funds allocated to provide new mental health services and to provide more of existing services included in plan initiatives. For example, two medical centers used funds to increase the number of mental health providers available at CBOCs. One of those medical centers also implemented a new 6-week PTSD day treatment program in which veterans live in the community but come to the medical center daily for counseling, group therapy, and other services. Officials at some medical centers reported that they were not able to use all of their fiscal year 2005 funding for plan initiatives by the end of the year as planned and cited several reasons that contributed to this situation. The length of time it takes to recruit new staff in general and the special problems of hiring specialized staff, such as psychiatrists, were cited. In some cases the need to locate or renovate space for programs contributed to delays in using mental health strategic plan funds, according to medical center officials. Medical centers varied in how they treated fiscal year 2005 funds that were allocated by VA for mental health strategic plan initiatives but not used for those initiatives. Some reported that they carried over the funds for use in the next fiscal year. Officials at some medical centers reported that they used these funds for other health care purposes. For example, officials at one medical center said they used funds that they did not spend on mental health strategic plan initiatives to support other mental health programs. VA headquarters officials advised participants from networks and medical centers in a weekly conference call in August 2005 that if they were unable to hire staff for initiatives in fiscal year 2005, they should use the funds allocated only for mental health services. As of September 20, 2006, VA headquarters had allocated $158 million of the $200 million to be used for VA mental health strategic plan initiatives in fiscal year 2006 by using several approaches. About $92 million of these funds was allocated directly to medical centers and certain offices to support new mental health strategic plan initiatives for fiscal year 2006. VA also allocated about $66 million to support the recurring costs of the continuing mental health initiatives that were funded in fiscal year 2005. The remaining $42 million had not been allocated as of September 20. Officials at some medical centers expected to spend all of the allocations they received during fiscal year 2006. However, officials at some medical centers were uncertain that they would spend all their allocations for plan initiatives during the fiscal year. VA headquarters had allocated about $158 million directly to medical centers and certain offices by September 20, 2006, through RFPs and other approaches targeted to specific initiatives related to the mental health strategic plan in fiscal year 2006. About $92 million was for new mental health strategic plan activities, and about $66 million was to support the recurring costs of continuing mental health strategic plan initiatives that were first funded in fiscal year 2005. As in fiscal year 2005, the new resources went to support a range of mental health services in line with priorities of VA's leadership and legislation, according to VA officials. Funding for services for PTSD, OIF and OEF veterans, substance abuse, and CBOC mental health services accounted for nearly three-fifths of the funds allocated for new initiatives. As of September 18, 2006, VA had not allocated resources for mental health strategic plan initiatives through its general resource allocation system and VA headquarters officials said VA was not planning to do so. As of September 20, 2006, VA did not allocate about $42 million of the $200 million planned for mental health strategic plan initiatives in fiscal year 2006 by any approach. VA officials said that a portion of these unallocated funds are related to the timing of allocations that were made for plan initiatives through RFPs and other funds targeted to medical centers. Specifically, some of the allocations through RFPs were made well into the fiscal year. VA allocated only the amount of funds through these approaches for fiscal year 2006 that would fund the projects through the end of the fiscal year, and not the full 12-month cost which VA expects to fund in fiscal year 2007. Because some of these allocations were made in the later part of fiscal year 2006, these allocations were smaller than they would be on a 12-month basis and accounted for part of the $42 million not allocated. VA officials said they anticipated that these funds would be available in fiscal year 2007. Officials from seven medical centers we interviewed in May and June of 2006 reported using funds allocated to them through RFPs and other approaches to support new 2006 mental health initiatives and to continue to support the initiatives first funded in fiscal year 2005. For example, one medical center used funding for a new mental health intensive case management program. Officials at some medical centers reported that they did not anticipate problems using all of the funds they had received in fiscal year 2006. However, others were less certain they would be able to use all of the funds. Officials at several medical centers were not sure they would be able to hire all of the new staff related to mental health strategic plan initiatives by the end of the fiscal year. In May 2006, officials at two medical centers that we interviewed said that they did not know whether they would receive additional funds through RFPs to spend in fiscal year 2006, and as a result they were uncertain whether they would be able to use all of their fiscal year 2006 funds for plan initiatives by the end of the fiscal year. Our preliminary findings show that VA allocated additional resources for mental health strategic plan initiatives in fiscal years 2005 and 2006 to help address identified gaps in VA's mental health services for veterans. VA intended to allocate $100 million for plan initiatives in fiscal year 2005. The allocations that were made resulted in some new and expanded mental health services to address gaps, according to officials at selected medical centers. However, approximately $12 million of the $100 million was not allocated by any method and $35 million was allocated through VA's general resource allocation system on a retrospective basis and without notifying networks and medical centers that resources for plan initiatives had been allocated in the general allocation that networks received several months earlier. Finally, some portion of the approximately $53 million that was allocated directly to medical centers was not used for plan initiatives in part because the timing of the allocation of the funds did not leave time to hire needed staff by the end of the fiscal year. As a result, it is likely that a substantial portion of the $100 million intended for mental health strategic plan funds in fiscal year 2005 was not used for plan initiatives. A larger amount of the planned mental health strategic plan funds was allocated in fiscal year 2006, although as of September 20, 2006, about a fifth of the $200 million planned for these initiatives was not allocated. However, it is unclear whether medical centers will be able to spend all of the fiscal year 2006 mental health strategic plan funds for plan initiatives by the end of the year, in part because of how late in the year the funds were allocated. For further information about this statement, please contact Laurie E. Ekstrand at (202) 512-7101 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. James Musselwhite, Assistant Director, and Robin Burke made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Veterans Affairs (VA) provides mental health services to veterans with conditions such as post-traumatic stress disorder (PTSD) and substance abuse disorders. To address gaps in services needed by veterans, VA approved a mental health strategic plan in 2004. VA planned to increase its fiscal year 2005 allocations for plan initiatives by $100 million above fiscal year 2004 levels. VA also planned to increase its fiscal year 2006 allocations for plan initiatives by $200 million above fiscal year 2004 levels--composed of $100 million for continuation of fiscal year 2005 initiatives and an additional $100 million identified in the President's fiscal year 2006 budget request. GAO was asked to provide preliminary information on VA's allocation and use of funding for mental health strategic plan initiatives in fiscal years 2005 and 2006. A report on this work will be issued later in the fall of 2006. GAO reviewed VA reports and documents on mental health strategic plan initiatives and conducted interviews with VA officials from headquarters, 4 of 21 health care networks, and 7 medical centers. VA delegates decision making to its health care networks for most budget and management responsibilities regarding medical center operations, and medical centers receive most of their resources from the networks. In fiscal year 2005, VA headquarters allocated $88 million of the $100 million VA officials intended for mental health strategic plan initiatives. VA allocated about $53 million directly to medical centers and certain offices based on proposals submitted for funding and other approaches targeted to specific initiatives. VA solicited submissions from networks for specific initiatives to be carried out at their individual medical centers through requests for proposals (RFPs). In addition, VA headquarters officials said that VA allocated $35 million for this purpose through VA's general resource allocation system to its 21 health care networks on a retrospective basis. VA made this decision several months after resources had been provided to the networks through the general allocation system. Moreover, VA did not notify network and medical center officials that these funds were to be used for plan initiatives. Health care network and medical center officials interviewed told GAO that they were not aware these allocations had been made. As a result, it is likely that some of these funds were not used for plan initiatives. Moreover, VA did not allocate the approximately $12 million remaining of the $100 million for fiscal year 2005 because, according to VA officials, there was not enough time during the fiscal year to do so. Medical center officials said they used the funds allocated directly to their medical centers for plan initiatives that included new mental health services and more of the services they already provided. For example, two medical centers used funds allocated to them through RFPs or other targeted approaches to increase the number of mental health providers at community based outpatient clinics. One of those medical centers also started a new 6-week PTSD day treatment program. However, some medical center officials reported that they did not use all funds allocated for plan initiatives by the end of fiscal year 2005, due in part to the length of time it took to hire new staff. In fiscal year 2006, as of September 20, 2006, VA headquarters had allocated $158 million of the $200 million planned for mental health strategic plan initiatives. VA allocated about $92 million of these funds directly to medical centers and certain offices to support new initiatives, using RFPs and other targeted funding approaches. VA also allocated about $66 million to support recurring costs of the continuing initiatives from the prior fiscal year. As of September 20, 2006, about $42 million of the $200 million for fiscal year 2006 had not been allocated. Officials from seven medical centers we interviewed reported that they had used funds for plan initiatives, such as the creation of a new intensive mental health case management program. Officials at some medical centers reported that they did not anticipate problems using all of the funds allocated to them through RFPs and other targeted approaches in fiscal year 2006. However, officials at other medical centers were less certain that they would use all of these funds for plan initiatives by the end of fiscal year 2006. GAO discussed the information in this statement with VA officials who agreed that the data are accurate, and provided updated data which are incorporated as appropriate.

USPS is a vast enterprise that delivers about 680 million pieces of mail daily to virtually every household and business in the United States through an array of services. Typical mail items--letters, flats, and parcels--may be introduced into the mailstream through mailboxes and collection boxes, thousands of drop points at customer sites, mail facilities, and other locations across the country. Once mail enters the USPS mail processing operation, it becomes part of a complex and diversified system, requiring the coordinated effort of mail processing plants and delivery units across the country. While much of mail delivery is labor intensive, most of the effort required to sort the mail for distribution has been automated by a series of high-volume machines. USPS has at least 10 different types of automated mail processors totaling more than 10,000 pieces of equipment in operation. These machines exist at various points in the mailstream and have mechanical forces that are likely to cause the release of substantial amounts of anthrax spores from a piece of mail. The October 2001 anthrax attacks raised great concerns over the security of postal employees and customers from exposure to biohazardous materials. In January 2002, Congress passed Public Law 107-117 providing USPS $500 million for emergency expenses to buy equipment for sanitizing and screening mail and to protect postal employees and customers from biohazardous material with the requirement that they develop an emergency plan. On March 6, 2002, USPS issued its Emergency Preparedness Plan. The plan discusses a variety of process changes and technology initiatives that could be applied to the threat of biohazards in the mail. In addition, the plan addresses USPS's goals of protecting postal employees and customers from exposure to biohazardous material and safeguarding the mail system from future bioterror attacks, while maintaining current service levels. USPS plans to achieve this by developing prototypes to test and evaluate which technologies should be used together with existing mail processing equipment. To fund its efforts, USPS plans to request an additional approximately $1.8 billion for fiscal years 2002 through 2004. In response to the anthrax-laden letters that caused widespread contamination at two postal facilities, USPS began testing HEPA filters to minimize paper dust, reduce risks to employees from biohazards, and clean mail processing equipment. The Postal Service plans to deploy this technology at nearly 300 P&DC/Fs that handle outgoing mail, but is specifically testing the prototypes for this technology at its Dulles and Merrifield, Virginia P&DC/Fs. These filtration systems have been implemented to run on two major types of mail processing equipment, the Delivery Bar Code Sorter (DBCS) and the Advanced Facer-Canceller System (AFCS) at both sites. The DBCSs are computerized machines that sort letter-sized mail by using a reader to interpret an imprinted barcode, while the AFCS is a type of mail processing equipment that automatically faces letter-sized mail in a uniform orientation and cancels the postage stamps. However, issues associated with the design and effectiveness of HEPA filtration systems still need to be addressed. First, USPS has not completed necessary tests and analysis to confirm the effectiveness of HEPA filtration systems installed on mail processing equipment and, therefore, does not know whether this technology will satisfy the agency's objectives. Second, the benefits of the HEPA air filtration system's ability to reduce dust and clean the mail processing equipment have not been confirmed. Third, the amount of energy needed to run the HEPA systems might overwhelm the existing power supply at some P&DC/Fs and, therefore, degrade the operation of current mail processing equipment. Finally, the mail processing equipment will have to be modified in order for the filtration systems to operate effectively. To date, USPS has performed initial tests to determine the effectiveness of its HEPA system's (1) airflow velocity and (2) ability to remove dust in the mail sorting machines. However, USPS has not yet confirmed whether its HEPA filtration system's prototypes are designed properly to capture and contain airborne anthrax within the system and not release it into the mail processing environment. As a result, USPS does not yet know whether this technology will meet its intended objectives. USPS has performed tests to determine its HEPA filtration system's airflow velocity, but it has not performed the necessary test to confirm whether the system can actually capture anthrax spores in a mail- processing environment. When installed correctly and in the proper environment, HEPA filters were designed to effectively capture 99.97 percent of all dust, pollen, mold spores, and bacteria at the 0.3- micron particle size that might pass through them. Because biohazard particles typically fall into the range of 1 to 10 microns, HEPA filtration may significantly reduce the number of particles that exhaust from the vacuum system into the ambient air of postal facilities. USPS has designed its air filtration equipment such that the air flows in accordance with industry standards to capture particle sizes similar to anthrax. To test the effectiveness of this design, USPS is working with the National Institute for Occupational Safety and Health to release smoke and tracer gas to verify that the air filtration equipment is working as expected. Using tracer gas confirms that the system is moving air as intended through the filters. Experts from the Environmental Protection Agency agree with this approach for testing airflow and capture velocity. However, this procedure does not test either how much anthrax is trapped in the system or the system's effectiveness in not releasing anthrax into the mail processing environment. Without conducting tests that confirm the system's ability to trap anthrax and not release any into the mail processing environment, the USPS has not proven that its design will meet the intent of protecting its employees and customers. According to USPS, another benefit of installing HEPA air filtration systems is that the negative air pressure (i.e., vacuum) generated by the systems may help clean the mail processing equipment. Until October 2001, USPS mail processing machines, including rollers, belts, and electronic card cages, were cleaned with compressed air--pressurized air exiting through nozzles akin to the air nozzles used to fill up tires--a generally acceptable way to blow out and clean dusty equipment. USPS maintenance personnel stated that using compressed air is the best way to clean its machines because most of the dust collects on the pinch rollers, which are hard to access using a vacuum nozzle. However, USPS banned compressed air blowing following the anthrax attacks last fall. As a result, USPS began installing HEPA systems to permanently vacuum its mail processing equipment and reduce or eliminate the need to hand vacuum the internal workings of the machines, which is the current process. USPS recently performed a test to quantify the amount of dust collected by the HEPA filtration systems deployed at Dulles, but the results have not yet been analyzed. USPS gathered data from June 11 through June 25, 2002, on the amount of dust captured by the HEPA filtration systems installed at the Dulles facility. The test used data collected from four machines--two AFCSs and two DBCSs--to determine how much dust the filtration systems are actually capturing and how much dust remains in the mail processing equipment. Although one AFCS and one DBCS have a HEPA filtration system installed, the remaining two did not. The test involved using preweighed filters on four portable HEPA vacuum cleaners, which are used to clean the four machines individually. After the 2-week test period, USPS weighed the portable vacuum filters and canisters to determine how much dust the mail processing equipment collected with the HEPA filtration system versus those that did not have the prototype system. These test results are still being analyzed. While this initial testing is a positive step, we are concerned that the amount of dust collected by the portable HEPA vacuums from the mail processing machines with filtration systems will be understated because the data reflect a 24-hour period of operations versus the normal operations, which are between 7 and 16 hours depending on the type of equipment. Accordingly, the test may not provide USPS with the reliable data necessary to make valid conclusions about the efficiency of the HEPA filtration system. Given the importance of USPS's initiative, it is imperative that reliable tests be performed to confirm whether the use of air filtration systems to clean mail processing equipment is effective. According to our preliminary observations, the HEPA filtration systems installed at the Dulles P&DC/F are collecting relatively few dust particles and may be causing the dust to settle inside the mail processing equipment. When we visited the Dulles P&DC/F, we were shown the trays where some of the dust could settle. The trays contained only rubber bands, paper clips, loose bits of paper, and mail. See figure 1 for the contents of HEPA filtration system's tray at the Dulles P&DC/F. The Dulles P&DC/F maintenance manager stated that when maintenance personnel blew air back through the filters to purge any dust that may be trapped in them, there was no dust dislodged and the filters appeared to be clean. The bulk of the dust may be lodged in the innards of the machines and electronic equipment and not in the filters. Therefore, USPS maintenance officials are concerned that mail processing equipment, such as the DBCS, is not being cleaned as thoroughly as it was previously with the dry sweeping and compressed air blowing methods. Without an effective mechanism to clean the equipment, the dust lodged in the machines will manifest itself relatively quickly and may result in burned out pinch rollers, equipment breakdowns, and generally higher repair costs and downtime. Hence, USPS may incur additional costs for repairing equipment in the AFCS and the DBCS, and the additional maintenance may possibly affect its operations. USPS believes that installing HEPA filtration systems will minimize the risks of airborne biohazards in the event of another anthrax attack, reduce dust levels, and lessen workers' allergy-like symptoms. Therefore, USPS is proposing the use of HEPA filtration technology as a final filtering stage to remove smaller particles that constitute airborne biohazards. However, the design and configuration of the HEPA filtration system calls for additional requirements. First, USPS has identified that the HEPA filtration systems installed at the Dulles P&DC/F require additional power to avoid affecting current mail processing equipment. At the Dulles facility, two air filtration systems-- the Torit and FSX--have been installed. The Torit system is being tested on the DBCS. The FSX system is being tested on the AFCS. See figure 2 for a picture of the HEPA filtration system design at the Dulles P&DC/F and figures 3 and 4 are pictures of the FSX and Torit HEPA air filtration systems being tested at the Dulles P&DC/F. Both the FSX and Torit systems have been installed with the ductwork covering the entire AFCS and the DBCS units. The front of the DBCS is covered with plastic, and the back of the cabinet doors have channels cut into them to allow the air to flow up into the ductwork along the entire length of the machine. According to USPS officials, this design, as it is configured, presumably collects dust from all of the rollers and belts along the length of the machine and directs airborne dust to the ductwork. However, this design requires a large amount of power to generate enough airflow to move the dust through the machines. As a result, the Vice President of Engineering is concerned that the amount of energy required to run the HEPA filtration systems might overwhelm the power supply at the P&DC/F and may result in an outage if additional power is not provided. He added that the HEPA filtration system's impact on the power supply is a serious concern, which the agency plans to address by performing site surveys to determine how much additional power is required for HEPA air filtration to operate effectively and to avoid degrading the performance of mail processing equipment. Another concern with USPS's design of the HEPA filtration system on the mail processing equipment is that modifications must be made to each type of machine to ensure that it is automatically and continuously vacuumed and minimal dust escapes. For instance, the air from inside these machines will be filtered using HEPA filters before it is discharged back into the mail processing environment. The continuous flow of air into the equipment and the discharge of air through multistage vacuum filtration (to initially filter out larger particles to prevent their plugging the finer filters), with a final filtration through a HEPA filter, is expected to reduce the release of airborne hazards from processing equipment into the facility by several orders of magnitude. To ensure that air is routed to the HEPA filters, the AFCS and the DBCS have to be closed up with metal and plastic hoods, respectively. See figures 5 and 6 for examples of the AFCS metal hoods and DBCS plastic shrouds and figure 7 for the DBCS Torit air filtration system. USPS has not yet performed any tests to determine whether the HEPA air filtration system will impede the performance of the proposed air sampling and detection system. While HEPA filtration systems might reduce the risk of exposure to biohazards, USPS will need additional technologies to detect and identify potential hazardous materials as early as possible in the mailstream. Therefore, in addition to installing air filtration equipment, USPS is designing and installing air sampling and detection equipment to monitor airborne particles released during automated mail processing. USPS plans to use this sampling in conjunction with biohazard detection technology to confirm whether anthrax spores are present. According to USPS officials, to be most effective in collecting airborne anthrax, the air sampling and detection system must be placed directly over the automated mail processing machines, including the AFCS and the DBCS, where the anthrax dispersion is most likely to occur. The efficacy of the air sampling detection equipment, however, might be hindered since the AFCS and DBCS will have to be closed up with metal and plastic hoods, respectively, in order for the HEPA filtration equipment to function effectively. Refer to figures 5 and 6 for pictures of AFCS and DBCS with the metal and plastic hoods installed. Therefore, any HEPA filtration equipment that is installed in the P&DC/F would have to be designed so that it does not interfere with anthrax air sampling and detection system. USPS engineers recognize this requirement and stated that they would design a "dead zone," or an area free of any negative air pressure, in the location where singular pieces of mail are processed through pinch rollers so that a proper sample can be taken by the air sampling and detection system. Consequently, until USPS tests this requirement, it will not know whether the "dead zone" design will be sufficient to ensure that an adequate sample can be collected for detection. According to industry best practices, investment analysis is a critical process required to select and fund technology investments that will result in cost-effective solutions focused on measurable and specific mission- related benefits. This process involves examining the fundamental cost, benefit, schedule, and risk characteristics of each investment before it is funded. USPS has not completed an investment analysis of its HEPA air filtration systems currently deployed at the Dulles P&DC/F and, thus, has not justified investing in HEPA filtration systems for deployment in its approximately 300 P&DC/Fs across the country. Even though the USPS has prepared cost estimates to develop and implement HEPA filtration systems at its nearly 300 P&DC/Fs across the nation, these estimates are incomplete and, therefore, are understated. USPS plans to implement the HEPA air filtration systems nationwide, at a cost of $245 million, by the end of fiscal year 2002 for air filtration on the Loose Mail system, AFCS, DBCS, and the Automated Flats Sorting Machine 100 (AFSM). A supplemental funding request of $61 million is also being considered for fiscal year 2002 to acquire additional air filtration systems on the regular and outgoing DBCS machines. When added to the $245 million already being considered for near-term purchase, the total cost of HEPA air filtration systems could increase to $306 million by September 2002. However, these amounts do not include USPS's recurring costs including the air filtration estimate of more than $125 million annually for regular activities such as equipment maintenance, purchase of new filters, training, and updates to air filtration manuals for more than 10,000 HEPA filtration systems nationwide. Furthermore, USPS may also incur additional costs. For instance, preliminary data show that the HEPA filtration systems require more power, which results in additional costs to run these systems. According to our analysis of the initial implementation of air filtration on the Loose Mail systems, an annual cost of about $8 million will be required to power these systems. When this amount is added to expenditures associated with providing more power to support the 6,300 AFCS and DBCS units on which HEPA filtering technology will be installed, the annual cost for the extra energy required could be as high as $42 million. Furthermore, there is the potential risk for greater maintenance costs because the HEPA filtration systems and portable vacuum systems appear to be less efficient in cleaning the mail processing equipment and may result in burned out bearings and equipment parts. USPS maintenance and engineering personnel at Dulles and Merrifield informed us that there is significant potential for equipment maintenance costs to rise. For example, we analyzed the potential cost impact of bearing replacement for the DBCS machines and found that, depending on the cost of the bearing, an additional $26 to $46 million could be spent on maintenance each year. According to USPS officials, the DBCS is the largest fleet of machines the USPS owns, and they run all secondary mail. If these machines break down more often because the bearings need replacing, this could affect both costs and operations. In addition, USPS will also have to consider the risks of increased maintenance costs associated with other equipment such as the AFCS, Loose Mail, and AFSM 100, which also contain bearings. However, until USPS completes a risk assessment to determine if the bearings are wearing out faster using the new maintenance procedures, it cannot know the extent of the additional maintenance costs that will be required. With respect to benefits, USPS officials stated that the agency is reluctant to quantify benefits because it is committed to spend whatever is necessary to protect its employees from future biohazard attacks. Therefore, the officials noted that it is difficult to quantify the benefits of this technology and its ability to safeguard human life. Nevertheless, without completing required tests to confirm that the HEPA filtration systems are able to contain airborne anthrax in a mail processing environment, USPS will not know whether it is making a worthwhile investment. We recognize the challenge that USPS faces in trying to protect its workers from airborne biohazards while trying to maintain its operations and control costs. By designing and testing air filtration systems on its mail processing machines, USPS has taken steps to reduce risk of exposure from biohazards to its employees. However, the USPS HEPA air filtration system design has not yet been proven to contain anthrax spores or reduce the levels of dust in a mail processing environment and in mail processing equipment. In addition, the HEPA filtration system's design and installation require additional energy and modifications to the mail processing equipment in order to work properly. Furthermore, USPS has not verified through testing that the HEPA air filtration system will not interfere with the air sampling and detection system. Finally, even though USPS has identified initial cost estimates, it has not yet completed investment analyses to identify the costs, benefits, and risks associated with alternative deployment scenarios for HEPA filtration systems. As a result, USPS has no assurance that investing in HEPA air filtration systems will provide adequate risk reduction to its employees. Given the magnitude of this investment and its impact on maintaining the mail processing equipment, as well as potential effects on its operations and proposed biohazard detection capabilities, it is important that the USPS show the specific performance gains attributable to this initiative before full deployment is pursued. To ensure that USPS is making a sound investment, we recommend that the Postmaster General direct the Vice President of Engineering to complete the following actions before determining whether to proceed with a large-scale rollout of air filtration systems at 300 USPS P&DC/Fs: Perform tests to determine (1) the HEPA air filtration system's ability to trap released hazards and other contaminants and (2) what level of hazards or contaminants could be released into the mail processing environment as a result of the air filtration system's design. Perform integrated tests with HEPA air filtration system and detection technologies being considered to determine whether the "dead zone" will impede the detection technology's performance. Identify the effects of the HEPA filtration system's energy consumption on mail processing equipment performance and what could be done to mitigate this risk. Complete an investment analysis to prioritize USPS's plans to spend approximately $300 million to deploy the HEPA air filtration systems nationwide. Analyze alternative solutions, including whether maintenance costs can be reduced by using compressed air for cleaning mail processing equipment after implementing a suitable detection technology. USPS provided comments on a draft of this report in a letter dated August 9, 2002. These comments are summarized below and reproduced in appendix I. In commenting on a draft of our report, USPS shared overall concerns that (1) our report placed too much emphasis on the supposed secondary benefits of the air filtration systems, (2) their cost estimates in its Emergency Preparedness Plan are low, and (3) increased maintenance costs are not anticipated. On the other hand, USPS generally agreed with our recommendations to continue testing the system to confirm its ability to trap anthrax spores and to test for interaction between the air filtration and detection systems. Furthermore, the Service noted that detailed site surveys would be performed at each P&DC/F as part of the deployment planning process to ensure that operation of these systems will not adversely affect the P&DC/F's power supply. USPS also commented that a Decision Analysis Report (DAR) is being prepared that will address both start-up costs to procure and deploy the equipment, as well as recurring costs such as increased electrical usage, maintenance support, spare parts, and training costs for HEPA air filtration systems. In its comments, the Service stated that it plans to submit a DAR that must be reviewed and approved by senior management and voted on by USPS's Board of Governors prior to deployment. Finally, USPS agreed with our recommendation that it review the prohibition on using compressed air to clean mail processing equipment after effective biohazard detection systems are in place. With regard to the concern about too much emphasis on secondary benefits, USPS noted that the main purpose of adding air filtration systems to the mail processing equipment is to minimize the potential exposure risk to postal employees and customers in the event of another anthrax attack. Further, the Service stated that it does not expect the air filtration systems to eliminate the need for daily cleaning of the mail processing equipment, and that no cost reductions for reducing nuisance dust were used to justify the deployment of these systems. We modified our report to address USPS's concern that the draft report placed too much emphasis on the secondary effects of air filtration systems. The reason we also focused on the HEPA air filtration system's ability to clean mail processing equipment is because an additional maintenance cost of up to $46 million annually could result from installing these HEPA air filtration systems and changing maintenance practices from compressed air blowing to hand vacuuming. Furthermore, USPS's Emergency Preparedness Plan discusses the HEPA air filtration system's ability to clean equipment and also states that such designs for reducing nuisance dust were under way prior to the anthrax attacks. USPS's comments additionally stated that the cost for deploying HEPA air filtration systems nationwide was based on the best information available at the time. The Service anticipates that as it moves further into testing and manufacturing, it may run into unanticipated complications that will require revisions to the cost estimates. We agree that unanticipated complications may arise and, as a result, additional funding may be required to reengineer and resolve these issues, which will most likely increase the cost to develop, deploy, and maintain the HEPA air filtration systems. Furthermore, we are concerned that the costs are understated due to the potential for increased operational costs to power the equipment. This potentially could add up to $42 million annually. The Service also had concerns relating to our finding on increased maintenance costs. The comments stated that USPS has not seen any increase in the number of machine repairs and parts replacements that were required because of dust buildup in bearings and other components and, therefore, does not foresee any increased maintenance costs. Our audit work and evidence provided to us by USPS engineers shows that bearing replacement rates have changed in the last 6 months. USPS may need to conduct more studies and analysis before it will know for sure whether the cost of the new maintenance procedures is higher or lower. With regard to USPS's concurrence with our other recommendations, these planned actions are the appropriate steps to take. USPS plans to conduct additional testing at the Dulles P&DC/F to determine the system's effectiveness in capturing biohazards and to determine the amount of biohazards that might be released into the mail processing environment. Testing in an P&DC/F environment with particles in the 2 to 6 micron range can be used by the USPS to confirm that the system operates as designed and will provide the USPS with objective data to make appropriate modifications, if necessary, to improve the design. Finally, once the additional testing is completed, USPS plans to complete the DAR for the HEPA air filtration system and present it for management review. This should ensure that USPS management has accurate and complete information on the capabilities and cost of the air filtration system prior to making a decision on nationwide implementation. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will provide copies to interested congressional committees, the Postmaster General, and Chief Executive Officer of USPS. 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 any questions on matters discussed in this report, please contact me at (202) 512-6412 or Madhav Panwar, Director, at (202) 512-6228. We can also be reached by E-mail at [email protected] and [email protected], respectively. Individuals making key contributions to this report were Karen A. Richey, Yvette R. Banks, Teresa Anderson, Teea Kim, and Sushil Sharma.

Following the anthrax attacks of October 2001, the Unites States Postal Service (USPS) has started to look at various technologies that could be implemented in the event of another bioterror attack. The high-efficiency particulate air (HEPA) filtration system is being used as a prototype at two facilities and is planned for implementation throughout the country. HEPA filtering technology is the state-of-the-art technology for the removal of particulate biohazards and other particles of micron-sized range. USPS has not adequately tested the HEPA filtration system to confirm that it will meet its intended purpose of trapping anthrax spores and its secondary purpose of cleaning the mail processing equipment. USPS's testing has not shown conclusively (1) the HEPA filtration system's ability to trap released hazards and other contaminants, and (2) what level of hazards or contaminants could be released into the mail processing environment as a result of the air filtration system's design. Furthermore, USPS has not verified through testing that the air filtration system will not interfere with the air sampling and detection equipment. Even though HEPA filtration systems could reduce the risk of exposure to biohazards, they may negate the benefits of other technologies being considered by USPS to protect its employees and customers in the event of another anthrax attack. Finally, the design and installation of the HEPA filtration system requires custom modification to USPS equipment nationwide and will likely cost more than USPS projected in its Emergency Preparedness Plan.

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

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

DHS Acquisition Management Directive 102-01 (MD 102) and an accompanying instruction manual establish the department's policies and processes for managing major acquisition programs. While DHS has had an acquisition management policy in place since October 2004, the department issued the initial version of MD 102 in 2008.leaders in the department are responsible for acquisition management functions, including managing the resources needed to fund major programs. DHS's Chief Acquisition Officer--currently the Under Secretary for Management (USM)--is responsible for the management and oversight of the department's acquisition policies and procedures. The Acquisition Decision Authority is responsible for approving the movement of programs through the acquisition life cycle at key milestone events. The USM or Deputy Secretary serve as the decision authority for programs with life cycle cost estimates of $1 billion or greater, while the cognizant component acquisition executive may serve as the decision authority for a program with a lower cost estimate. The DHS Acquisition Review Board (ARB) supports the Acquisition Decision Authority by reviewing major acquisition programs for proper management, oversight, accountability, and alignment with the department's strategic functions at the key acquisition milestones and other meetings as needed. The ARB is supported by the Office of Program Accountability and Risk Management (PARM), which reports to the USM and is responsible for DHS's overall acquisition governance process. In March 2012, PARM issued its first Quarterly Program Accountability Report (QPAR), which provided an independent evaluation of major programs' health and risks. Since that time, PARM has issued two additional QPARs, most recently in July 2013, and plans to issue a fourth by the end of September 2013. PARM also prepares the Comprehensive Acquisition Status Reports, which are to be submitted to the appropriations committees with the President's budget proposal and updated quarterly. The Office of Program Analysis and Evaluation (PA&E), within the Office of the Chief Financial Officer, is responsible for advising the USM, among others, on resource allocation issues. PA&E also oversees the development of the Future Years Homeland Security Program (FYHSP). The FYHSP is DHS's 5-year funding plan for programs approved by the Secretary that are to support the department's strategic plan. DHS acquisition policy reflects many key program management practices intended to mitigate the risks of cost growth and schedule slips. However, we previously found that the department did not implement the policy consistently. Officials explained that DHS's culture emphasized the need to rapidly execute missions more than sound acquisition management practices, and we found that senior leaders did not bring to bear the critical knowledge needed to accurately track program performance. Most notably, we found that most programs lacked approved acquisition program baselines, which are critical management tools that establish how systems will perform, when they will be delivered, and what they will cost. We also reported that most of the department's major programs were at risk of cost growth and schedule slips as a result. In our past work examining DOD weapon acquisition issues and best practices for product development, we have found that leading commercial firms pursue an acquisition approach that is anchored in knowledge, whereby high levels of product knowledge are demonstrated by critical points in the acquisition process. While DOD's major acquisitions have unique aspects, our large body of work in this area has established knowledge-based principles that can be applied to government agencies and can lead to more effective use of taxpayer dollars. A knowledge-based approach to capability development allows developers to be reasonably certain, at critical points in the acquisition life cycle, that their products are likely to meet established cost, schedule, and performance objectives. This knowledge provides them with information needed to make sound investment decisions. Over the past several years, our work has emphasized the importance of obtaining key knowledge at critical points in major system acquisitions and, based on this work, we have identified eight key practice areas for program management. These key practice areas are summarized in table 1, along with our assessment of DHS's acquisition policy. As indicated in table 1, DHS acquisition policy establishes several key program-management practices through document requirements. MD 102 requires that major acquisition programs provide the ARB documents demonstrating the critical knowledge needed to support effective decision making before progressing through the acquisition life cycle. Figure 1 identifies acquisition documents that must be approved at the department level and their corresponding key practice areas. DHS acquisition policy has required these documents since November 2008, but in September 2012, we reported that the department generally had not implemented this policy as intended, and had not adhered to key program management practices. For example, we reported that DHS had only approved 4 of 66 major programs' required documents in accordance with the policy. See figure 2. In September 2012, we reported that DHS leadership had, since 2008, formally reviewed 49 of the 71 major programs for which officials had responded to our survey. Of those 49 programs, DHS permitted 43 programs to proceed with acquisition activities without verifying the programs had developed the knowledge required under MD 102. Additionally, we reported that most of DHS's major acquisition programs lacked approved acquisition program baselines, as required. These baselines are critical tools for managing acquisition programs, as they are the agreement between program-, component-, and department-level officials, establishing how systems will perform, when they will be Officials from half of the eight delivered, and what they will cost.components' acquisition offices we spoke with, as well as PARM officials, noted that DHS's culture had emphasized the need to rapidly execute missions more than sound acquisition management practices. PARM officials explained that, in certain instances, programs were not capable of documenting knowledge, while in others, PARM lacked the capacity to validate that the documented knowledge was adequate. As a result, we reported that senior leaders lacked the critical knowledge needed to accurately track program performance, and that most of the department's major programs were at risk of cost growth and schedule slips. We also reported that DHS's lack of reliable performance data not only hindered its internal acquisition management efforts, but also limited congressional oversight. We made five recommendations to the Secretary of Homeland Security at that time, identifying specific actions DHS should take to mitigate the risk of poor acquisition outcomes and strengthen the department's investment management activities. DHS concurred with all five recommendations, and is taking steps to address them, most notably through policy updates. Since that time, we have continued to assess DHS's acquisition management activities and the reliability of the department's performance data. We currently have a review underway for this subcommittee assessing the extent to which DHS is executing effective executive oversight and governance (including the quality of the data used) of a major effort to modernize an information technology system, TECS. TECS is a major border enforcement system used for preventing terrorism, providing border security and law enforcement information about people who are inadmissible or may pose a threat to the security of the United States. We are (1) determining the status of the modernization effort, including what has been deployed and implemented to date, as well as the extent to which the modernization is meeting its cost and schedule commitments, including the quality of schedule estimates; and (2) assessing requirements management and risk management practices. We plan to issue our report in early November. According to DHS officials, its efforts to implement the department's acquisition policy were complicated by the large number of programs initiated before the department was created, including 11 programs that PARM officials told us in 2012 had been fielded and were in the sustainment phase when MD 102 was signed.work, we found that, in May 2013, the USM waived the acquisition documentation requirements for 42 major acquisition programs that he identified as having been already fielded for operational use when MD 102 was issued in 2008. In a memo implementing the waiver, the USM explained that it would be cost prohibitive and inefficient to recreate documentation for previous acquisition phases. However, he stated that the programs will continue to be monitored, and that they must comply with MD 102 if any action is taken that materially impacts the scope of the current program, such as a major modernization or new acquisition. We plan to obtain more information on this decision and its effect on the department's management of its major acquisitions. In September 2012, we reported that most of DHS's major acquisition programs cost more than expected, took longer to deploy than planned, or delivered less capability than promised. We reported that these outcomes were largely the result of DHS's lack of adherence to key knowledge-based program management practices. As part of our ongoing work, we analyzed a recent PARM assessment that suggests many of the department's major acquisition programs are continuing to struggle. In its July 2013 quarterly program assessment, PARM reported that it had assessed 112 major acquisition programs. PARM reported that 37 percent of the programs experienced no cost variance at the end of fiscal year 2012, but it also reported that a large percentage of the programs were experiencing cost or schedule variances at that time. See table 2. However, as we reported in September 2012, DHS acquisition programs generally did not have the reliable cost estimates and realistic schedules needed to accurately assess program performance. We will continue to track DHS's efforts to improve the quality of its program assessments moving forward. We have previously reported that cost growth and schedule slips at the individual program level complicated DHS's efforts to manage its investment portfolio as a whole. When programs encountered setbacks, the department often redirected funding to troubled programs at the expense of others, which in turn were more likely to struggle. DHS's Chief Financial Officer recently issued a memo stating that DHS faced a 30 percent gap between funding requirements for major acquisition programs and available resources. DHS has efforts underway to develop a more disciplined and strategic portfolio management approach, but the department has not yet developed key portfolio management policies and processes that could help the department address its affordability issues, and DHS's primary portfolio management initiative may not be fully implemented for several years. In September 2012, we noted that DHS's acquisition portfolio may not be affordable. That is, the department may have to pay more than expected for less capability than promised, and this could ultimately hinder DHS's day-to-day operations.DHS's Chief Financial Officer issued an internal memo in December 2012, shortly after our report was issued, stating that the aggregate 5- year funding requirements for major acquisitions would likely exceed available resources by approximately 30 percent. This acknowledgment was a positive step toward addressing the department's challenges, in that it clearly identified the need to improve the affordability of the department's major acquisition portfolio. Additionally, the Chief Financial Officer has required component senior financial officers to certify that they have reviewed and validated all current-, prior-, and future-year funding information presented in ARB materials, and ensure it is consistent with the FYHSP. Additionally, through our ongoing work, PA&E officials told us that the magnitude of the actual funding gap may be even greater than suggested because only a small portion of the cost estimates that informed the Chief Financial Officer's analysis had been approved at the department level, and expected costs may increase as DHS improves the quality of the estimates. This is a concern we share. While holding components accountable is important, without validated and department- approved documents--such as acquisition program baselines and life cycle cost estimates--efforts to fully understand and address the department's overall funding gap will be hindered. In September 2012, we reported that DHS largely made investment decisions on a program-by-program and component-by-component basis. DHS did not have a process to systematically prioritize its major investments to ensure that the department's acquisition portfolio was consistent with anticipated resource constraints. In our work at DOD, we have found this approach hinders efforts to achieve a balanced mix of programs that are affordable and feasible and that provide the greatest return on investment. In our past work focused on improving weapon system acquisitions, we found that successful commercial companies use a disciplined and integrated approach to prioritize needs and allocate resources. As a result, they can avoid pursuing more projects than their resources can support, and better optimize the return on their investment. This approach, known as portfolio management, requires companies to view each of their investments as contributing to a collective whole, rather than as independent and unrelated. With an enterprise perspective, companies can effectively (1) identify and prioritize opportunities, and (2) allocate available resources to support the highest priority--or most promising--investment opportunities. Over the past several years, we have examined the practices that private and public sector entities use to achieve a balanced mix of new projects, and based on this work, we have identified key practice areas for portfolio management. One I would like to highlight today is that investments should be ranked and selected using a disciplined process to assess the costs, benefits, and risks of alternative products to ensure transparency and comparability across alternatives. In this regard, DHS established the Joint Requirements Council (JRC) in 2003, to identify crosscutting opportunities and common requirements among DHS components and help determine how DHS should use its resources. But the JRC stopped meeting in 2006 after the chair was assigned to other duties within the department. In 2008, we recommended that it be reinstated, or that DHS establish another joint requirements oversight board, and DHS officials recognized that strengthening the JRC was a top priority. Through our ongoing work, we have identified that DHS recently piloted a Capabilities and Requirements Council (CRC) to serve in a similar role as the JRC. The CRC began reviewing a portfolio of cyber capabilities in the summer of 2013. The pilot is intended to inform the department's fiscal year 2015 budget request; therefore, it is too soon to assess the outcomes of this new oversight body. It is also unknown at this time how DHS will sustain the CRC over time or what its outcomes will be. In addition to private and public sector practices, which we discuss above, our prior work at DOD has identified an oversight body similar to the CRC's expected function. The Joint Requirements Oversight Council (JROC) has a number of statutory responsibilities related to the identification, validation, and prioritization of joint military requirements. This body, which has been required by law since 1997, and its supporting organizations review requirements documents several times per year, prior to major defense acquisition programs' key milestones. Through these reviews, proposed acquisition programs are scrutinized prior to their initiation and before decisions are made to begin production. The JROC also takes measures to help ensure the programs are affordable. In 2011, we reported that the JROC required the military services to show that their proposed programs were fully funded before it validated requirements for five of the seven proposed programs we reviewed. The two other proposed programs were funded at more than 97 and 99 percent, respectively. This full funding requirement is similar to the funding certification requirement DHS's CFO established in December 2012. While some DOD acquisition programs continue to experience cost growth and schedule delays, as identified in our annual report on weapon systems acquisitions, the department does have in place mechanisms that DHS could adopt to improve the affordability of its acquisition portfolio, and put its acquisition programs in a better position to achieve successful outcomes. In September 2012, we reported that the CRC is one of several new councils and offices that DHS would establish as part of its Integrated Investment Life Cycle Model (IILCM), which is intended to improve portfolio management at DHS through the identification of priorities and capability gaps. This model, which the department proposed in January 2011, would provide a framework for information to flow between councils and offices responsible for strategic direction, requirements development, resource allocation, and program governance. DHS explained that the IILCM would ensure that mission needs drive investment decisions. While the IILCM, as envisioned, could improve DHS management decisions by better linking missions to acquisition outcomes, our ongoing work indicates that its full implementation may be several years away. From January 2011 to June 2012, the schedule for initiating IILCM operations slipped by a year, and in May 2013, a DHS official responsible for the IILCM told us he was unsure when the IILCM would be fully operational. We also found that some component acquisition officials are not aware of how the IILCM would apply to their own acquisition portfolios. Some of the officials we interviewed told us that DHS leadership needs to conduct more outreach and training about the IILCM and how it is expected to work, and a DHS headquarters official told us that the department is in the process of implementing an initial department-wide IILCM communications strategy. We will continue to assess the department's progress in implementing what it views as a very important management model. Chairman Duncan, Ranking Member Barber, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Michele Mackin 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. GAO staff who made key contributions to this testimony include Katherine Trimble (Assistant Director), Nate Tranquilli, Steve Marchesani, Mara McMillen, and Sylvia Schatz. 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 highlighted DHS acquisition management issues on its high-risk list, and over the past several years, GAO's work has identified significant shortcomings in the department's ability to manage an expanding portfolio of major acquisitions. It is important for DHS to address these shortcomings because the department invests extensively in acquisition programs to help it execute its many critical missions. DHS is acquiring systems to help secure the border, increase marine safety, enhance cyber security, and execute a wide variety of other operations. In 2011, DHS reported to Congress that it planned to ultimately invest $167 billion in its major acquisition programs. In fiscal year 2013 alone, DHS reported it was investing more than $9.6 billion. This statement discusses (1) DHS's acquisition policy and how it has been implemented; and (2) DHS's mechanisms for managing emerging affordability issues. The statement is based on GAO's prior work on DHS acquisition management and leading commercial companies' knowledge-based approach to managing their large investments. It also reflects observations from ongoing work for this subcommittee. For that work, GAO is reviewing key documentation, and interviewing headquarters and component level acquisition and financial management officials. GAO has previously established that the Department of Homeland Security's (DHS) acquisition policy reflects many sound program management practices intended to mitigate the risks of cost growth and schedule slips. The policy largely reflects the knowledge-based approach used by leading commercial firms, which do not pursue major investments without demonstrating, at critical milestones, that their products are likely to meet cost, schedule, and performance objectives. DHS policy requires that important acquisition documents be in place and approved before programs are executed. For example, one key document is an acquisition program baseline, which outlines a program's expected cost, schedule, and the capabilities to be delivered to the end user. However, in September 2012, GAO found that the department did not implement the policy consistently, and that only 4 of 66 programs had all of the required documents approved in accordance with DHS's policy. GAO made five recommendations, which DHS concurred with, identifying actions DHS should take to mitigate the risk of poor acquisition outcomes and strengthen management activities. Further, GAO reported that the lack of reliable performance data hindered DHS and congressional oversight of the department's major programs. Officials explained that DHS's culture had emphasized the need to rapidly execute missions more than sound acquisition management practices. GAO also reported that most of the department's major programs cost more than expected, took longer to deploy than planned, or delivered less capability than promised. DHS has taken steps to improve acquisition management, but as part of its ongoing work, GAO found that DHS recently waived documentation requirements for 42 programs fielded for operational use since 2008. DHS explained it would be cost prohibitive and inefficient to recreate documentation for previous acquisition phases. GAO plans to obtain more information on this decision and its effect on the management of DHS's major acquisitions. DHS's July 2013 status assessment indicated that, as of the end of fiscal year 2012, many major programs still face cost and schedule shortfalls. DHS expects to provide another update in the near future. In December 2012, DHS's Chief Financial Officer reported that the department faced a 30 percent gap between expected funding requirements for major acquisition programs and available resources. DHS has efforts underway to develop a more disciplined and strategic approach to managing its portfolio of major investments, but the department has not yet developed certain policies and processes that could help address its affordability issues. In September 2012, GAO reported that DHS largely made investment decisions on a program-by-program and component-by-component basis and did not have a process to systematically prioritize its major investments. In GAO's work at the Department of Defense, it has found this approach hinders efforts to achieve a balanced mix of programs that are affordable and feasible and that provide the greatest return on investment. DHS's proposed Integrated Investment Life Cycle Model (IILCM) is intended to improve portfolio management by ensuring mission needs drive investment decisions. For example, a high-level oversight body would identify potential trade-offs among DHS's component agencies. GAO has recommended such an oversight body for several years. Full implementation of the IILCM may be several years away. GAO will continue to assess the department's progress in its ongoing work. GAO is not making any new recommendations in this statement. It has made numerous recommendations in its prior work to strengthen acquisition management, and DHS is taking steps to address them.

As the principal component of the National Airspace System, FAA's air traffic control system must operate continuously--24 hours a day, 365 days a year. Under federal law, FAA has the primary responsibility for operating a common air traffic control system--a vast network of radars; automated data processing, navigation, and communications equipment; and air traffic control facilities. FAA meets this responsibility by providing such services as controlling takeoffs and landings and managing the flow of air traffic between airports. The users of FAA's services include the military, other government users, private pilots, and commercial aircraft operators. Projects in FAA's modernization program are primarily organized around seven functional areas--automation, communications, facilities, navigation and landing, surveillance, weather, and mission support. FAA expects to spend approximately $41 billion for its modernization program through 2004. Of this amount, Congress appropriated over $27 billion for fiscal years 1982 through 1999. The agency expects that approximately $13 billion will be provided for fiscal years 2000 through 2004. See figure 1 for an illustration of how FAA's appropriation was divided among the seven functional areas. Figure 2 illustrates how FAA's appropriation was divided by project status--completed projects, ongoing projects, canceled/restructured projects, and personnel-related expenses. Over the past 17 years, FAA's modernization projects have experienced substantial cost overruns, lengthy schedule delays, and significant performance shortfalls. Because of the size, complexity, cost, and problem-plagued past of FAA's modernization program, we have designated it a high-risk information technology investment since 1995. FAA has encountered difficulty in acquiring new systems to help achieve its goals of replacing the air traffic control system's aging infrastructure and of meeting the projected increase in air traffic. In the 1980s and early 1990s, the agency did not follow the structured approach outlined in federal acquisition guidance. Even after the agency revised its approach in 1991--to address past shortcomings in the design and implementation of the approach--problems persisted with FAA's air traffic control modernization program. In 1996, FAA began a new approach that emphasized, once again, the need for discipline in selecting, monitoring, and evaluating modernization projects. Despite this new approach, problems persist with FAA's ability to effectively implement and manage its modernization program. We have identified a number of root causes that have contributed to modernization problems. These causes are related to the lack of a disciplined acquisition management approach. In the 1980s and early 1990s, we reported that problems with modernization projects occurred largely because FAA did not follow the guidance outlined in Office of Management and Budget Circular A-109, which is the principal guidance for acquiring major systems in the federal government. Circular A-109 calls for following a disciplined, five-phased approach to acquisition in order to minimize problems, such as cost increases and schedule delays. The five phases include (1) determining mission needs; (2) identifying and exploring alternative design concepts; (3) demonstrating alternative design concepts, including prototype testing, and evaluation; (4) initiating full-scale development and limited production, including independent testing; and (5) full production. Before moving from one phase to the next, the guidance calls for a key decision point, at which time agency heads are to evaluate the cost, schedule, and performance parameters of major projects. During these reviews, any management concerns about these parameters must be resolved before the acquisition is allowed to proceed. From the inception of the air traffic control modernization program until 1991, FAA did not follow Circular A-109 guidance. The agency believed that it could deliver and install new systems more quickly by combining Circular A-109 phases. For example, FAA merged the first three phases into one, under which the agency performed some prototype testing but ignored mission need and alternative analyses. However, FAA's failure to follow Circular A-109 resulted in delays in many of the major systems in the modernization effort, most notably FAA's centerpiece project, known as the Advanced Automation System (AAS). For example, FAA contracted for the production of a key component of this project before it had fully defined requirements for this component. Between 1983 and 1991, the lack of clarity and decisiveness in resolving requirements contributed to costs for the project increasing from $2.6 billion to $4.5 billion and the schedule slipping by 7 years. In February 1991, FAA issued revised guidance on major acquisitions, which put FAA policy in compliance with Circular A-109. Among the changes incorporated in this guidance was a requirement that new projects have a mission needs statement approved before being included in FAA's budget. The guidance also required that alternatives be identified and evaluated and that operational testing be conducted and reviewed by an independent test group within FAA before production decisions were made. Moreover, FAA required that program managers submit a risk management plan, including measures to reduce risk, that FAA senior managers must approve before an acquisition could proceed to the next phase. Program managers were also required to develop acquisition program baselines (boundaries) for the most costly major acquisitions--usually those exceeding $150 million. These baseline documents were intended to promote stability and control costs by establishing quantified targets for key performance, cost, and schedule parameters that are critical to the success of the acquisition. Although FAA revised its acquisition policies in 1991 to instill more discipline into the acquisition management process, shortcomings in both design and implementation limited the process's effectiveness. For example, the agency's acquisition orders and guidance still did not require an analysis of current system performance as the starting point in the acquisition process. Instead, under the order, the starting point for the acquisition process was the mission needs statement. The order did not include any procedures or guidance for conducting a mission analysis before generating mission needs statements and made little mention of what types of data analyses were expected. As a result, the agency did not document that its current assets could no longer fulfil its needs and did not have any assurance that it was not wasting scarce resources in developing systems that were not the most appropriate and cost-effective. Similarly, senior acquisition officials did not thoroughly review project justifications to ensure that they were adequately supported. Other conditions that contributed to this lack of discipline in FAA's acquisition process during this period included the frequent turnover of FAA senior managers. For example, between 1982 and 1995, the average tenure of the FAA Administrator was less than 2 years. This lack of continuity in personnel allowed the agency's bureaucracy to focus on short-term improvements, avoid accountability, and resist fundamental changes. FAA continued to experience problems in the mid-1990s with its major acquisitions. For example, in 1994, FAA restructured AAS after the estimated cost to deploy the system had tripled, capabilities were significantly less than promised, and delays were expected to run nearly a decade. Additionally, the costs of the Voice Switching and Control System increased by 400 percent, from about $260 million to $1.4 billion, and the project's planned date for implementation slipped by 6 years. Concerned about the continuing slow pace of the air traffic control modernization program--which led at times to FAA's having to implement costly interim projects to sustain the ATC system--FAA sought from the Congress exemptions from many federal procurement rules. The agency asserted that these rules contributed to its acquisition problems and that exemptions would allow it to reduce the time and cost to deliver new products and services. In response, Congress exempted FAA in 1995 from many federal procurement rules, and the agency implemented its Acquisition Management System (AMS) on April 1, 1996. AMS is intended to provide high-level acquisition policy and guidance and to establish rigorous management practices for selecting and monitoring investments. To date, FAA has established a structure that is generally sound and could provide the discipline needed to help ensure that ATC modernization projects are implemented in a cost-effective manner. However, our past and recent work have shown that FAA has fallen short when it comes to implementing practices to build discipline into acquisition management. Specifically, our preliminary findings on FAA's present approach indicate that the agency has not fully implemented an effective process for monitoring the cost, schedule, benefits, performance, and risk of its key projects throughout their life-cycle. Additionally, FAA lacks an evaluation process for assessing outcomes after projects have been developed to help improve the selection and monitoring of future projects. As we reported in 1995, exempting FAA from procurement rules could result in a somewhat more expeditious acquisition process, but those looking for dramatic, immediate changes in the modernization program would likely be disappointed. Our work showed then, and continues to show today, that the schedule, cost, and performance problems are caused by factors other than procurement rules. We have reported on several root causes of FAA's past modernization problems. First, FAA lacks reliable cost estimating practices and cost accounting data, which leaves it at risk of making ill-informed decisions on critical and costly air traffic control systems and limits the ability of congressional decisionmakers to make trade-offs among FAA programs. Second, FAA attempted to modernize the National Airspace System without a complete systems architecture, or blueprint, to guide development and evolution and did not have the management structure needed to enforce its architecture once completed. The result has been unnecessarily higher spending to buy, integrate, and maintain hardware and software. Third, FAA processes for acquiring software for air traffic control systems are ad hoc, sometimes chaotic, and not repeatable across projects. As a result, FAA is at great risk of acquiring software that does not perform as intended and is not delivered on time and within budget. Finally, FAA's organizational culture--the values, beliefs, attitudes, and expectations shared by an organization's members that affect their behavior and the behavior of the whole organization--is an underlying cause of acquisition problems.When employees act in ways that do not reflect a strong commitment to mission focus, accountability, coordination, and adaptability, acquisitions can be impaired. We made recommendations in these reports to correct these root causes. FAA has taken a number of steps, in addition to implementing its Acquisition Management System, to overcome past problems with modernization efforts. However, most of these initiatives are just getting under way, and it is too soon to tell how successful they will be. Additionally, the agency has now completed work on about 90 modernization projects. In some cases, the costs were higher and the development longer than expected. The FAA Administrator took a notable step in November 1997 when she began an outreach effort to the aviation community to build consensus on and seek commitment to the future direction of the agency's modernization program. As a result of this outreach effort, FAA and the aviation community agreed to (1) use an incremental approach to modernizing the National Airspace System, referred to as the "build a little, test a little" approach; (2) revise its blueprint for modernizing this system; and (3) deploy certain technologies earlier than FAA had planned because the aviation industry believed that these technologies could provide immediate benefits. These practices differ from those of the past in which FAA made unilateral decisions about air traffic control modernization and tried to deploy large, complex projects all at once, known as the "big bang" approach. Furthermore, FAA has actions under way to address the root causes we have identified in the past with its acquisitions. First, FAA has begun to develop a cost estimating process for its projects that will satisfy recognized estimating standards; draft guidance on reporting project cost estimates as ranges rather than precise point estimates; and develop a cost accounting system. Specifically, FAA plans to complete a cost estimating handbook, which should help improve the agency's approach to estimating project costs. However, FAA has not established a firm date for issuing the handbook or for completing other tasks related to cost estimating. As for cost accounting, FAA had hoped to have a system operating by October 1998, but officials underestimated the complexity of developing the system and found that their implementation milestones were unrealistic. The agency now projects that the system will be fully operational by April 2001. Second, FAA has begun to develop a complete systems architecture for its modernization program and estimated in May 1998 that it would take 18 to 24 months to complete the development. Third, FAA has initiated efforts to improve its software acquisition processes. However, these efforts have not been implemented agencywide. In this connection, the agency hired a Chief Information Officer in February 1999. It is expected that FAA will establish a management structure similar to the department-level Chief Information Officers provision of the Clinger-Cohen Act of 1996, as we recommended. If so, the Chief Information Officer organization would be responsible for activities related to information technology, including software acquisition and systems architecture. Finally, FAA has outlined its overall structure for changing its organizational culture and described its ongoing actions to influence organizational culture. In this area, FAA has a pilot program under way for a new compensation program that it plans to implement agencywide. In recent years, FAA has claimed some success with delivering systems under its modernization program. While the agency has completed some modernization projects since 1982, many of the major projects, especially in the automation area, are years behind schedule. The agency has spent $6.3 billion of the over $27 billion appropriated between 1982 and 1999 on 93 completed projects. We note that although FAA completed several of its major projects, they generally cost more than anticipated and were delivered behind schedule. For example, FAA has declared the Display System Replacement a success because it deployed operational equipment to the first of 20 sites in December 1998. However, FAA's 1983 modernization plan called for a similar system under the Advanced Automation System to be deployed in 1990. Likewise, FAA is now completing the deployment of other key systems first identified in its 1983 modernization plan. For example, FAA expects to complete the deployment later this year of two projects--Airport Surface Detection Equipment and Air Route Surveillance Radar--which were originally scheduled to be completed in 1990 and 1995, respectively. Of FAA's key modernization projects, the agency has successfully deployed two large-scale projects over the past 17 years--both involving the HOST computer system. FAA completed the implementation of the HOST computer in 1988 and is currently replacing portions of this system. Both of these projects involve replacing hardware while utilizing existing system software. On a related issue, our work on the Year 2000 problem has shown that FAA has made tremendous progress over the past year, but much remains to be done to complete the validation and implementation of FAA's mission-critical systems. In addition to these systems, the agency is concerned that system failures by external organizations, such as airports and foreign air traffic control systems could seriously affect FAA's ability to provide aviation services. For example, we recently reported that 26 of the largest 50 airports in the United States are not planning to be Year 2000 compliant by June 30, 1999. Because of the risk of anticipated and unanticipated failures--whether from internal systems or from reliance on external partners and suppliers--a comprehensive business continuity and contingency plan is crucial to continuing core operations. FAA drafted its Year 2000 Business Continuity and Contingency Plan in December 1998 and is currently reviewing it. The agency plans to release four more iterations of this plan by the end of the year, with the next version due out in April 1999. We and others have expressed some concerns with FAA's draft plans, which the agency is working to address. In conclusion Mr. Chairman, FAA has fallen short over the past two decades in implementing a disciplined management acquisition approach. While the agency has many of the elements in place to improve its management of the modernization program, implementation is key to the agency's future success in this area. Among the positive steps that FAA has taken include actions to bring stability to the agency's senior management ranks, as evidenced by the Administrator's commitment to serve a full 5-year term. Moreover, she has filled many key management positions that had been vacant and has also begun to provide senior managers with incentives to work together toward agency goals. For the most part, FAA will need to sustain its commitment to fully implementing the various initiatives underway. As a first priority, it will be important for the agency to continue all of its efforts to help ensure that it can fulfill its mission when the year 2000 arrives. As for the longer-term, FAA's continued collaboration with the aviation community will allow the agency to develop future plans for air traffic control modernization, including establishing realistic and clear goals and measures for tracking progress. Similarly, fully implementing solutions to the root causes of modernization problems and strengthening FAA's control over modernization investments will better position the agency to consistently deliver modernization projects within established cost, schedule, and performance goals. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO discussed the Federal Aviation Administration's (FAA) Air Traffic Control Modernization Program, focusing on: (1) the causes of the problems that have plagued FAA's modernization program for nearly two decades; (2) recent agency efforts to overcome these problems; and (3) the readiness of FAA and others to meet year 2000 requirements. GAO noted that: (1) from the inception of the air traffic control modernization program to today, FAA has not consistently followed a disciplined management approach for acquiring new systems; (2) in the 1980s and early 1990s, FAA did not follow the phased approach of federal acquisition guidance designed to help mitigate the cost, schedule, and performance risk associated with the development of major systems; (3) FAA believed it could develop and install new systems more quickly by combining several of the five phases outlined in this guidance; (4) however, as a result of not following this disciplined, phased approach, FAA often encountered major difficulties such as those associated with developing the Advanced Automation System; (5) in 1995, Congress exempted FAA from many federal procurement rules and regulations; (6) in April 1996, FAA implemented an acquisition management system, which emphasized the need for a disciplined approach to acquisition management; (7) however, GAO found continuing weaknesses in key areas such as how FAA monitors the status of projects throughout their life cycles; (8) FAA has taken a number of steps to overcome problems with past modernization efforts; (9) FAA has moved away from its practice of taking on large, complex projects all at once and is now acquiring new systems by using a more incremental approach; (10) in addition, FAA is no longer making unilateral decisions about air traffic control modernization; (11) instead, it has been working actively with the aviation community to make decisions more collaboratively; (12) furthermore, FAA has begun to address some of the root causes of its modernization problems by implementing processes to help: (a) improve its ability to estimate and account for project costs; (b) develop a complete architecture for modernizing the National Airspace System; (c) reduce the risks associated with software development; and (d) reform the organization's culture, including providing incentives to make managers more accountable; (13) while FAA has delivered some of its major systems, it must be recognized that many of these projects encountered difficulties in meeting their original cost and schedule goals, and the baselines were subsequently revised; and (14) FAA has taken critical steps over the past year to address problems associated with the date change to the year 2000, but much work remains to be done to help ensure that FAA and other key players such as airports have made needed fixes and have contingency plans in place so that operations can continue should problems arise.

The Department of Justice established the ODP in 1998 within the Office of Justice Programs to assist state and local first responders in acquiring specialized training and equipment needed to respond to and manage terrorist incidents involving weapons of mass destruction. ODP, which was transferred to DHS upon its creation in March 2003, has been a principal source of domestic preparedness grant funds. These grants are a means of achieving an important goal--enhancing the ability of first responders to prevent, prepare for, respond to, and recover from terrorist incidents with well-planned and well-coordinated efforts that involve police, fire, emergency medical, public health, and other personnel from multiple jurisdictions. In March 2004, the Secretary of Homeland Security consolidated ODP with the Office of State and Local Government Coordination to form the Office of State and Local Government Coordination and Preparedness (SLGCP). In addition, other preparedness grant programs from agencies within DHS were also transferred to SLGCP. SLGCP, which reports directly to the Secretary, was created to provide a one-stop shop for the numerous federal preparedness initiatives applicable to state and local first responders. Within SLGCP, ODP continues to have program management and monitoring responsibilities for the domestic preparedness grants. From fiscal year 2002 through fiscal year 2005, the amount of domestic preparedness grants awarded by ODP increased from about $436 million to about $3.3 billion. The scope of ODP's grant programs expanded as well, from funding only first responder advanced equipment, exercises, and administrative activities in fiscal year 2002 to funding a range of preparedness planning activities, exercises, training, equipment purchases, and related program management and administrative costs in fiscal year 2005. During fiscal years 2002 through 2005, the State Homeland Security Grant Program and Urban Areas Security Initiative program accounted for about 69 percent of total ODP grant funds. Table 1 shows the amounts provided for the domestic preparedness grant programs. For fiscal years 2002 through 2005, ODP awarded approximately $2.1 billion in urban area grant funds to selected urban areas identified by DHS. The amount of individual urban area grants is determined through a combination of factors, including current threat estimates, an assessment of each area's critical assets, and population density. For the same period, ODP awarded approximately $5.1 billion in statewide grant funds to states to enhance domestic preparedness. Under its current funding formula, approximately 40 percent of statewide grant funds are shared equally among states, while the remaining amount is distributed according to state population. Several congressional proposals have been advanced to alter the statewide funding formula to base it more directly on risk considerations. One proposal would largely maintain the portion of funds shared equally by the states but would base the distribution of the remaining funds on a risk- based formula similar to the one currently used for urban area grants. Another proposal from the House Homeland Security Committee would reduce the minimum amount of funding shared equally by states to approximately 14 percent of total funding and establish a board to allocate the remaining funds through an evaluation of threat, vulnerability, and the potential consequences of a terrorist attack. GAO supports a risk-based approach to homeland security. Adoption of a risk management framework can aid in assessing risk by determining which vulnerabilities should be addressed in what ways within available resources. Assessing risk for specific assets or locations is defined by two conditions: (1) probability or likelihood, quantitative or qualitative, that an adverse event would occur, and (2) consequences, the damage resulting from the event, should it occur. Because it is unlikely that sufficient resources will be available to address all risks, it becomes necessary to prioritize both risks and the actions taken to reduce those risks, taking cost into consideration. For example, which actions will have the greatest net potential benefit in reducing one or more risks? Over time, ODP has modified its grant application processes and procedures for awarding grants to states, governing how states distribute funds to local jurisdictions, and facilitating reimbursements for states and localities. To obtain funding, state and urban area grantees must submit applications to ODP and have them approved. In fiscal year 2004, ODP began to streamline the application process. According to ODP, based on feedback from the grantees, and to continue to improve the grant programs, it combined three grant programs into a single grant application solicitation. In fiscal year 2005, the number of combined programs increased to six. ODP stated that the consolidation was done to streamline the grant application process and better coordinate federal, state, and local grant funding distribution and operations. For the statewide grant programs, ODP has allowed the states flexibility in deciding how the grant programs are structured and implemented in their states. In general, states are allowed to determine such things as the following: the formula for distributing grant funds to local jurisdictional units; the definition of what constitutes a local jurisdiction eligible to receive funds, such as a multicounty area; the organization or agency that would be designated to manage the grant program; and whether the state or local jurisdictions would purchase grant-funded items for the local jurisdictions. Urban area grantees, for the most part, have had flexibilities similar to those of the states and could, in coordination with members of the Urban Area Working Group, designate contiguous jurisdictions to receive grant funds. For the first round of the urban area grants in fiscal year 2003, the grants were made directly to the seven urban areas identified as recipients. Starting with the second round of urban area grants in 2003, grants were made to states, which then subgranted the funds to the designated urban areas, but retained responsibility for administering the grant program. The core city and county/counties work with the state administrative agency to define the geographic borders of the urban area and coordinate with the Urban Area Working Group. Once the grant funds are awarded to the states and then subgranted to the local jurisdictions or urban areas, certain legal and procurement requirements have to be met, such as a city council's approval to accept grant awards. Once these requirements are satisfied, states, local jurisdictions, and urban areas can then obligate their funds for first responder equipment, exercises, training, and services. Generally, when a local jurisdiction or urban area directly incurs an expenditure, it submits related procurement documents, such as invoices, to the state. The state then draws down the funds from the Justice Department's Office of Justice Programs. According to this office, funds from the U.S. Treasury are usually deposited with the states' financial institution within 48 hours. The states, in turn, provide the funds to the local jurisdiction or urban area. Since the first announcement of the dramatic increase in first responder grants after the terrorist attacks of September 11, 2001, the speed with which the funding reached localities has been a matter of concern and some criticism. Congress, state and local officials, and others expressed concerns about the time ODP was taking to award grant funds to states and for states to transfer grant funds to local jurisdictions. Beginning in fiscal year 2003, ODP, at congressional direction, demonstrated significant progress in expediting grant awards to states. For the fiscal year 2002 statewide grants, ODP was not required to award funds to states within a specific time frame. During fiscal year 2002, ODP took 123 days to make the statewide grant application available to states and, on average, about 21 days to approve states' applications after receipt. For the second round of fiscal year 2003 statewide grants, however, the appropriations act required that ODP make the grant application available to states within 15 days of enactment of the appropriation and approve or disapprove states' applications within 15 days of receipt. According to ODP data, ODP made the grant application for this round of grants available to states within the required deadline and awarded over 90 percent of the grants within 14 days of receiving the applications. The appropriations act also mandated that states submit grant applications within 30 days of the grant announcement. According to ODP data, all states met the statutory 30-day mandate; in fact, the average number of days from grant announcement to application submission declined from about 81 days in fiscal year 2002 to about 23 days for the second round of fiscal year 2003 statewide grants. The transfer of funds from states to local jurisdictions has also received attention from Congress and ODP. To expedite the transfer of grant funds from the states to local jurisdictions, ODP program guidelines and subsequent appropriations acts imposed additional deadlines on states. For the fiscal year 2002 statewide grants, there were no mandatory deadlines or dates by which states should transfer grant funds to localities. One of the states we visited, for example, took 91 days to transfer these grant funds to a local jurisdiction while another state we visited took 305 days. Beginning with the first round of fiscal year 2003 statewide grants, ODP required in its program guidelines that states transfer grant funds to local jurisdictions within 45 days of the grant award date. Congress subsequently included this requirement in the appropriations act for the second round of fiscal year 2003 statewide grant funds. To ensure compliance, ODP required states to submit a certification form indicating that all awarded grant funds had been transferred within the required 45- day period. States that were unable to meet the 45-day period had to explain the reasons for not transferring the funds and indicate when the funds would be transferred. According to ODP, for the first and second rounds of the fiscal year 2003 grants, respectively, 33 and 31 states certified that the required 45-day period had been met. To further assist states in expediting the transfer of grant funds to local jurisdictions, ODP also modified its requirements for documentation to be submitted as part of the grant application process for fiscal years 2002 and 2003. In fiscal year 2002, ODP required states to submit and have approved by ODP budget detail worksheets and program narratives indicating how the grant funds would be used for equipment, exercises, and administration. If a state failed to submit the required documentation, ODP would award the grant funds, with the special condition that the state could not transfer, expend, or draw down any grant funds until the required documentation was submitted and approved. In fiscal year 2002, ODP imposed special conditions on 37 states for failure to submit the required documentation and removed the condition only after the states submitted the documentation. The time required to remove the special conditions ranged from about 1 month to 21 months. For example, in one state we reviewed, ODP awarded the fiscal year 2002 statewide grant funds and notified the state of the special conditions on September 13, 2002; the special conditions were removed about 6 months later on March 18, 2003, after the state had met those conditions. In fiscal year 2003, however, ODP allowed states to move forward more quickly, by permitting them to transfer grant funds to local jurisdictions before all required grant documents had been submitted. If a state failed to submit the required documentation for the first round of fiscal year 2003 statewide grants, ODP awarded the grant funds and allowed the state to transfer the funds to local jurisdictions. While the state and local jurisdictions could not expend--and the state could not draw down--the grant funds until the required documentation was submitted and approved, they could plan their expenditures and begin state and locally required procedures, such as obtaining approval of the state legislature or city council to use the funds. Later that fiscal year, ODP further relaxed this requirement and allowed the states to transfer, expend, and draw down grant funds immediately after ODP awarded the grant funds. The states only had to submit all documentation along with their biannual progress reports. Despite congressional and ODP efforts to expedite the award of grant funds to states and the transfer of those funds to localities, some states and local jurisdictions could not expend the grant funds to purchase equipment or services until other, nonfederal requirements were met. Some state and local officials' ability to spend grant funds was complicated by the need to meet various state and local legal and procurement requirements and approval processes, which could add months to the process of purchasing equipment after grant funds had been awarded. For example, in one state we visited, the legislature must approve how the grant funds will be expended. If the state legislature is not in session when the grant funds are awarded, it could take as long as 4 months to obtain state approval to spend the funds. Some states, in conjunction with DHS, have modified their procurement practices to expedite the procurement of equipment and services. Officials in two of the five states we visited told us they established centralized purchasing systems that allow equipment and services to be purchased by the state on behalf of local jurisdictions, freeing them from some local legal and procurement requirements. In addition, the DHS's Homeland Security Advisory Council Task Force reported that several states developed statewide procurement contracts that allow local jurisdictions to buy equipment and services using a prenegotiated state contract. DHS has also offered options for equipment procurement, through agreements with the U.S. Department of Defense's Defense Logistics Agency and the Marine Corps Systems Command, to allow state and local jurisdictions to purchase equipment directly from their prime vendors. These agreements provide an alternative to state and local procurement processes and, according to DHS, often result in a more rapid product delivery at a lower cost. Congress has also taken steps to address a problem that some states and localities cited concerning a federal law, the Cash Management Improvement Act (CMIA), that provides for reimbursement to states and localities only after they have incurred an obligation, such as a purchase order, to pay for goods and services. Until fiscal year 2005, after submitting the appropriate documentation, states and localities could receive federal funds to pay for these goods and services several days before the payment was due so that they did not have to use their own funds for payment. However, according to DHS's Homeland Security Advisory Council Task Force report, many municipalities and counties had difficulty participating in this process either because they did not receive their federal funds before payment had to be made or their local governments required funds to be on hand before commencing the procurement process. Officials in one city we visited said that, to solve the latter problem, the city had to set up a new emergency operations account with its own funds. The task force recommended that for fiscal year 2005, ODP homeland security grants be exempt from a provision of CMIA to allow funds to be provided to states and municipalities up to 120 days in advance of expenditures. In response, the fiscal year 2005 DHS appropriations legislation included a provision that exempts formula- based grants (e.g., the State Homeland Security Grant Program grants) and discretionary grants, including the Urban Areas Security Initiative and other ODP grants, from the CMIA's requirement that an agency schedule the transfer of funds to a state so as to minimize the time elapsing between the transfer of funds from the U.S. Treasury and the state's disbursement of the funds for program purposes. ODP's fiscal year 2005 program guidelines informed grantees and subgrantees that they are allowed to draw down funds up to 120 days prior to expenditure. In addition, DHS efforts are under way to identify and disseminate best practices, including how states and localities manage legal and procurement issues that affect grant distribution. DHS's Homeland Security Advisory Council Task Force reported that some jurisdictions have been "very innovative" in developing mechanisms to support the procurement and delivery of emergency-response-related equipment. The task force recommended that, among other things, DHS should, in coordination with state, county, and other governments, identify, compile, and disseminate best practices to help states address grant management issues. ODP has responded by establishing a new Homeland Security Preparedness Technical Assistance Program service to enhance the grant management capabilities of state administrative agencies and by surveying states to identify their technical needs and best practices they have developed related to managing and accounting for ODP grants, including the procurement of equipment and services at the state and local levels. This information is to serve as a foundation for the development of a tailored, on-site assistance program for states to ensure that identified best practices are implemented and critical grant management needs and problems are addressed. According to ODP, the technical assistance service was made operational in December 2004, however, the final compendium of best grants management practices will not be formally released until May 2005. Despite efforts to streamline local procurement practices, some challenges remain at the state and local levels. An ODP requirement that is based on language in the appropriations act could delay procurements, particularly in states that have a centralized purchasing system. Specifically, beginning with the fiscal year 2004 grant cycle, states were required by law to pass through no less than 80 percent of total grant funding to local jurisdictions within 60 days of the award. In order for states to retain grant funds beyond the 60-day limit, ODP requires states and local jurisdictions to sign a memorandum of understanding (MOU) indicating that states may retain--at the local jurisdiction's request--some or all funds in order to make purchases on a local jurisdiction's behalf. The MOU must specify the amount of funds to be retained by the state. This requirement may pose problems for some states. A state official in one state we visited said that, while the state's centralized purchasing system had worked well in prior years, the state has discontinued using it because of the MOU requirement, since establishing MOUs with every locality might take years. The state transferred the fiscal year 2004 grant funds to local jurisdictions so they can make their own purchases. In another state, officials expressed concern that this requirement would negatively affect their ability to maintain homeland security training provided to local jurisdictions at state colleges that had been previously funded from local jurisdictions' grant funds. In the fiscal year 2005 grant program guidelines, states were encouraged, but not required, to submit their MOUs to ODP for review by DHS's Office of General Counsel to ensure compliance. In distributing federal funds to states to assist first responders in preventing, preparing for, and responding to terrorist threats, the federal government has required states to develop strategies to address their homeland security needs as a condition for receiving funding. The details of this federal requirement have also evolved over time. Before the events of September 11, 2001, ODP required states to develop homeland security strategies that would provide a roadmap of where each state should target grant funds. To assist the states in developing these strategies, state agencies and local jurisdictions were directed to conduct needs assessments on the basis of their own threat and vulnerability assessments. The needs assessments were to include related equipment, training, exercise, technical assistance, and research and development needs. In addition, state and local officials were to identify current and required capabilities of first responders to help determine gaps in capabilities. In fiscal year 2003, ODP directed the states to update their homeland security strategies to better reflect post-September 11 realities and to identify progress on the priorities originally outlined in the initial strategies. As required by statute, completion and approval of these updated strategies were a condition for awarding fiscal year 2004 grant funds. ODP has also revised its approach on how states and localities report on grant spending and use. ODP took steps to shift the emphasis away from reporting on specific items purchased and toward results-based reporting on the impact of states' expenditures on preparedness. ODP maintains an authorized equipment list that includes such diverse items as personal protection suits for dealing with hazardous materials and contamination, bomb response vehicles, and medical supplies. This information is in turn listed on the budget worksheets that localities submitted to states for their review. Until the fiscal year 2004 grant cycle, states were required to submit itemized budget detail worksheets that itemized each item to be purchased under first responder grants. ODP found, however, that, while the worksheets reflected the number and cost of specific items that states and localities planned to purchase, neither states nor ODP had a reporting mechanism to specifically assess how well these purchases would, in the aggregate, meet preparedness planning needs or priorities, or the goals and objectives contained in state or urban area homeland security strategies. Accordingly, ODP revised its approach for fiscal year 2004 and required that states, instead of submitting budget detail worksheets to ODP, submit new "Initial Strategy Implementation Plans" (ISIP). These ISIPs are intended to show how planned grant expenditures for all funds received are linked to one or more larger projects, which in turn support specific goals and objectives in either a state or urban area homeland security strategy. In addition to the ISIPs, ODP now requires the states to submit biannual strategy implementation reports showing how the actual expenditure of grant funds at both the state and local levels was linked by projects to the goals and objectives in the state and urban area strategy. Reports by GAO and DHS's Office of Inspector General, as well as by the House Homeland Security Committee, have identified the need for clear national guidance in defining the appropriate level of preparedness and setting priorities to achieve it. The lack of such guidance has in the past been identified as hindering state and local efforts to prioritize their needs and plan how best to allocate their homeland security funding. We have reported that national preparedness standards that can be used to assess existing first responder capacities, identify gaps in those capacities, and measure progress in achieving specific performance goals are essential to effectively managing federal first responder grant funds as well as to the ability to measure progress and provide accountability for the use of public funds. ODP has responded to the calls for national preparedness standards and specifically to HSPD-8 that required DHS to develop a new national preparedness goal and performance measures, standards for preparedness assessments and strategies, and a system for assessing the nation's overall preparedness. In order to develop performance standards that will allow ODP to measure the nation's success in achieving this goal, ODP is using a capabilities-based planning approach--one that defines the capabilities required by states and local jurisdictions to respond effectively to likely threats. These capability requirements are to establish the minimum levels of capability required to provide a reasonable assurance of success against a standardized set of 15 scenarios for threats and hazards of national significance. The scenarios include such potential emergencies as a biological, nuclear or cyber attack, two natural disasters, and a flu pandemic. The objective is to develop the minimum number of credible, high-consequence scenarios needed to identify a broad range of prevention and response requirements. As part of the HSPD-8 implementation process, in January 2005, ODP issued a list of capability requirements in keeping with a requirement of the fiscal year 2005 DHS appropriations act. To help define the capabilities that jurisdictions should set as targets, ODP first defined the essential tasks that need to be performed from the incident scene to the national level for major events illustrated by the 15 scenarios. It then developed a Target Capabilities List that identifies 36 areas in which responding agencies are expected to be proficient in order to perform these critical tasks. ODP further plans to develop performance measures, on the basis of the target capability standards that define the minimal acceptable proficiency required in performing the tasks outlined in the task list. According to ODP's plan, the measures will allow the development of a rating methodology that incorporates preparedness resources and information about overall performance into a summary report that represents a jurisdiction's or agency's ability to perform essential prevention, response, or recovery tasks. The office acknowledges that this schedule may result in a product that requires future incremental refinements but has concluded that this is preferable to spending years attempting to develop a "perfect" process. On March 31, 2005, DHS issued a document entitled "Interim National Preparedness Goal" that reflects the department's progress in developing readiness targets, priorities, standards for preparedness assessments and strategies, and a system for assessing the nation's overall level of preparedness. The document also states that National Preparedness Guidance will follow within 2 weeks. This guidance is to include, in DHS' words, "detailed instructions on how communities can use the Goal and a description of how the Goal will generally be used in the future to allocate Federal preparedness assistance." DHS expects to issue a Final Goal and an updated target capabilities list on October 1, 2005. Over the next several months, ODP plans to work with its stakeholders to identify the levels of capabilities that various types of jurisdictions should possess in order for the Nation to reach the desired state of national preparedness. In May 2004, we reported on the use of first responder grant monies in the National Capital Region, which includes the District of Columbia and specified surrounding jurisdictions in the states of Maryland and Virginia. We found that the grant monies were not being spent in accordance with a regional plan for their use. To ensure that emergency preparedness grants and associated funds were managed in a way that maximizes their effectiveness, we recommended that the Secretary of Homeland Security work with NCR jurisdictions to develop a coordinated strategic plan to establish goals and priorities for the use of funds, monitor the plan's implementation to ensure that funds are used in a way that are not unnecessarily duplicative, and evaluate the effectiveness of expenditures in addressing gaps in preparedness. DHS and the Senior Policy Group of the National Capital Region generally agreed with our recommendations and have been working to implement them. In our report on interoperable communications for first responders, we found that federal assistance programs to state and local government did not fully support regional planning for communications interoperability. We also found that federal grants that support interoperability had inconsistent requirements to tie funding to interoperable communications plans. In addition, uncoordinated federal and state level grant reviews limited the government's ability to ensure that federal funds were used to effectively support improved regional and statewide communications systems. We recommended that DHS grant guidance encourage states to establish a single statewide body responsible for interoperable communications that would prepare a single comprehensive statewide interoperability plan for federal, state, and local communications systems in all frequency bands. We also recommended that at the appropriate time, that DHS grant guidance should require that federal grant funding for interoperable communications equipment should be approved only upon certification by the statewide body that such grant applications were in conformance with the statewide interoperability plan. In its comments on our draft report, DHS did not address the second recommendation. However, on November 1, 2004, the SAFECOM office with DHS Office of Interoperability and Compatibility issued its methodology for developing a statewide interoperability communications plan. In summary, Mr. Chairman, since the tragic events of September 11, 2001, the federal government has dramatically increased the resources and attention it has devoted to national preparedness and the capabilities of first responders. The grant programs managed by ODP have expanded rapidly in their scope and funding levels. Over the 3- 1/2 years since the terrorist attacks, Congress, ODP, states, and local governments encountered obstacles, some of them frustrating and unexpected, in delivering grant funds to their ultimate recipients in a timely manner and ensuring they are used most effectively. All levels of government have attempted to address these obstacles and succeeded in resolving or ameliorating many of them. Some of the changes made are relatively new; thus, it is still too early to determine if they will have the desired outcome. ODP's focus has changed over time from examining and approving, for example, specific items of equipment proposed for purchase under first responder grants to defining the capabilities that states and local jurisdictions need to attain--that is, establishing performance standards. Such a results-based orientation could prove to be the most practical and effective grants management approach at the federal level to help ensure accountability and effectiveness of results. DHS must also continue to ensure that an effective system for monitoring and accounting for limited federal funds intended for enhancing the nation's ability to respond to terrorist attacks or natural disasters exists at the state and local level. DHS's task of defining a national preparedness goal and translating that definition into capabilities that are meaningful and readily transferable to the wide variety of local jurisdictions around the nation is still not complete. As the department has acknowledged, the process will necessarily be iterative. As we have stressed before, during this process DHS must continue to listen and respond constructively to the concerns of states, local jurisdictions, and other interested parties. Such collaboration will be essential to ensuring that the nation's emergency response capabilities are appropriately identified, assessed, and strengthened. At the same time, state, local, and tribal governments, and the private sector must recognize that the process is iterative, will include periodic adjustments and refinements, and that risks are not equally distributed across the nation. As we have noted previously, it is important that the quest for speed in distributing and using federal first responder grants does not hamper the planning and accountability needed to ensure that the funds are spent on the basis of a comprehensive, well-coordinated plan to provide first responders with the equipment, skills, and training needed to be able to respond quickly and effectively to a range of emergencies, including, where appropriate, major natural disasters and terrorist attacks. The challenges we noted in developing effective interoperable communications for first responders are applicable to developing effective first responder capabilities for major emergencies, regardless of cause. A fundamental challenge has been limited regional and statewide planning, coordination, and cooperation. No one level of government can successfully address the challenges of developing needed first responder capabilities alone. The federal government can play a leadership role in developing requirements and providing support for state, regional, and local governments to: assess first responder capabilities; identify gaps in meeting those capabilities; develop coordinated plans and priorities for closing those gaps; and assess success in developing and maintaining the needed capabilities. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the subcommittee may have. For further information on this testimony, please contact William O. Jenkins, Jr., at (202) 512-8777. Individuals making key contributions to this testimony included Amy Bernstein, David Brown, Frances Cook, James Cook, Christopher Keisling, Katrina Moss, Sandra Tasic, John Vocino, and Robert White. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In fiscal years 2002 through 2005, the Office for Domestic Preparedness (ODP) within the Department of Homeland Security managed first responder grants totaling approximately $10.5 billion. The bulk of this funding has been for statewide grants through the State Homeland Security Grant Program and urban area grants through the Urban Areas Security Initiative. This testimony provides information on the history and evolution of these two grant programs, particularly with respect to ODP grant award procedures; timelines for awarding and transferring grant funds; and accountability for effective use of grant funds. Federal first responder grants are a means of achieving an important goal--enhancing the ability of first responders to prevent, prepare for, respond to, and recover from terrorist and other incidents with well-planned, well-coordinated efforts that involve a variety of first responders from multiple jurisdictions. ODP has led federal efforts to develop these capabilities in part through its management of federal first responder grants. ODP has modified grant award procedures for states and localities. ODP developed procedures and guidelines for awarding the State Homeland Security Grant Program and the Urban Areas Security Initiative grants to states, and for determining how states and localities could expend funds and seek reimbursement for first responder equipment or services they purchased. As part of this process, ODP gave states some flexibility by allowing them to determine how grant funds were to be managed and distributed within their states and whether purchases would be made locally or at the state level. Congress, ODP, states, and localities have acted to expedite grant awards by setting time limits for the grant application, award, and distribution processes and by instituting other procedures. Nevertheless, the ability of states and localities to spend grant funds expeditiously was complicated by the need to fulfill state and local legal and procurement requirements, which in some cases added months to the purchasing process. Some states have modified their procurement practices, and ODP is identifying best practices to aid in the effort, but challenges remain. ODP has taken steps to improve accountability in the state preparedness planning process, in part by requiring states to update homeland security strategies. In tandem with this effort, ODP revised its grant-reporting method, moving away from requiring states, localities, and urban areas to submit itemized lists of first responder equipment they plan to purchase towards a more results-based approach, whereby grant managers at all levels must demonstrate how grant expenditures are linked to larger projects that support goals in state homeland security strategies. As part of a broader effort to meet mandates contained in Homeland Security Presidential Directive 8, addressing national preparedness goals for all hazards, ODP has taken steps to ensure more assessments of first responder needs are conducted on a national basis. Finally, ODP recently issued interim national preparedness goals that reflect the department's progress in developing readiness targets, priorities, standards for preparedness assessments and strategies, and a system for assessing the nation's overall level of preparedness. However, DHS's task of finalizing these goals and translating them into capabilities that are meaningful and readily transferable to the wide variety of local jurisdictions around the nation is still not complete.

Money laundering, which is the disguising or concealing of illicit income in order to make it appear legitimate, is a problem of international proportions. Federal law enforcement officials estimate that between $100 billion and $300 billion in U.S. currency is laundered each year. Numerous U.S. agencies play a role in combating money laundering. Law enforcement agencies within the Departments of Justice and the Treasury have the greatest involvement in domestic and international money-laundering investigations. FRB and OCC have the primary responsibility for examining and supervising the overseas branches of U.S. banks to ascertain the adequacy of the branches' anti-money-laundering controls. FinCEN provides governmentwide intelligence and analysis that federal, state, local, and foreign law enforcement agencies can use to aid in the detection, investigation, and prosecution of domestic and international money laundering and other financial crimes. In addition, other U.S. agencies play a role, including the State Department, which provides information on international money laundering through its annual assessment of narcotics and money-laundering problems worldwide. Until recently, U.S. banking regulators' anti-money-laundering efforts relied heavily on regulations requiring financial institutions to routinely report currency transactions that exceed $10,000, primarily through filing currency transaction reports (CTR) with the IRS. U.S. banking regulators have also relied on approaches in which financial institutions report financial transactions involving known or suspected money laundering.According to a senior Treasury official, U.S. regulators' anti-money-laundering efforts in coming years are expected to rely more on the reporting of financial transactions involving known or suspected money laundering. U.S. regulators will also be expected to continue relying on CTRs, but to a lesser extent. Most U.S. banks have adopted so-called "know your customer" policies over the past few years to help them improve their identification of financial transactions involving known or suspected money laundering, according to the American Bankers Association. Under these know your customer policies, which are currently voluntary but which the Treasury plans to make mandatory in 1996, financial institutions are to verify the business of a new account holder and report any activity that is inconsistent with that type of business. According to the American Bankers Association, these policies are among the most effective means of combating money laundering, and the majority of banks have already adopted such policies. The seven European countries we visited have tended to model their anti-money-laundering measures after a 1991 European Union (EU)Directive that established requirements for financial institutions similar to those that financial institutions conducting business in the United States must follow. However, instead of relying on the routine reports of currency transactions that the United States has traditionally emphasized, European countries have tended to rely more on suspicious transaction reports and on know your customer policies. These know your customer policies are somewhat more comprehensive than comparable U.S. ones, according to European bank and regulatory officials. While Hungary and Poland have adopted anti-money-laundering measures following the EU Directive, banking and government officials in these two countries told us that the implementation and enforcement of their anti-money-laundering measures have been hindered. They attributed problems to such factors as resource shortages, inexperience in detection and prevention, and in Poland, conflicts between bank secrecy laws and recently adopted anti-money-laundering statutes. FinCEN and INTERPOL have recently initiated Project Eastwash, to attempt to assess money laundering in 20 to 30 countries throughout East and Central Europe and the former Soviet Union. According to FinCEN officials, as of late 1995 on-site visits had been made to five countries to assess the law enforcement, regulatory, legislative, and financial industry environment in each nation. Information from these visits is to be used for policy guidance and resource planning purposes for both the countries assessed and U.S. and international anti-money-laundering organizations, according to these officials. U.S. banks had over 380 overseas branches located in 68 countries as of August 1995. These branches, which are a direct extension of U.S. banks, are subject to host countries' anti-money-laundering laws rather than U.S. anti-money-laundering laws, according to OCC and FRB officials. In some cases, U.S. banking regulators have not been allowed to perform on-site reviews of these branches' anti-money-laundering controls. According to U.S. banking regulators, bank privacy and data protection laws in some countries serve to prevent U.S. regulators from examining U.S. bank branches located within their borders. Of the seven European countries we visited, U.S. regulators were not allowed to enter Switzerland and France to examine branches of U.S. banks because of these countries' strict bank secrecy and data protection laws. U.S. regulators, however, have other means besides on-site examinations for obtaining information on U.S. overseas branches' anti-money-laundering controls, according to FRB and OCC officials. For example, U.S. regulators can and do exchange information--excluding information requested for law enforcement purposes--with foreign banking regulators on their respective examinations of one another's foreign-based branches. In addition, FRB can deny a bank's application to open a branch in a country with strict bank secrecy laws if it does not receive assurance that the branch will have sufficient anti-money-laundering controls in place, according to FRB officials. OCC and FRB officials said that in countries that allow them to examine anti-money-laundering controls at overseas branches of U.S. banks, such examinations are of a much narrower scope than those of branches located in the United States. One reason is that host country anti-money laundering measures may not be as stringent as U.S. anti-money-laundering requirements and, thus, may not provide the necessary information for U.S. examiners. OCC and FRB officials also said that the expense of sending examiners overseas limits the amount of time examiners can spend reviewing the anti-money-laundering controls of the bank. However, according to these officials less time is needed to conduct an anti-money-laundering examination at some overseas branches because of the small volume of currency transactions. FRB officials told us that they have recently developed money-laundering examination procedures to be used by its examiners to address the uniqueness of overseas branches' operations and to fit within the short time frames of these examinations. Although these procedures have been tested, they have not been implemented and, thus, we have not had the chance to review them. Responsibilities for investigating both domestic and international crimes involving money-laundering are assigned to numerous U.S. law enforcement agencies, including DEA, FBI, IRS, and the Customs Service. While European law enforcement officials acknowledged the important role U.S. law enforcement agencies play in criminal investigations involving money laundering, some commented about the difficulties of dealing with multiple agencies. Some British and Swiss law enforcement officials we spoke with said that too many U.S. agencies are involved in money-laundering inquiries. This overlap makes it difficult, in some money-laundering inquiries, to determine which U.S. agency they should coordinate with. These European officials indicated that designating a single U.S. office to serve as a liaison on these money-laundering cases would improve coordination. According to U.S. law enforcement agency officials, however, designating a single U.S. law enforcement agency as a focal point on overseas money-laundering cases could pose a jurisdictional problem because money-laundering cases are usually part of an overall investigation of another crime, such as drug trafficking or financial fraud. Nevertheless, U.S. law enforcement agencies have taken recent steps to address overseas money-laundering coordination. In particular, a number of U.S. agencies adopted a Memorandum of Understanding (MOU) in July 1994 on how to assign responsibility for international drug money-laundering investigations. Law enforcement officials were optimistic that the MOU, which was signed by representatives of the Secretary of the Treasury, the Attorney General, and the Postmaster General, would improve overseas anti-money-laundering coordination. Although law enforcement is optimistic about improvements in coordination, we have not assessed how well U.S. international investigations are being coordinated. The United States works with other countries through multilateral and bilateral treaties and arrangements to establish global anti-money-laundering policies, enhance cooperation, and facilitate the exchange of information on money-laundering investigations. The United States' multilateral efforts to establish global anti-money-laundering policies occur mainly through FATF, an organization established at the 1989 economic summit meeting in Paris of major industrialized countries. The United States, through the Treasury Under Secretary for Enforcement, assumed the presidency of FATF in July 1995 for a one-year term. FATF has worked to persuade both member and nonmember countries to institute effective anti-money-laundering measures and controls. In 1990, FATF developed 40 recommendations that describe measures that countries should adopt to control money laundering through financial institutions and improve international cooperation in money-laundering investigations. During 1995, FATF completed its first round of mutual evaluations of its members' progress on implementing the 40 recommendations. FATF found that most member countries have made satisfactory progress in carrying out the recommendations, especially in the area of establishing money-laundering controls at financial institutions. FATF has also continued to identify global money-laundering trends and techniques, including conducting surveys of Russia's organized crime and Central and East European countries' anti-money-laundering efforts. In addition, FATF has expanded its outreach efforts by cooperating with other international organizations, such as the International Monetary Fund, and by attempting to involve nonmember countries in Asia, South America, Russia, and other parts of the world. A more recent multilateral effort involved the United States and other countries in the Western Hemisphere. On December 9-11, 1994, the 34 democratically elected leaders of the Western Hemisphere met at the Summit of the Americas in Miami, Florida. At the summit, the leaders signed a Declaration of Principles that included a commitment to fight drug trafficking and money laundering. The summit documents also included a detailed plan of action to which the leaders affirmed their commitment. One action item called for a working-level conference on money laundering, to be followed by a ministerial conference, to study and agree on a coordinated hemispheric response to combat money laundering. The ministerial conference, held on December 1-2, 1995, at Buenos Aires, Argentina, represented the beginning of a series of actions each country committed to undertake in the legal, regulatory, and law enforcement areas. U.S. Department of Justice officials told us that these actions are designed to establish an effective anti-money-laundering program to combat money laundering on a hemispheric basis. Further, the officials told us that the conference created an awareness that money laundering is not only a law enforcement issue, but also a financial and economic issue, requiring a coordinated interagency approach. As part of another multilateral effort, FinCEN is working with other countries to develop and implement Financial Information Units (FIU) modeled, in large part, on FinCEN operations, according to FinCEN officials. FinCEN has also met with officials from other countries' FIUs to discuss issues common to FIUs worldwide. The most recent meeting was held in Paris in November 1995, during which issue-specific working groups were created to address common concerns such as use of technology and legal matters on exchanging intelligence information. U.S. Treasury officials said that in recent years, the United States has relied on bilateral agreements to improve cooperation in international investigations, prosecutions, and forfeiture actions involving money laundering. These bilateral agreements, consisting of mutual legal assistance treaties, financial information exchange agreements, and customs mutual assistance agreements with individual countries, also help to facilitate information exchanges on criminal investigations that may involve money laundering. However, the State Department's 1995 annual report on global narcotics crime concluded that many countries still refuse to share with other governments information about financial transactions that could facilitate global money-laundering investigations. Mr. Chairman, this concludes my prepared statement. I would be pleased to try to answer any questions you or 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. 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GAO discussed U.S. efforts to combat money laundering abroad. GAO noted that: (1) U.S. bank regulators rely on financial institutions' reporting currency transactions that exceed $10,000, involve known or suspected money laundering, or are inconsistent with the account holder's stated business; (2) European countries focus their anti-laundering efforts less on routine currency transaction reports and more on reports of suspicious activities; (3) host countries' anti-laundering and bank privacy and protection laws, to which overseas branches of U.S. banks must adhere, sometimes hinder U.S. bank regulators' reviews of overseas branches, and examinations of overseas banks tend to be more narrowly scoped; (4) while European law enforcement officials acknowledged the important role of several U.S. law enforcement agencies in anti-laundering activities, they also indicated that it was difficult to determine which U.S. agency they should coordinate efforts with; and (5) the United States works with other countries through multilateral and bilateral treaties and arrangements to establish global anti-laundering policies, enhance cooperation, and facilitate the exchange of information on money-laundering investigations.

FSA was established in 1994 during the reorganization of the Department of Agriculture and operates through a network of field offices located across the United States. The agency provides a variety of services, including providing financial assistance to new or disadvantaged farmers and ranchers who are unable to obtain commercial credit at reasonable rates and terms. FSA loans available to farmers and ranchers include direct or guaranteed ownership loans and direct or guaranteed operating loans. Direct ownership loans are for buying farm real estate and making capital improvements. Direct operating loans, which are made to beginning farmers and ranchers who are unable to qualify for guaranteed operating loans, are for the purchase of items to help daily farm operations. Guaranteed farm loan program loans are for the same purposes as direct farm loan program loans, but they are made by private third-party lenders and are guaranteed by FSA for up to 95 percent of the principal loan amount. Our objectives were to determine whether (1) FSA was promptly referring eligible farm loan program loans to FMS for collection action, (2) any obstacles were hampering FSA from referring farm loan program loans to FMS, and (3) FSA was appropriately using exclusions from referral requirements. To address these objectives, we interviewed officials from FSA to obtain an understanding of the FSA referral process and any obstacles that were hampering the referral of eligible debts. We reviewed FSA's policies and procedures on debt referrals and examined the agency's current and planned efforts to refer eligible delinquent debts. We obtained and analyzed the TROR for the fourth quarter of fiscal year 2000, which was the most recent year-end report available at the completion of our fieldwork, and other financial reports prepared by FSA, and held discussions with FSA officials to determine whether the agency was appropriately using exclusions from referral requirements. In addition, we reviewed responses to questions about FSA's debt collection practices that you submitted to the deputy secretary of agriculture in October 2001 and used information from the responses to clarify or augment our report, where appropriate. To determine whether FSA's use of exclusions from referral requirements was appropriate, we used statistical sampling techniques to select 15 FSA field offices from the four states with the highest dollar amounts of reported debt excluded from TOP as of September 30, 2000. Using electronic and hard-copy files obtained from Agriculture, we reviewed all 263 loans from the 15 selected offices that were more than 180 days delinquent and had been reported as excluded from referral to FMS as of September 30, 2000, for bankruptcy, forbearance/appeals, foreclosure, and DOJ litigation. (Appendix I contains additional information on the sampling method and the results.) Based on the results of our review, we estimated the percentage of loans inappropriately excluded as of September 30, 2000, in the four states from which the sample offices were drawn. Because we found numerous errors in the exclusion categories we tested, we did not test other reported exclusions from referral to FMS for cross-servicing, such as internal offset. We did not review FSA's process for identifying and referring debts to Treasury for cross-servicing because the agency had suspended all such referrals in April 2000 pending development of guidelines to implement a new referral policy. FSA issued the new guidelines in July 2001 and, according to an Agriculture official, the first referral to FMS under this new policy was made in September 2001. We did not review implementation of FSA's new guidelines, since the procedures were implemented near the completion of our fieldwork. We conducted our review from November 2000 through October 2001 in accordance with U.S. generally accepted government auditing standards. We did not independently verify the reliability of certain information that FSA provided to us, such as debts more than 180 days delinquent and debts classified as currently not collectible (CNC) and information in FSA's loan- accounting and loan-servicing systems. We requested written comments on a draft of this report from the secretary of agriculture or her designated representative. The written response from the administrator of FSA is reprinted in appendix II. As of September 30, 2000, FSA reported having about $8.7 billion in direct farm loan program loans. As shown in table 1, the agency reported about $1.7 billion of direct farm loan program loans more than 180 days delinquent, including debts classified as CNC, as of September 30, 2000. Of this amount, FSA reported referring about $934 million to TOP and excluding about $732 million from referral to TOP. FSA reported that it had referred only $38 million of loans to FMS for cross-servicing as of September 30, 2000. It is FSA's policy to refer delinquent loans for cross- servicing only if collateral has been liquidated and a deficiency remains. In addition, as discussed in more detail later in this report, FSA suspended cross-servicing referrals from April 2000 until September 2001 while it developed and implemented a new cross-servicing referral policy. Since DCIA's enactment, several obstacles have impeded FSA's implementation of the act's referral requirements. Loan system limitations have resulted in the automatic exclusion of certain types of debts without any review for eligibility and the inability to pursue collection from codebtors through TOP. FSA's failure to ensure that field offices routinely updated the status of delinquent loans has led to inappropriate exclusions from referral and inaccurate reporting of delinquent and eligible debt amounts to Treasury. A change in referral policy led to a suspension of all delinquent loan referrals to FMS for cross-servicing. FSA's policy of referring delinquent debt to FMS only once a year resulted in delayed referrals and may have reduced collections. Finally, FSA did not take action until recently to recognize losses on guaranteed farm loan program loans as nontax federal debt. According to FSA, until certain steps, such as software implementation, are completed, FSA cannot use the collection tools provided under DCIA to pursue collection directly from debtors on guaranteed farm loan program loans. Of the $694 million of debt reported by FSA as excluded from referral for bankruptcy, forbearance/appeals, foreclosure, and DOJ litigation, about $295 million consists of judgment debts, including deficiency judgments, which are court judgments requiring payment of a sum certain to the United States. According to FSA officials, deficiency judgments--unlike some other types of judgment debts--are eligible for TOP and should be referred to FMS. However, FSA's Finance Office in St. Louis automatically excluded all judgment debts for direct farm loan program loans from referral to FMS because of automated system limitations. Although the system does contain information indicating which debts are judgment debts, it cannot currently accommodate information on subcategories of judgment debts. Therefore, FSA staff cannot use the agency's automated system to identify deficiency judgments for referral. On account of our inquiries, FSA officials initiated a special project in May 2001 to manually identify all deficiency judgment debts for direct farm loan program loans so that such debts could be referred to FMS. Even though FSA reported having referred $934 million of direct farm loan program loans to FMS for TOP as of September 30, 2000, the agency has lost and continues to lose opportunities to maximize collections on these loans because it does not report information on codebtors to FMS. According to FSA officials, the vast majority of direct farm loan program loans have codebtors, who are also liable for loan repayment, but FSA's automated loan system cannot record more than one taxpayer identification number for each loan. Because taxpayer identification numbers are required for referrals to FMS for TOP, FSA cannot refer codebtors on farm loan program loans to FMS. An FSA official said that the agency first recognized the need to have codebtor information in the system in 1986 to facilitate debt collection but that higher-priority systems projects have precluded FSA from completing the necessary enhancements to allow the system to accept more than one taxpayer identification number per debt. FSA was planning to incorporate this modification in the new Farm Loan Program Information System scheduled for implementation in fiscal year 2005, but during the December 5, 2001, testimony before your subcommittee, the agency committed to make the change by December 2002. FSA field offices across the country make determinations as to whether direct farm loan program loans are in bankruptcy, forbearance/appeals, or foreclosure and therefore should be excluded from referral to FMS. The status of these loans changes over time, and information on the loans must be updated as changes occur if exclusion determinations are to be continuously accurate. Our review of selected excluded loans indicated that personnel in the FSA field offices we visited did not routinely update the eligibility status of farm loan program loans in FSA's Program Loan Accounting System. Without up-to-date information on loan status, the system cannot accurately identify which loans are eligible for referral. One of the most frequently identified inappropriate exclusions pertained to amounts that had been discharged in bankruptcy, which should not have been included in delinquent debt. Farm loan managers in some of the FSA field offices we visited said they had not closed out many direct farm loan program loans discharged in bankruptcy because making new loans has been a higher-priority use of their resources. In addition, FSA did not provide sufficient oversight to help ensure that field office personnel adequately tracked the status of discharged bankruptcies and updated the loan files and debt records in the Program Loan Accounting System. Delays in promptly closing out discharged bankruptcy debts not only distort the TROR for debt management and credit policy purposes, but also distort key financial indicators such as receivables, total delinquencies, and loan loss data. The information is therefore misleading for budget and management decisions and oversight. Aside from erroneously inflating reported loans receivable and delinquent loan amounts, failure to process closed-out debts delays the agency's reporting of those amounts to the Internal Revenue Service as income to the debtor. FSA suspended cross-servicing referrals in April 2000 pending development of guidelines implementing a new policy to refer only debts less than 6 years delinquent to FMS for cross-servicing. According to agency officials, FSA adopted the new policy in response to discussions they had with Agriculture's Office of the General Counsel that addressed a conflict between Farm Loan Program regulations and FMS policy. These officials stated that the Office of the General Counsel decided that FSA must adhere to Farm Loan Program regulations, which specify a 6-year delinquency limit for cross-servicing referrals, despite the fact that, according to FMS officials, FMS accepts debts for cross-servicing that are more than 6 years delinquent. In July 2001, FSA issued revised guidelines to implement the new policy and is now reviewing loans at more than a thousand FSA field offices to determine the loans' eligibility for referral under the new policy. According to an Agriculture official, FSA made the first referral under the new policy in September 2001. Agency officials told us they eventually plan to make cross-servicing referrals quarterly but will refer delinquent loans more frequently until the backlog resulting from the referral suspension is cleared. According to data provided by FSA officials, about $400 million of new delinquent debt became eligible for TOP during calendar year 2000. FSA officials stated that the debts became eligible relatively evenly throughout the year, but the agency refers debts eligible for TOP only once annually, during December. Consequently, a large portion of the $400 million of debt likely was not promptly referred when it became eligible. As we have previously testified, industry statistics have shown that the likelihood of recovering amounts owed on delinquent debt decreases dramatically as the age of the debt increases. Thus, the old adage that "time is money" is very relevant for referrals of debts to FMS for collection action. FSA officials told us that the agency agrees that quarterly referrals could enhance collection of delinquent debts and is working on automated system modifications to refer debts quarterly to TOP. FSA plans to have a quarterly referral process ready for implementation in August 2002. Guaranteed farm loan program loans--as well as related losses--have been significant since the enactment of DCIA in 1996. The outstanding principal due on guaranteed farm loan program loans was about $8 billion as of September 30, 2000; as of that date, FSA had paid out about $293 million in losses on guaranteed farm loan program loans since fiscal year 1996. Since DCIA's enactment, FSA has referred none of its losses on guaranteed farm loan program loans to FMS for collection action. According to FSA officials, the agency could not pursue recovery from guaranteed farm loan program debtors or use DCIA debt collection tools because under the guaranteed farm loan program, no contract existed between these debtors and FSA. As a result, the agency did not recognize the losses that it paid to guaranteed lenders as federal debt and did not apply DCIA debt collection remedies to them. In June 2000, Agriculture's Office of Inspector General reported that FSA was not referring its losses on guaranteed farm loan program loans to FMS for collection and identified the need for FSA to recognize the losses as federal debts and begin referring them to FMS for collection action. However, as of September 30, 2000, FSA still had no policies and procedures to recognize losses on guaranteed farm loan program loans as federal debts and to refer such debts to FMS for TOP and cross-servicing. As a result, FSA has missed opportunities to collect millions of dollars that the agency has paid to lenders to cover guaranteed losses. FSA officials told us that the agency has revised the loan application forms applicable to guaranteed loans made after July 20, 2001, to include a section specifying that amounts FSA pays to a lender as a result of a loss on a guaranteed loan constitute a federal debt. FSA expects that software needed to implement the revisions to the Guaranteed Loan Accounting System should be completed around mid-2002 and in place before any loss claims are paid on guaranteed loans made after July 20, 2001. As of September 30, 2000, FSA had excluded $732 million of delinquent loans from referral to FMS for TOP. FSA cited bankruptcy, forbearance/appeals, foreclosure, and DOJ litigation as the reasons for about $694 million, or 95 percent, of these exclusions. About $295 million of the exclusions were judgment debts. As we noted earlier, FSA excluded all judgment debts from referral because of automated system limitations, despite the fact that deficiency judgment debts are eligible for referral. We also noted that we found exclusion errors caused by FSA's failure to ensure that loan status was routinely updated. As a result of inappropriate exclusions and exclusion errors, FSA failed to maximize its collection of delinquent loans and provided inaccurate TROR data to federal agencies that rely on such information for policy and oversight purposes. Using statistical sampling, we selected 15 FSA field offices in California, Louisiana, Oklahoma, and Texas--the four states with the highest dollar amounts of debt excluded from TOP. We reviewed supporting documents for all 263 loans from these offices that were more than 180 days delinquent and had been excluded from referral to FMS as of September 30, 2000, to determine the extent to which exclusions in the four states were consistent with established criteria for excluding loans in bankruptcy, forbearance/appeals, foreclosure, and DOJ litigation. Based on the results of our review, we estimate that as of September 30, 2000, FSA had inappropriately placed about 575 loans, or approximately half the excluded loans in the four selected states, in exclusion categories. As part of our sample, we reviewed supporting documents for 52 bankruptcies that had been discharged before September 30, 2000. In fact, many had been discharged several years before that date. For example, one loan with a balance due of about $325,000 was reported as more than 180 days delinquent and had been excluded from referral because of bankruptcy. Our review of the loan file at the FSA field office showed that a bankruptcy court had discharged the debt in 1986. Therefore, the debt should not have been included in either the delinquent debt amount or exclusion amount reported to Treasury as of September 30, 2000. Because of the large number of errors we found in the bankruptcy, forbearance/appeals, foreclosure, and DOJ litigation exclusion categories, we did not test other reported exclusions from referral to FMS for cross- servicing, such as loans being internally offset. Although DCIA was enacted in 1996, FSA continues to face major obstacles to complying fully with the act. FSA lacks sufficient processes and controls to adequately identify and promptly refer all direct farm loan program loans eligible for referral to FMS. Automated system limitations, which have existed for years and have delayed FSA's compliance with the act, have still not been corrected, even though they have prevented referral and potential collection of substantial amounts of eligible delinquent debt. The failure of FSA field offices to routinely update delinquent loan information has led to erroneous exclusions from referral and inaccurate reporting of debt to Treasury. FSA's policy of referring debts to TOP only once a year has allowed debts to age unnecessarily and has likely reduced their collectibility. FSA has only recently taken action to establish procedures to refer losses on guaranteed loans to FMS; therefore, opportunities to collect on losses of about $300 million since DCIA was enacted may have already been lost. If FSA is to make significant progress in collecting on millions of dollars of delinquent farm loan program loans, the agency must give higher priority to fully complying with the debt collection provisions of DCIA. To improve FSA's compliance with DCIA, we recommend that the secretary of agriculture direct the administrator of FSA to take the following actions: Develop and implement automated system enhancements to make the Program Loan Accounting System capable of identifying all judgment debts eligible for referral to FMS for collection action. In the interim, continue with the manual project to identify judgment debts eligible for referral to FMS. Monitor planned system enhancements to the Program Loan Accounting System to ensure that capacity to record and use codebtor information is available and implemented by December 2002. Develop and implement oversight procedures to ensure that FSA field offices timely and routinely update the Program Loan Accounting System to accurately reflect the status of delinquent debts. Aside from requirements for database integrity, this is critical to determining allowable collection action, including whether debts are eligible for referral to FMS for collection action. Develop and implement oversight procedures to ensure that all debts discharged through bankruptcy are promptly closed out and reported to the Internal Revenue Service as income to the debtor in accordance with the Federal Claims Collection Standards and Office of Management and Budget Circular A-129. Monitor effective completion of the planned automated system modifications to refer eligible debt to TOP on a quarterly, rather than annual, basis by August 2002. Monitor planned system enhancements to the Guaranteed Loan Accounting System to ensure that the software is completed that is needed to implement the revisions to the loan application forms to establish guaranteed loan losses as federal debt. Once guaranteed loan losses are established as federal debt and are deemed eligible for referral to FMS, timely refer such debt to FMS for collection action in accordance with DCIA. In written comments on a draft of this report, the administrator of FSA generally agreed with our findings and recommendations. The administrator stated that FSA has developed an aggressive action plan to implement the remaining DCIA provisions mentioned in our report by December 31, 2002. FSA's letter is reprinted in appendix II. While FSA agreed with our finding that it had inappropriately placed several loans in various exclusion categories allowed by DCIA, it disagreed with our estimated error rate of about 50 percent in the sample population of 1,187 loans. FSA stated that its own internal review of 967 loans in the four states that were included in our review resulted in an error rate of 35.7 percent. Our sample was statistically selected and resulted in a valid projected error rate of about 50 percent for the states covered by our test work. To substantiate our work for each error identified during our testing, we asked FSA farm loan managers to sign a statement as to whether they agreed with the GAO sample results and conclusion that the exclusion was inappropriate. In all but 3 of the 113 errors we identified, the managers agreed with our conclusions and, as a result, said they planned to take action to correct the errors. Since the FSA review was performed subsequent to our tests, we cannot comment on the validity of FSA's internal assessment of the reported results. In addition, since many of the loans in our sample had been inappropriately excluded for years, corrections made subsequent to our testing but prior to FSA's review would likely have resulted in a lower error rate at the time of FSA's work. In any case, it is important to note that the 35.7 percent error rate cited by FSA from its internal assessment is still unacceptable, and we remain firm in our recommendation that FSA develop and implement oversight procedures to ensure that FSA field offices timely and routinely update the Program Loan Accounting System to accurately reflect the status of delinquent debts. FSA also took issue with our report's reference to possible missed collection opportunities. It stated we had not given FSA sufficient credit for collections totaling millions of dollars of delinquent debt using various collection tools. Our point is that FSA's mentioned successes could have been much greater had it made DCIA a higher priority and thus implemented certain key provisions much sooner. Our position remains unchanged. The details in the body of our report demonstrate lack of adequate progress. Most important, 5 years after the passage of DCIA, FSA had not yet established an adequate framework or systems capacity to effectively carry out its responsibilities for collecting large sums of delinquent debt. As agreed with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies to the chairmen and ranking minority members of the Senate Committee on Governmental Affairs and the House Committee on Government Reform and to the ranking minority member of your subcommittee. We will also provide copies to the secretary of agriculture, the inspector general of the Department of Agriculture, the administrator of the Farm Service Agency, and the secretary of the treasury. We will then make copies available to others upon request. If you have any questions about this report, please contact me at (202) 512-3406 or Kenneth R. Rupar, assistant director, at (214) 777-5714. Key contributors to this report are listed in appendix III. We first identified the four states (Texas, California, Louisiana, and Oklahoma) with the highest dollar amounts of debt excluded from TOP. From the four states, we drew a multistage cluster sample of 15 field offices (population 123) using probability proportionate to size, a sampling method in which larger clusters (in this case, offices) have a higher probability of being selected than smaller clusters. Our debt population consisted of all FSA debt more than 180 days delinquent that had been excluded from referral to Treasury as of September 30, 2000. We reviewed all excluded debt (263) at the 15 sample offices. Table 2 identifies the four states selected, the number of offices selected in each state, the number of excluded debts at the selected offices in each state, and the number of errors found at the selected offices in each state. Based on our review, we estimate that 48.5 percent +- 15.7 percent of the population were inappropriately excluded from Treasury referral. When projecting these errors to the population of 1,187, we are 95 percent confident that the errors in the population are from 389 to 761 debts. Table 3 shows the two-stage probability proportionate to size cluster sample results. Other key contributors to this report were Arthur W. Brouk, Sharon O. Byrd, Richard T. Cambosos, Michael D. Chambless, Michael S. LaForge, and Gladys E. Toro. 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The Debt Collection Improvement Act of 1996 seeks to maximize the collection of billions of dollars of nontax delinquent debt owed to the federal government. The act requires agencies to refer eligible debts delinquent more than 180 days to the Department of the Treasury for payment offset and to Treasury or a Treasury-designated debt collection center for cross-servicing. The Treasury Offset Program includes the offset of benefit payments, vendor payments, and tax refunds. Cross-servicing involves locating debtors, issuing demand letters, and referring debts to private collection agencies. The Farm Service Agency (FSA) has initiatives to ensure the timely referral of all delinquent debt. However, the agency's failure to make the act a priority has left key provisions of the legislation unimplemented and has severely reduced opportunities for collection. FSA lacks effective procedures and controls to identify and promptly refer eligible delinquent debts to Treasury for collection action. GAO identified several obstacles to FSA's establishment and implementation of an effective and complete debt-referral process. In the four states with the highest dollar amounts of federal debt excluded from the Treasury Offset Program, GAO reviewed FSA's use of exclusions from referral requirements because of bankruptcy, forbearance/appeals, foreclosure and Department of Justice litigation. GAO found that about half of the exclusions in these states were inconsistent with established criteria.

The overall purpose of FFMIA is to ensure that agency financial management systems comply with federal financial management systems requirements, applicable accounting standards, and the SGL in order to provide uniform, reliable, and thus more useful financial information. With such information, government leaders will be better positioned to help invest scarce resources, reduce costs, oversee programs, and hold agency managers accountable for the way they run government programs. The 1990 CFO Act laid the legislative foundation for the federal government to provide taxpayers, the nation's leaders, and agency program managers with reliable financial information through audited financial statements. Under the CFO Act, as expanded by the Government Management Reform Act of 1994, 24 major agencies, which account for 99 percent of federal outlays, are required to annually prepare organizationwide audited financial statements beginning with those for fiscal year 1996. Table 1 lists the 24 CFO agencies and their reported fiscal year 1996 outlays. Financial audits address the reliability of information contained in financial statements, provide information on the adequacy of systems and controls used to ensure accurate financial reports and safeguard assets, and report on agencies' compliance with laws and regulations. Building on the CFO Act audits, FFMIA requires, beginning with the fiscal year ended September 30, 1997, that each of the 24 CFO agencies' financial statement auditors report on whether the agency's financial management systems substantially comply with federal financial management systems requirements, applicable accounting standards, and the SGL. The financial management systems policies and standards prescribed for executive agencies to follow in developing, operating, evaluating, and reporting on financial management systems are defined in OMB Circular A-127, "Financial Management Systems," which was revised in July 1993. Circular A-127 references the series of publications entitled Federal Financial Management Systems Requirements, issued by the Joint Financial Management Improvement Program (JFMIP), as the primary source of governmentwide requirements for financial management systems. JFMIP initially issued Core Financial System Requirements, the first document in its Federal Financial Management Systems Requirements series, in January 1988. An updated version reflecting changes in legislation and policies was released in September 1995. This document establishes the standard requirements for a core financial system to support the fundamental financial functions of an agency. Framework for Federal Financial Management Systems was published in January 1995 and describes the basic elements of a model for an integrated financial management system in the federal government, how these elements should relate to each other, and specific considerations in developing and implementing such an integrated system. In this regard, FFMIA defines financial management systems as "financial systems" and the financial portions of "mixed systems" necessary to support financial management, including automated and manual processes, procedures, controls, data, hardware, software, and support personnel dedicated to the operation and maintenance of the system. Other documents in the JFMIP series provide requirements for specific types of systems covering personnel/payroll, travel, seized/forfeited asset, direct loan, guaranteed loan, and inventory systems. Table 2 lists the publications in the Federal Financial Management System Requirements Series and their issue dates. In addition to these eight documents, JFMIP is developing additional systems requirements for managerial cost accounting. This document was issued as an exposure draft in April 1997. Federal accounting standards, which agency CFOs use in preparing financial statements and in developing financial management systems, are recommended by FASAB. In October 1990, the Secretary of the Treasury, the Director of OMB, and the Comptroller General established FASAB to recommend a set of generally accepted accounting standards for the federal government. FASAB's mission is to recommend reporting concepts and accounting standards that provide federal agencies' financial reports with understandable, relevant, and reliable information about the financial position, activities, and results of operations of the U.S. government and its components. FASAB recommends accounting standards after considering the financial and budgetary information needs of the Congress, executive agencies, other users of federal financial information, and comments from the public. The Secretary of the Treasury, the Director of OMB, and the Comptroller General then decide whether to adopt the recommended standards. If they do, the standards are published by OMB and GAO and become effective. As discussed further in the section "Status of Federal Accounting Standards," this process has resulted in issuance of two statements of accounting concepts and eight statements of accounting standards. GAO published these concepts and standards in FASAB Volume 1, Original Statements, Statements of Federal Financial Accounting Concepts and Standards, in March 1997. In 1984, OMB tasked an interagency group to develop a standard general ledger chart of accounts for governmentwide use. The resulting SGL was established and mandated for use by the Department of the Treasury in 1986. Further, OMB Circular A-127, Financial Management Systems, requires agencies to record financial events using the SGL at the transaction level. The SGL provides a uniform chart of accounts and pro forma transactions used to standardize federal agencies' financial information accumulation and processing, enhance financial control, and support budget and external reporting, including financial statement preparation. Use of the SGL improves data stewardship throughout the government, enabling consistent analysis and reporting at all levels within the agencies and at the governmentwide level. It is published in the Treasury Financial Manual. The Department of the Treasury's Financial Management Service is responsible for maintaining the SGL. As part of a CFO agency's annual audit, the auditor is to report whether the agency's financial management systems substantially comply with federal financial management systems requirements, applicable accounting standards, and the SGL. If the auditor determines that an agency's financial management systems do not substantially comply with these requirements, the act requires that the audit report (1) identify the entity or organization responsible for management and oversight of the noncompliant financial management systems, (2) disclose all facts pertaining to the failure to comply, including the nature and extent of the noncompliance, the primary reason or cause of the noncompliance, the entity or organization responsible for the noncompliance, and any relevant comments from responsible officers or employees, and (3) include recommended corrective actions and proposed time frames for implementing such actions. The act assigns to the head of an agency responsibility for determining, based on a review of the auditor's report and any other relevant information, whether the agency's financial management systems comply with the act's requirements. This determination is to be made no later than 120 days after the receipt of the auditor's report, or the last day of the fiscal year following the year covered by the audit, whichever comes first. If the head of an agency determines that the agency does not comply with the act's requirements, the agency head, in consultation with the Director of OMB, shall establish a remediation plan that will identify, develop, and implement solutions for noncompliant systems. The remediation plan is to include corrective actions, time frames, and resources necessary to achieve substantial compliance with the act's requirements within 3 years of the date the noncompliance determination is made. If, in consultation with the Director of OMB, the agency head determines that the agency's financial management systems are so deficient that substantial compliance cannot be reached within 3 years, the remediation plan must specify the most feasible date by which the agency will achieve compliance and designate an official responsible for effecting the necessary corrective actions. Under the FFMIA process, the auditor's and the agency head's determinations of compliance may differ. In such situations, the Director of OMB will review the differing determinations and report on the findings to the appropriate congressional committees. The act also contains additional reporting requirements. OMB is required to report each year on the act's implementation. In addition, each inspector general (IG) of the 24 CFO agencies is required to report to the Congress, as part of its semiannual report, instances in which an agency has not met the intermediate target dates established in its remediation plan and the reasons why. Efforts are underway to implement FFMIA and improve the quality of financial management systems. OMB recently issued implementation guidance in a memorandum dated September 9, 1997, for agencies and auditors to use in assessing compliance with FFMIA. This is interim guidance to be used in connection with audits of federal financial statements for fiscal year 1997. OMB's guidance emphasizes implementation of federal financial management improvements by fully describing in separate sections each of the requirements under the act, which are (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the SGL at the transaction level. Each section begins by identifying and discussing the executive branch policy documents that previously established the requirement. Information is also provided on the meaning of substantial compliance and the types of indicators that should be used in assessing whether an agency is in substantial compliance. For example, one indicator of substantial compliance with financial management systems requirements would include financial management systems that meet the requirements of OMB Circular A-127. Likewise, an indicator of substantial compliance with financial accounting standards would include an agency that has no material weaknesses in internal controls that affect its ability to prepare auditable financial statements and related disclosures in accordance with federal accounting standards. Information is also provided for the auditor to consider in evaluating and reporting audit results, as well as other reporting requirements. The guidance states that the auditor shall use professional judgment in determining substantial compliance with FFMIA. Further, substantial noncompliance in any one or more of the three requirements of FFMIA would result in substantial noncompliance with FFMIA. For example, an agency could have an unqualified opinion on its financial statements indicating that the financial statements are prepared in accordance with applicable federal accounting standards, yet have financial management systems that are not in substantial compliance with financial management systems requirements. This situation would preclude the agency from being in substantial compliance with FFMIA. Finally, the guidance also directs auditors to follow the reporting guidance, with respect to compliance, contained in OMB Bulletin 93-06. We have been discussing with OMB some refinements to this bulletin, with particular focus on four areas: (1) clarifying, based on information provided in OMB's implementation guidance, that the auditor should perform tests of the reporting entity's compliance with the requirements of FFMIA, (2) including in the reporting entity's management representation letter a representation about whether the reporting entity's financial management systems are in substantial compliance with FFMIA requirements, (3) clarifying that the auditor's report on the reporting entity's compliance with applicable laws and regulations state that the auditor performed sufficient compliance tests of FFMIA requirements to report whether the entity's financial management systems comply substantially with FFMIA requirements, and (4) separately stating in the auditor's report whether such tests disclosed any instances in which the reporting entity's financial management systems did not comply substantially with FFMIA requirements. Finally, we have discussed with OMB the requirement in the act, that if the reporting entity does not comply substantially with FFMIA requirements, the auditor's report needs to identify the entity or organization responsible for the financial management systems that have been found not to comply with FFMIA requirements; disclose all facts pertaining to the noncompliance, including the nature and extent of the noncompliance, such as the areas in which there is substantial but not full compliance; the primary reason or cause of the noncompliance; the entity or organization responsible for the noncompliance; and any relevant comments from reporting entity management or employee responsible for the noncompliance; and state recommended remedial actions and the time frames to implement such actions. We are also exploring other tools to assist the CFO and IG communities in implementing OMB's interim guidelines. OMB plans to review its interim guidelines and replace them during 1998 with revisions to appropriate OMB policy documents. Agencies are also taking steps to improve the quality of their financial management systems. According to the CFO Council's and OMB's Status Report on Financial Management Systems, dated June 1997, agencies are reporting plans to replace or upgrade operational applications within the next 5 years. For applications that are now under development or in the process of a phased implementation, reported plans are also in place to fully implement the SGL at the transaction level and comply with federal financial management system requirements. This report indicates that many agencies are also reporting considering greater use of commercial off-the-shelf software, cross-servicing, and outsourcing as they seek more effective ways to improve their financial management systems. Successful implementation of these efforts will be instrumental in achieving future compliance with FFMIA requirements. Agencies face significant challenges in achieving substantial compliance with the act's requirements in the near future. The majority of agencies did not receive an unqualified opinion on their fiscal year 1996 financial statements. In addition, fiscal year 1996 financial management systems inventory data, self-reported by agencies and summarized in the CFO Council's and OMB's June 1997 Status Report on Federal Financial Management Systems, reveal that the majority of agencies' financial systems did not comply with federal financial management systems requirements or the SGL at the transaction level prior to FFMIA's effective date. An inability to prepare timely and accurate financial statements suggests that agencies find it difficult to effectively implement applicable federal accounting standards. A financial statement audit provides a meaningful measure of compliance with applicable federal accounting standards. An unqualified opinion is one of several indications that the agency's financial management systems support the preparation of accurate and reliable financial statements with minimal manual intervention. However, for fiscal year 1996, only 6 of the 24 CFO agencies received unqualified opinions on their organizationwide financial statements. Further, according to OMB's Federal Financial Management Status Report & Five-Year Plan, only 13 CFO agencies anticipate being able to obtain unqualified opinions on their fiscal year 1997 financial statements. Our past audit experience has indicated that numerous agencies' financial management systems do not maintain and generate original data to readily prepare financial statements. Consequently, many agencies have relied on ad hoc efforts and manual adjustments to prepare financial statements. Such procedures can be time-consuming, produce inaccurate results, and delay the issuance of audited statements. In addition, agencies' lack of reliable and consistent financial information on a regular, ongoing basis undermines federal managers' ability to effectively evaluate the cost and performance of government programs and activities. Also, the current status of federal financial management systems portends potential problems in agencies complying fully with federal financial management systems requirements and the SGL as mandated by the act. When FFMIA was enacted, federal agencies lacked many of the basic systems needed to provide uniform and reliable financial information. Agencies are still struggling to comply with governmentwide standards and requirements, although they have recently exhibited some progress in implementing and maintaining financial management systems that comply with federal financial system requirements and the SGL. For instance, according to the CFO Council's and OMB's FY 1995 Status Report on Federal Financial Management Systems, issued in June 1996, only 29 percent of agencies' financial management systems were reported to be in compliance with JFMIP federal financial management system requirements. In addition, agencies had fully implemented the SGL in only 40 percent of the operational applications to which they reported it applied. The fiscal year 1996 status report, issued in June 1997, showed some improvement, with 36 percent of agencies' financial management systems reported as complying with federal financial management system requirements and full SGL implementation reported in 45 percent of the applications to which agencies reported it applied. However, these statistics indicate that the majority of agencies' financial management systems still lacked compliance with financial management systems requirements and full SGL implementation in fiscal year 1996. Using a due process and consensus building approach, FASAB has successfully provided the federal government with an initial set of accounting standards. To date, FASAB has recommended, and OMB and GAO have issued, two statements of accounting concepts and eight statements of accounting standards with various effective dates ranging from fiscal year 1994 through fiscal year 1998. These concepts and standards, which are listed in table 3, underpin OMB's guidance to agencies on the form and content of their financial statements. In addition to the two concepts and eight standards, FASAB is working on standards relating to management's discussion and analysis of federal financial statements, social insurance, the cost of capital, natural resources, and computer software costs. The objectives of federal financial reporting are to provide users with information about budgetary integrity, operating performance, stewardship, and systems and controls. With these as the objectives of federal financial reporting, the federal government can better develop new reporting models that bring together program performance information with audited financial information and provide congressional and other decisionmakers with a more complete picture of the results, operational performance, and the costs of agencies' operations. FFMIA is intended to improve federal accounting practices and increase the government's ability to provide credible and reliable financial information. Such information is important in providing a foundation for formulating budgets, managing government program operations, and making difficult policy choices. Efforts are underway both in assisting agencies in implementing the act's requirements and to assist auditors in measuring compliance with the act's requirements. However, long-standing problems with agencies' financial management systems suggests that agencies will have difficulty, at least in the short term, achieving compliance with the act's requirements. Successful implementation of the act and resulting financial management improvements depend on the united effort of all organizations involved, including agency CFOs, IGs, OMB, the Department of the Treasury, and GAO. In performing our work, we evaluated OMB's implementation guidance for FFMIA. In addition, we reviewed the CFO Council's and OMB's June 1997 and 1996 Status Report on Federal Financial Management Systems and OMB's June 1997 Federal Financial Management Status Report & Five-Year Plan. We did not verify or test the reliability of the data in these reports. Further, we reviewed fiscal year 1996 audit results for the 24 CFO agencies and applicable federal accounting standards. We conducted our work from July through September 1997 at GAO headquarters in Washington, D.C. in accordance with generally accepted government auditing standards. We provided a draft of this report to OMB and Treasury and they generally concurred with its contents. We have incorporated their comments as appropriate. We are sending copies of this letter to the Chairmen and Ranking Minority Members of the Subcommittee on Oversight of Government Management, Restructuring, and the District of Columbia, Senate Committee on Governmental Affairs; the Subcommittee on Government Management, Information, and Technology, House Committee on Government Reform and Oversight; other interested congressional committees; the Director, Office of Management and Budget; the Secretary of the Treasury; heads of the 24 CFO agencies; agency CFOs and IGs; and other interested parties. We will also make copies available to others upon request. This letter was prepared under the direction of Gloria L. Jarmon, Director, Civil Audits/Health and Human Services, who may be reached at (202) 512-4476 if you or your staffs have any questions. Major contributors to this letter are listed in appendix I. Deborah A. Taylor, Assistant Director Maria Cruz, Senior Audit Manager Anastasia Kaluzienski, Audit Manager The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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 legislative requirement, GAO provided information on: (1) the requirements of the Federal Financial Management Improvement Act (FFMIA) of 1996; (2) efforts under way to implement the act; (3) challenges that agencies face in achieving full compliance with those requirements; and (4) the status of federal accounting standards. GAO noted that: (1) it is too early to tell the extent to which the 24 agencies named in the Chief Financial Officers (CFO) Act will be in compliance with FFMIA requirements for fiscal year 1997 because auditor reports discussing the results of the fiscal year 1997 financial statement audits will generally not be available until March 1, 1998, which is the statutory reporting deadline; (2) the Office of Management and Budget (OMB) and the CFO agencies have initiated efforts to implement the act's requirements and improve financial management systems; (3) although auditors performing financial audits under the CFO Act are not required to report on FFMIA compliance until March 1, 1998, prior audit results and agency self-reporting all point to significant challenges that agencies must meet in fully implementing systems requirements, accounting standards, and the U.S. Government Standard General Ledger; (4) regarding the adequacy of accounting standards, the Federal Accounting Standards Advisory Board (FASAB) has successfully developed a good initial set of accounting standards; (5) to date, FASAB has recommended, and OMB and GAO have issued, two statements of accounting concepts and eight statements of accounting standards tailored to the federal government's unique characteristics and special needs; and (6) OMB has integrated these concepts and standards into its guidance to agencies on the form and content of their financial statements.

The Internet is a vast network of interconnected networks that is used by governments, businesses, research institutions, and individuals around the world to communicate, engage in commerce, do research, educate, and entertain. From its origins in the 1960s as a research project sponsored by the U.S. government, the Internet has grown increasingly important to both American and foreign businesses and consumers, serving as the medium for hundreds of billions of dollars of commerce each year. The Internet has also become an extended information and communications infrastructure, supporting vital services such as power distribution, health care, law enforcement, and national defense. Today, private industry--including telecommunications companies, cable companies, and Internet service providers--owns and operates the vast majority of the Internet's infrastructure. In recent years, cyber attacks involving malicious software or hacking have been increasing in frequency and complexity. These attacks can come from a variety of actors, including criminal groups, hackers, and terrorists. Federal regulation recognizes the need to protect critical infrastructures such as the Internet. It directs federal departments and agencies to identify and prioritize critical infrastructure sectors and key resources and to protect them from terrorist attack. Furthermore, it recognizes that since a large portion of these critical infrastructures is owned and operated by the private sector, a public/private partnership is crucial for the successful protection of these critical infrastructures. Federal policy also recognizes the need to be prepared for the possibility of debilitating disruptions in cyberspace and, because the vast majority of the Internet infrastructure is owned and operated by the private sector, tasks DHS with developing an integrated public/private plan for Internet recovery. In its plan for protecting critical infrastructures, DHS recognizes that the Internet is a key resource composed of assets within both the information technology and the telecommunications sectors. It notes that the Internet is used by all critical infrastructure sectors to varying degrees and provides information and communications to meet the needs of businesses and government. In the event of a major Internet disruption, multiple organizations could help recover Internet service. These organizations include private industry, collaborative groups, and government organizations. Private industry is central to Internet recovery because private companies own the vast majority of the Internet's infrastructure and often have response plans. Collaborative groups--including working groups and industry councils--provide information-sharing mechanisms to allow private organizations to restore services. In addition, government initiatives could facilitate response to major Internet disruptions. Federal policies and plans assign DHS lead responsibility for facilitating a public/private response to and recovery from major Internet disruptions. Within DHS, responsibilities reside in two divisions within the Preparedness Directorate: the National Cyber Security Division (NCSD) and the National Communications System (NCS). NCSD operates the U.S. Computer Emergency Readiness Team (US-CERT), which coordinates defense against and response to cyber attacks. The other division, NCS, provides programs and services that assure the resilience of the telecommunications infrastructure in times of crisis. Additionally, the Federal Communications Commission can support Internet recovery by coordinating resources for restoring the basic communications infrastructures over which Internet services run. For example, after Hurricane Katrina, the commission granted temporary authority for private companies to set up wireless Internet communications supporting various relief groups; federal, state, and local government agencies; businesses; and victims in the disaster areas. Prior evaluations of DHS's cybersecurity responsibilities have highlighted issues and challenges facing the department. In May 2005, we issued a report on DHS's efforts to fulfill its cybersecurity responsibilities. We noted that while DHS had initiated multiple efforts to fulfill its responsibilities, it had not fully addressed any of the 13 key cybersecurity responsibilities noted in federal law and policy. We also reported that DHS faced a number of challenges that have impeded its ability to fulfill its cyber responsibilities. These challenges included achieving organizational stability, gaining organizational authority, overcoming hiring and contracting issues, increasing awareness of cybersecurity roles and capabilities, establishing effective partnerships with stakeholders, achieving two- way information sharing with stakeholders, and demonstrating the value that DHS can provide. In this report, we also made recommendations to improve DHS's ability to fulfill its mission as an effective focal point for cybersecurity, including recovery plans for key Internet functions. DHS agreed that strengthening cybersecurity is central to protecting the nation's critical infrastructures and that much remained to be done, but it has not yet addressed our recommendations. The Internet's infrastructure is vulnerable to disruptions in service due to terrorist and other malicious attacks, natural disasters, accidents, technological problems, or a combination of the above. Disruptions to Internet service can be caused by cyber and physical incidents--both intentional and unintentional. Recent physical and cyber incidents have caused localized or regional disruptions, highlighting the importance of recovery planning. However, these incidents have also shown the Internet as a whole to be flexible and resilient. Even in severe circumstances, the Internet has not yet suffered a catastrophic failure. To date, cyber attacks have caused various degrees of damage. For example, in 2001, the Code Red worm used a denial-of-service attack to affect millions of computer users by shutting down Web sites, slowing Internet service, and disrupting business and government operations. In 2003, the Slammer worm caused network outages, canceled airline flights, and automated teller machine failures. Slammer resulted in temporary loss of Internet access to some users, and cost estimates on the impact of the worm range from $1.05 billion to $1.25 billion. The federal government coordinated with security companies and Internet service providers and released an advisory recommending that federal departments and agencies patch and block access to the affected channel. However, because the worm had propagated so quickly, most of these activities occurred after it had stopped spreading. In 2002, a coordinated denial-of-service attack was launched against all of the root servers in the Domain Name System. At least nine of the thirteen root servers experienced degradation of service. However, average end users hardly noticed the attack. The attack became visible only as a result of various Internet health-monitoring projects. The response to the attacks was handled by the server operators and their service providers. The attack pointed to a need for increased capacity for servers at Internet exchange points to enable them to manage the high volumes of data traffic during an attack. If a massive disruptive attack on the domain name server system were successful, it could take several days to recover from. According to experts familiar with the attack, the government did not have a role in recovering from it. Like cyber incidents, physical incidents could affect various aspects of the Internet infrastructure, including underground or undersea cables and facilities that house telecommunications equipment, Internet exchange points, or Internet service providers. For example, on July 18, 2001, a 60-car freight train derailed in a Baltimore tunnel, causing a fire that interrupted Internet and data services between Washington and New York. The tunnel housed fiber-optic cables serving seven of the biggest U.S. Internet service providers. The fire burned and severed fiber optic cables, causing backbone slowdowns for at least three major Internet service providers. Efforts to recover Internet service were handled by the affected Internet service providers; however, local and federal officials responded to the immediate physical issues of extinguishing the fire and maintaining safety in the surrounding area, and they worked with telecommunications companies to reroute affected cables. In addition, Hurricane Katrina caused substantial destruction of the communications infrastructure in Louisiana, Mississippi, and Alabama, but it had minimal affect on the overall functioning of the Internet outside of the immediate area. According to an Internet monitoring service provider, while there was a loss of routing around the affected area, there was no significant impact on global Internet routing. According to the Federal Communications Commission, the storm caused outages for over 3 million telephone customers, 38 emergency 9-1-1 call centers, hundreds of thousands of cable customers, and over 1,000 cellular sites. However, a substantial number of the networks that experienced service disruptions recovered relatively quickly. Federal officials stated that the government took steps to respond to the hurricane, such as increasing analysis and watch services in the affected area, coordinating with communications companies to move personnel to safety, working with fuel and equipment providers, and rerouting communications traffic away from affected areas. However, private-sector representatives stated that requests for assistance, such as food, water, fuel, and secure access to facilities were denied for legal reasons; the government made time- consuming and duplicative requests for information; and certain government actions impeded recovery efforts. Since its inception, the Internet has experienced disruptions of varying scale--including fast-spreading worms, denial-of-service attacks, and physical destruction of key infrastructure components--but the Internet has yet to experience a catastrophic failure. However, it is possible that a complex attack or set of attacks could cause the Internet to fail. It is also possible that a series of attacks against the Internet could undermine users' trust and thereby reduce the Internet's utility. Several federal laws and regulations provide broad guidance that applies to the Internet infrastructure, but it is not clear how useful these authorities would be in helping to recover from a major Internet disruption because some do not specifically address Internet recovery and others have seldom been used. Pertinent laws and regulations address critical infrastructure protection, federal disaster response, and the telecommunications infrastructure. Specifically, the Homeland Security Act of 2002 and Homeland Security Presidential Directive 7 establish critical infrastructure protection as a national goal and describe a strategy for cooperative efforts by the government and the private sector to protect the physical and cyber-based systems that are essential to the operations of the economy and the government. These authorities apply to the Internet because it is a core communications infrastructure supporting the information technology and telecommunications sectors. However, this law and regulation do not specifically address roles and responsibilities in the event of an Internet disruption. Regarding federal disaster response, the Defense Production Act and the Stafford Act provide authority to federal agencies to plan for and respond to incidents of national significance like disasters and terrorist attacks. Specifically, the Defense Production Act authorizes the President to ensure the timely availability of products, materials, and services needed to meet the requirements of a national emergency. It is applicable to critical infrastructure protection and restoration but has never been used for Internet recovery. The Stafford Act authorizes federal assistance to states, local governments, nonprofit entities, and individuals in the event of a major disaster or emergency. However, the act does not authorize assistance to for-profit companies--such as those that own and operate core Internet components. Other legislation and regulations, including the Communications Act of 1934 and the NCS authorities, govern the telecommunications infrastructure and help to ensure communications during national emergencies. For example, the NCS authorities establish guidance for operationally coordinating with industry to protect and restore key national security and emergency preparedness communications services. These authorities grant the President certain emergency powers regarding telecommunications, including the authority to require any carrier subject to the Communications Act of 1934 to grant preference or priority to essential communications. The President may also, in the event of war or national emergency, suspend regulations governing wire and radio transmissions and authorize the use or control of any such facility or station and its apparatus and equipment by any department of the government. Although these authorities remain in force in the Code of Federal Regulations, they have been seldom used--and never for Internet recovery. Thus it is not clear how effective they would be if used for this purpose. In commenting on the statutory authority for Internet reconstitution following a disruption, DHS agreed that this authority is lacking and noted that the government's roles and authorities related to assisting in Internet reconstitution following a disruption are not fully defined. DHS has begun a variety of initiatives to fulfill its responsibility to develop an integrated public/private plan for Internet recovery, but these efforts are not complete or comprehensive. Specifically, DHS has developed high-level plans for infrastructure protection and national disaster response, but the components of these plans that address the Internet infrastructure are not complete. In addition, DHS has started a variety of initiatives to improve the nation's ability to recover from Internet disruptions, including working groups to facilitate coordination and exercises in which government and private industry practice responding to cyber events. While these activities are promising, some initiatives are not complete, others lack time lines and priorities, and still others lack effective mechanisms for incorporating lessons learned. In addition, the relationship between these initiatives is not evident. As a result, the nation is not prepared to effectively coordinate public/private plans for recovering from a major Internet disruption. DHS has two key documents that guide its infrastructure protection and recovery efforts, but components of these plans dealing with Internet recovery are not complete. The National Response Plan is DHS's overarching framework for responding to domestic incidents. It contains two components that address issues related to telecommunications and the Internet, Emergency Support Function 2 and the Cyber Incident Annex. These components, however, are not complete; Emergency Support Function 2 does not directly address Internet recovery, and the annex does not reflect the National Cyber Response Coordination Group's current operating procedures. The other key document, the National Infrastructure Protection Plan, consists of both a base plan and sector-specific plans. The base plan, which was recently released, describes the importance of cybersecurity and networks such as the Internet to critical infrastructure protection and includes an appendix that provides information on cybersecurity responsibilities. The appendix restates DHS's responsibility to develop plans to recover Internet functions. However, the base plan is at a high level and the sector-specific plans that would address the Internet in more detail are not scheduled for release until December 2006. Several representatives of private-sector firms supporting the Internet infrastructure expressed concerns about both plans, noting that they would be difficult to execute in times of crisis. Other representatives were uneasy about the government developing recovery plans, because they were not confident of the government's ability to successfully execute the plans. DHS officials acknowledged that it will be important to obtain input from private- sector organizations as they refine these plans and initiate more detailed public/private planning. Both the National Response Plan and National Infrastructure Protection Plan are designed to be supplemented by more specific plans and activities. DHS has numerous initiatives under way to better define its ability to assist in responding to major Internet disruptions. While these activities are promising, some initiatives are incomplete, others lack time lines and priorities, and still others lack an effective mechanism for incorporating lessons learned. DHS plans to revise the role and mission of the National Communications System (NCS) to reflect the convergence of voice and data communications, but this effort is not yet complete. A presidential advisory committee on telecommunications established two task forces that recommended changes to NCS's role, mission, and functions to reflect this convergence, but DHS has not yet developed plans to address these recommendations. As a primary entity responsible for coordinating governmentwide responses to cyber incidents--such as major Internet disruptions-- DHS's National Cyber Response Coordination Group is working to define its roles and responsibilities, but much remains to be done. DHS officials acknowledge that the trigger to activate this group is imprecise and will need to be clarified. Because key activities to define roles, responsibilities, capabilities, and the appropriate triggers for government involvement are still under way, the group is at risk of not being able to act quickly and definitively during a major Internet disruption. Since most of the Internet is owned and operated by the private sector, NCSD and NCS established the Internet Disruption Working Group to work with the private sector to establish priorities and develop action plans to prevent major disruptions of the Internet and to identify recovery measures in the event of a major disruption. According to DHS officials who organized the group, it held its first forum, in November 2005, to begin to identify real versus perceived threats to the Internet, refine the definition of an Internet disruption, determine the scope of a planned analysis of disruptions, and identify near-term protective measures. DHS officials stated that they had identified a number of potential future plans; however, agency officials have not yet finalized plans, resources, or milestones for these efforts. US-CERT officials formed the North American Incident Response Group, which includes both public and private-sector network operators that would be the first to recognize and respond to cyber disruptions. In September 2005, US-CERT officials conducted regional workshops with group members to share information on structure, programs, and incident response and to seek ways for the government and industry to work together operationally. While the outreach efforts of the North American Incident Response Group are promising, DHS has only just begun developing plans and activities to address the concerns of private-sector stakeholders. Over the last few years, DHS has conducted several broad inter- governmental exercises to test regional responses to significant incidents that could affect the critical infrastructure. More recently, in February 2006, DHS conducted an exercise called Cyber Storm, which was focused primarily on testing responses to a cyber-related incident of national significance. Exercises that include Internet disruptions can help to identify issues and interdependencies that need to be addressed. However, DHS has not yet identified planned activities, milestones, or which group should be responsible for incorporating lessons learned from the regional and Cyber Storm exercises into its plans and initiatives. While DHS has various initiatives under way, the relationships and interdependencies between these various efforts are not evident. For example, the National Cyber Response Coordination Group, the Internet Disruption Working Group, and the North American Incident Response Group are all meeting to discuss ways to address Internet recovery, but the interdependencies between the groups have not been clearly established. Without a thorough understanding of the interrelationships between its various initiatives, DHS risks pursuing redundant efforts and missing opportunities to build on related efforts. After our report was issued, a private-sector organization released a report that examined the nation's preparedness for a major Internet disruption. The report stated that our nation is unprepared to reconstitute the Internet after a massive disruption. The report supported our findings that significant gaps exist in government response plans and that the responsibilities of the multiple organizations that would play a role in recovery are unclear. The report also made recommendations to complete and revise response plans such as the Cyber Incident Annex of the National Response Plan; better define recovery roles and responsibilities; and establish more effective oversight and strategic direction for Internet reconstitution. Although DHS has various initiatives under way to improve Internet recovery planning, it faces key challenges in developing a public/private plan for Internet recovery, including (1) innate characteristics of the Internet that make planning for and responding to a disruption difficult, (2) lack of consensus on DHS's role and on when the department should get involved in responding to a disruption, (3) legal issues affecting DHS's ability to provide assistance to restore Internet service, (4) reluctance of the private sector to share information on Internet disruptions with DHS, and (5) leadership and organizational uncertainties within DHS. Until it addresses these challenges, DHS will have difficulty achieving results in its role as focal point for recovering the Internet from a major disruption. First, the Internet's diffuse structure, vulnerabilities in its basic protocols, and the lack of agreed-upon performance measures make planning for and responding to a disruption more difficult. The components of the Internet are not all governed by the same organization. In addition, the Internet is international. According to private-sector estimates, only about 20 percent of Internet users are in the United States. Also, there are no well-accepted standards for measuring and monitoring the Internet infrastructure's availability and performance. Instead, individuals and organizations rate the Internet's performance according to their own priorities. Second, there is no consensus about the role DHS should play in responding to a major Internet disruption or about the appropriate trigger for its involvement. The lack of clear legislative authority for Internet recovery efforts complicates the definition of this role. DHS officials acknowledged that their role in recovering from an Internet disruption needs further clarification because private industry owns and operates the vast majority of the Internet. The trigger for the National Response Plan, which is DHS's overall framework for incident response, is poorly defined and has been found by both us and the White House to need revision. Since private-sector participation in DHS planning activities for Internet disruption is voluntary, agreement on the appropriate trigger for government involvement and the role of government in resolving an Internet disruption is essential to any plan's success. Private-sector officials representing telecommunication backbone providers and Internet service providers were also unclear about the types of assistance DHS could provide in responding to an incident and about the value of such assistance. There was no consensus on this issue. Many private-sector officials stated that the government did not have a direct recovery role, while others identified a variety of potential roles, including * providing information on specific threats; * providing security and disaster relief support during a crisis; * funding backup communication infrastructures; * driving improved Internet security through requirements for the government's own procurement; * serving as a focal point with state and local governments to establish standard credentials to allow Internet and telecommunications companies access to areas that have been restricted or closed in a crisis; * providing logistical assistance, such as fuel, power, and security, to Internet infrastructure operators; * focusing on smaller-scale exercises targeted at specific Internet limiting the initial focus for Internet recovery planning to key national security and emergency preparedness functions, such as public health and safety; and * establishing a system for prioritizing the recovery of Internet service, similar to the existing Telecommunications Service Priority Program. A third challenge to planning for recovery is that there are key legal issues affecting DHS's ability to provide assistance to help restore Internet service. As noted earlier, key legislation and regulations guiding critical infrastructure protection, disaster recovery, and the telecommunications infrastructure do not provide specific authorities for Internet recovery. As a result, there is no clear legislative guidance on which organization would be responsible in the case of a major Internet disruption. In addition, the Stafford Act, which authorizes the government to provide federal assistance to states, local governments, nonprofit entities, and individuals in the event of a major disaster or emergency, does not authorize assistance to for-profit corporations. Several representatives of telecommunications companies reported that they had requested federal assistance from DHS during Hurricane Katrina. Specifically, they requested food, water, and security for the teams they were sending in to restore the communications infrastructure and fuel to power their generators. DHS responded that it could not fulfill these requests, noting that the Stafford Act did not extend to for-profit companies. A fourth challenge is that a large percentage of the nation's critical infrastructure--including the Internet--is owned and operated by the private sector, meaning that public/private partnerships are crucial for successful critical infrastructure protection. Although certain policies direct DHS to work with the private sector to ensure infrastructure protection, DHS does not have the authority to direct Internet owners and operators in their recovery efforts. Instead, it must rely on the private sector to share information on incidents, disruptions, and recovery efforts. Many private-sector representatives questioned the value of providing information to DHS regarding planning for and recovery from Internet disruption. In addition, DHS has identified provisions of the Federal Advisory Committee Act as having a "chilling effect" on cooperation with the private sector. The uncertainties regarding the value and risks of cooperation with the government limit incentives for the private sector to cooperate in Internet recovery-planning efforts. Finally, DHS has lacked permanent leadership while developing its preliminary plans for Internet recovery and reconstitution. In addition, the organizations with roles in Internet recovery (NCS and NCSD) have overlapping responsibilities and may be reorganized once DHS selects permanent leadership. As a result, it is difficult for DHS to develop a clear set of organizational priorities and to coordinate between the various activities necessary for Internet recovery planning. In May 2005, we reported that multiple senior DHS cybersecurity officials had recently left the department. These officials included the NCSD Director, the Deputy Director responsible for Outreach and Awareness, the Director of the US- CERT Control Systems Security Center, the Under Secretary for the Information Analysis and Infrastructure Protection Directorate and the Assistant Secretary responsible for the Information Protection Office. Additionally, DHS officials acknowledge that the current organizational structure has overlapping responsibilities for planning for and recovering from a major Internet disruption. In a July 2005 departmental reorganization, NCS and NCSD were placed in the Preparedness Directorate. NCS's and NCSD's responsibilities were to be placed under a new Assistant Secretary of Cyber Security and Telecommunications--in part to raise the visibility of cybersecurity issues in the department. However, almost a year later, this position remains vacant. While DHS stated that the lack of a permanent assistant secretary has not hampered its efforts in protecting critical infrastructure, several private-sector representatives stated that DHS's lack of leadership in this area has limited progress. Specifically, these representatives stated that filling key leadership positions would enhance DHS's visibility to the Internet industry and potentially improve its reputation. Given the importance of the Internet infrastructure to our nation's communication and commerce, in our accompanying report we suggested matters for congressional consideration and made recommendations to DHS regarding improving efforts in planning for Internet recovery. Specifically, we suggested that Congress consider clarifying the legal framework that guides roles and responsibilities for Internet recovery in the event of a major disruption. This effort could include providing specific authorities for Internet recovery as well as examining potential roles for the federal government, such as providing access to disaster areas, prioritizing selected entities for service recovery, and using federal contracting mechanisms to encourage more secure technologies. This effort also could include examining the Stafford Act to determine whether there would be benefits in establishing specific authority for the government to provide for-profit companies--such as those that own or operate critical communications infrastructures--with limited assistance during a crisis. Additionally, to improve DHS's ability to facilitate public/private efforts to recover the Internet in case of a major disruption, we recommended that the Secretary of the Department of Homeland Security implement the following nine actions: * Establish dates for revising the National Response Plan--including efforts to update key components that are relevant to the Internet. * Use the planned revisions to the National Response Plan and the National Infrastructure Protection Plan as a basis to draft public/private plans for Internet recovery and obtain input from key Internet infrastructure companies. * Review the NCS and NCSD organizational structures and roles in light of the convergence of voice and data communications. * Identify the relationships and interdependencies among the various Internet recovery-related activities currently under way in NCS and NCSD, including initiatives by US-CERT, the National Cyber Response Coordination Group, the Internet Disruption Working Group, the North American Incident Response Group, and the groups responsible for developing and implementing cyber recovery exercises. * Establish time lines and priorities for key efforts identified by the Internet Disruption Working Group. * Identify ways to incorporate lessons learned from actual incidents and during cyber exercises into recovery plans and procedures. * Work with private-sector stakeholders representing the Internet infrastructure to address challenges to effective Internet recovery by * further defining needed government functions in responding to a major Internet disruption (this effort should include a careful consideration of the potential government functions identified by the private sector earlier in this testimony), * defining a trigger for government involvement in responding to such a disruption, and * documenting assumptions and developing approaches to deal with key challenges that are not within the government's control. In written comments, DHS agreed with our recommendations and stated that it recognizes the importance of the Internet for information infrastructures. DHS also provided information about initial actions it is taking to implement our recommendations. In summary, as a critical information infrastructure supporting our nation's commerce and communications, the Internet is subject to disruption--from both intentional and unintentional incidents. While major incidents to date have had regional or local impacts, the Internet has not yet suffered a catastrophic failure. Should such a failure occur, however, existing legislation and regulations do not specifically address roles and responsibilities for Internet recovery. As the focal point for ensuring the security of cyberspace, DHS has initiated efforts to refine high-level disaster recovery plans; however, pertinent Internet components of these plans are not complete. While DHS has also undertaken several initiatives to improve Internet recovery planning, much remains to be done. Specifically, some initiatives lack clear timelines, lessons learned are not consistently being incorporated in recovery plans, and the relationships between the various initiatives are not clear. DHS faces numerous challenges in developing integrated public/private recovery plans--not the least of which is the fact that the government does not own or operate much of the Internet. In addition, there is no consensus among public and private stakeholders about the appropriate role of DHS and when it should get involved; legal issues limit the actions the government can take; the private sector is reluctant to share information on Internet performance with the government; and DHS is undergoing important organizational and leadership changes. As a result, the exact role of the government in helping to recover the Internet infrastructure following a major disruption remains unclear. To improve DHS's ability to facilitate public/private efforts to recover the Internet in case of a major disruption, our report suggested that Congress consider clarifying the legal framework guiding Internet recovery. We also made recommendations to DHS to establish clear milestones for completing key plans, coordinate various Internet recovery-related activities, and address key challenges to Internet recovery planning. Effectively implementing these recommendations could greatly enhance our nation's ability to recover from a major Internet disruption. 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 us at (202) 512-9286 and at (202) 512-6412 or by e- mail at [email protected] and [email protected]. Other key contributors to this testimony include Don R. Adams, Naba Barkakati, Scott Borre, Neil Doherty, Vijay D'Souza, Joshua A. Hammerstein, Bert Japikse, Joanne Landesman, Frank Maguire, Teresa M. Neven, and Colleen M. Phillips. (310829) 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.

Since the early 1990s, growth in the use of the Internet has revolutionized the way that our nation communicates and conducts business. While the Internet originated as a U.S. government-sponsored research project, the vast majority of its infrastructure is currently owned and operated by the private sector. Federal policy recognizes the need to prepare for debilitating Internet disruptions and tasks the Department of Homeland Security (DHS) with developing an integrated public/private plan for Internet recovery. GAO was asked to summarize its report--Internet Infrastructure: DHS Faces Challenges in Developing a Joint Public/Private Recovery Plan, GAO-06-672 (Washington, D.C.: June 16, 2006). This report (1) identifies examples of major disruptions to the Internet, (2) identifies the primary laws and regulations governing recovery of the Internet in the event of a major disruption, (3) evaluates DHS plans for facilitating recovery from Internet disruptions, and (4) assesses challenges to such efforts. A major disruption to the Internet could be caused by a physical incident (such as a natural disaster or an attack that affects key facilities), a cyber incident (such as a software malfunction or a malicious virus), or a combination of both physical and cyber incidents. Recent physical and cyber incidents, such as Hurricane Katrina, have caused localized or regional disruptions but have not caused a catastrophic Internet failure. Federal laws and regulations that address critical infrastructure protection, disaster recovery, and the telecommunications infrastructure provide broad guidance that applies to the Internet, but it is not clear how useful these authorities would be in helping to recover from a major Internet disruption. Specifically, key legislation on critical infrastructure protection does not address roles and responsibilities in the event of an Internet disruption. Other laws and regulations governing disaster response and emergency communications have never been used for Internet recovery. DHS has begun a variety of initiatives to fulfill its responsibility for developing an integrated public/private plan for Internet recovery, but these efforts are not complete or comprehensive. Specifically, DHS has developed high-level plans for infrastructure protection and incident response, but the components of these plans that address the Internet infrastructure are not complete. In addition, the department has started a variety of initiatives to improve the nation's ability to recover from Internet disruptions, including working groups to facilitate coordination and exercises in which government and private industry practice responding to cyber events. However, progress to date on these initiatives has been limited, and other initiatives lack time frames for completion. Also, the relationships among these initiatives are not evident. As a result, the government is not yet adequately prepared to effectively coordinate public/private plans for recovering from a major Internet disruption. Key challenges to establishing a plan for recovering from Internet disruptions include (1) innate characteristics of the Internet that make planning for and responding to disruptions difficult, (2) lack of consensus on DHS's role and when the department should get involved in responding to a disruption, (3) legal issues affecting DHS's ability to provide assistance to restore Internet service, (4) reluctance of many in the private sector to share information on Internet disruptions with DHS, and (5) leadership and organizational uncertainties within DHS. Until these challenges are addressed, DHS will have difficulty achieving results in its role as a focal point for helping the Internet to recover from a major disruption.

To meet the challenges of ongoing operations in Iraq and Afghanistan, DOD has taken steps to increase the availability of personnel and equipment for units deploying to Iraq and Afghanistan, particularly with regard to the Army and Marine Corps. Among other things, DOD has adjusted rotation goals, and employed strategies such as to retrain units to perform missions other than those they were designed to perform. It has also transferred equipment from nondeployed units and prepositioned stocks to support deployed units. The Army and Marine Corps have refocused training to prepare deploying units for counterinsurgency missions. DOD has also relied more on Navy and Air Force personnel and contractors to help perform tasks normally handled by Army or Marine Corps personnel. Using these measures, DOD has been able to continue to support ongoing operations, but not without consequences for readiness. In the short term, ground forces are limited in their ability to train for other missions and nondeployed forces are experiencing shortages of resources. The long-term implications of DOD's actions, such as the impact of increasing deployment times on recruiting and retention, are unclear. For the past several years, DOD has continually rotated forces in and out of Iraq and Afghanistan to maintain required force levels. While DOD's goals generally call for active component personnel to be deployed for 1 of every 3 years and reserve component personnel involuntarily mobilized 1 of 6 years, many have been mobilized and deployed more frequently. Additionally, ongoing operations have created particularly high demand for certain ranks and occupational specialties. For example, officers and senior noncommissioned officers are in particularly high demand due to increased requirements within deployed headquarters organizations and new requirements for transition teams, which train Iraqi and Afghan forces. Several support force occupations such as engineering, civil affairs, transportation, and military police have also been in high demand. Since September 11, 2001, DOD has made a number of adjustments to its personnel policies, including those related to length of service obligations, length of deployments, frequency of reserve component mobilizations, and the use of volunteers. While these measures have helped to increase the availability of personnel in the short term, the long-term impacts of many of these adjustments are uncertain. For example, the Army has successively increased the length of deployments in Iraq--from 6 to 12 and eventually to 15 months. Also, the services have, at various times, used "stop-loss" policies, which prevent personnel from leaving the service, and DOD has made changes to reserve component mobilization policies. In the latter case, DOD modified its policy, which had previously limited the cumulative amount of time that reserve component servicemembers could be involuntarily called to active duty for the Global War on Terrorism. Under DOD's new policy, which went into effect in January 2007, there are no cumulative limits on these involuntary mobilizations, but DOD has set goals to limit the mobilizations to 12 months and to have 5 years between these Global War on Terrorism involuntary mobilizations. DOD has also stated that in the short term it will not be able to meet its goal for 5 years between rotations. By making these adjustments, DOD has made additional personnel available for deployment, thus helping to meet short- term mission requirements in Iraq and Afghanistan. However, it is unclear whether longer deployments or more frequent involuntary mobilizations or other adjustments will affect recruiting and retention. In the near term, the Army and Marine Corps have taken a number of steps to meet operational requirements and mitigate the stress on their forces. Such actions include deploying units from branches with lower operational tempos in place of units from branches with higher operational tempos after conducting some additional training for the units. For example, after retraining units, the Army has used active component field artillery units for convoy escort, security, and gun truck missions and has used active and reserve component quartermaster units to provide long-haul bulk fuel support in Iraq. As we have reported, ongoing military operations in Iraq and Afghanistan combined with harsh combat and environmental conditions are inflicting heavy wear and tear on equipment items that, in some cases, are more than 20 years old. In response to the sustained operations in Iraq and Afghanistan, the Army and Marine Corps developed programs to reset (repair or replace) equipment to return damaged equipment to combat- ready status for current and future operations. We also have reported that while the Army and Marine Corps continue to meet mission requirements and report high readiness rates for deployed units, nondeployed units have reported a decrease in reported readiness rates, in part due to equipment shortages. Some units preparing for deployment have reported shortages of equipment on hand as well as specific equipment item shortfalls that affect their ability to carry out their missions. The Army Chief of Staff has testified that the Army has had to take equipment from nondeployed units in order to provide it to deployed units. The Marine Corps has also made trade-offs between preparing units to deploy to Iraq and Afghanistan and other unit training. In addition, the Army National Guard and Army Reserve have transferred large quantities of equipment to deploying units, which has contributed to equipment shortages in nondeployed units. As a result, state officials have expressed concerns about their National Guard's equipment that would be used for domestic requirements. To meet current mission requirements, the services, especially the Army and the Marine Corps, have focused unit training on counterinsurgency tasks. Given limitations in training time, and the current focus on preparing for upcoming, scheduled deployments, nondeployed troops are spending less training time on their core tasks than in the past. Our analysis of Army unit training plans and discussions with training officials indicate that unit commanders' training plans have focused solely on preparing for their unit's assigned mission instead of moving progressively from preparing for core missions to training for full-spectrum operations. Since February 2004, all combat training rotations conducted at the Army's National Training Center have been mission rehearsal exercises to prepare units for deployments, primarily to Iraq and Afghanistan. As a result, units are not necessarily developing and maintaining the skills for a fuller range of missions. For instance, units do not receive full-spectrum operations training such as combined arms maneuver and high-intensity combat. In addition, the Army has changed the location of some training. According to Army officials, the National Training Center has provided home station mission rehearsal exercises at three Army installations, but these exercises were less robust and on a smaller scale than those conducted at the center. Army leaders have noted that the limited time between deployments has prevented their units from completing the full-spectrum training that the units were designed and organized to perform. The Chief of Staff of the Army recently stated that units need 18 months between deployments to be able to conduct their entire full-spectrum mission training. While the Chairman of the Joint Chiefs of Staff expressed concerns about the impact of the current operational tempo on full- spectrum training during his testimony last week, he also noted that the military is capable of responding to all threats to our vital national interests. The Army's decision to remove equipment from its prepositioned ships impacts its ability to fill equipment shortages in nondeployed units and could impact DOD's ability to meet other demands if new demands were to cause requirements to rise above current levels to new peaks. The Army's decision to accelerate the creation of two additional brigade combat teams by removing equipment from prepositioned ships in December 2006 helps the Army to move toward its deployment rotation goals. However, the lack of prepositioned equipment means that deploying units will either have to deploy with their own equipment or wait for other equipment to be assembled and transported to their deployment location. Either of these options could slow deployment response times. The most recent DOD end-to-end mobility analysis found that the mobility system could continue to sustain the current (post 9/11) tempo of operations with acceptable risk. The study found that when fully mobilized and augmented by the Civil Reserve Air Fleet and the Voluntary Intermodal Sealift Agreement ships, the United States has sufficient capability to support national objectives during a peak demand period with acceptable risk. The study highlighted the need for DOD to continue actions to reset and reconstitute prepositioned assets. However, some prepositioned stocks have been depleted. Since portions of the Army's prepositioned equipment are no longer available, transportation requirements may increase and risk levels may increase, which could increase timelines for delivery of personnel and equipment. Shortly after September 11, 2001, the Army's pace of operations was relatively low, and it was generally able to meet combatant commander requirements with its cadre of active duty and reserve component personnel. For example, in the aftermath of September 11, 2001, the President, through the Secretary of Defense and the state governors, used Army National Guard forces to fill security roles both at Air Force bases and domestic civilian airports. Today, with the Army no longer able to meet the deployment rotation goals for its active and National Guard and Reserve forces due to the pace of overseas operations, DOD is increasingly turning to the Navy and the Air Force to help meet requirements for skills typically performed by ground forces. The Navy and Air Force are filling many of these traditional Army ground force requirements with personnel who possess similar skills to the Army personnel they are replacing. According to Air Force and Navy testimony before this committee in July 2007, some examples of the personnel with similar skills included engineers, security forces, chaplains, and public affairs, intelligence, medical, communications, logistics, and explosive ordnance disposal personnel. The Navy and Air Force are also contributing personnel to meet emerging requirements for transition teams to train Iraqi and Afghan forces. Regardless of whether they are filling new requirements or just operating in a different environment with familiar sets of skills, Navy and Air Force personnel undergo additional training prior to deploying for these nontraditional assignments. While we have not verified the numbers, according to the July 2007 testimonies, the Air Force and Navy deployments in support of nontraditional missions had grown significantly since 2004 and at the time of the testimonies the Air Force reported that it had approximately 6,000 personnel filling nontraditional positions in the Central Command area of responsibility, while the Navy reported that it had over 10,000 augmentees making significant contributions to the Global War on Terror. Finally, the Air Force testimony noted that many personnel who deployed for these nontraditional missions came from stressed career fields--security force, transportation, air traffic control, civil engineering, and explosive ordnance disposal--that were not meeting DOD's active force goal of limiting deployments to 1 in every 3 years. The U.S. military has long used contractors to provide supplies and services to deployed U.S. forces; however, the scale of contractor support in Iraq is far greater than in previous military operations, such as Operation Desert Shield/Desert Storm and in the Balkans. Moreover, DOD's reliance on contractors continues to grow. In December 2006, the Army estimated that almost 60,000 contractor employees supported ongoing military operations in Southwest Asia. In October 2007, DOD estimated the number of DOD contractors in Iraq to be about 129,000. By way of contrast, an estimated 9,200 contractor personnel supported military operations in the 1991 Gulf War. In Iraq, contractors provide deployed U.S. forces with an almost endless array of services and support, including communication services; interpreters who accompany military patrols; base operations support (e.g., food and housing); maintenance services for both weapon systems and tactical and nontactical vehicles; intelligence analysis; warehouse and supply operations; and security services to protect installations, convoys, and DOD personnel. Factors that have contributed to this increase include reductions in the size of the military, an increase in the number of operations and missions undertaken, a lack of organic military capabilities, and DOD's use of increasingly sophisticated weapons systems. DOD has long recognized that contractors are necessary to successfully meet current and future requirements. In 1990, DOD issued guidance that requires DOD components to determine which contracts provide essential services and gives commanders three options if they cannot obtain reasonable assurance of continuation of essential services by a contractor: they can obtain military, DOD civilian, or host-nation personnel to perform services; they can prepare a contingency plan for obtaining essential services; or they can accept the risk attendant with a disruption of services during a crisis situation. While our 2003 report found that DOD has not taken steps to implement the 1990 guidance, DOD officials informed us that DOD has awarded a contract to deploy planners to the combatant commands. According to the DOD officials, the planners will focus on the contractor support portions of the operational plans, including requirements for contractor services. In addition, the planners will streamline the process through which the combatant commander can request requirements definition, contingency contracting, or program management support. DOD officials report that, as of February 7, 2008, eight planners have been deployed. Without firm contingency plans in place or a clear understanding of the potential consequences of not having the essential service available, the risks associated with meeting future requirements increase. Given the change in the security environment since September 11, 2001, and related increases in demands on our military forces as well as the ongoing high level of commitment to ongoing operations, rebuilding readiness of U.S. ground forces is a long-term prospect. In addition, the department faces competing demands for resources given other broad- based initiatives to grow, modernize, and transform its forces, and therefore will need to carefully validate needs and assess trade-offs. While there are no quick fixes to these issues, we believe the department has measures it can take that will advance progress in both the short and long terms. Over the past several years, we have reported and testified on a range of issues related to military readiness and made multiple recommendations aimed at enhancing DOD's ability to manage and improve military readiness. DOD faces significant challenges in rebuilding readiness while it remains engaged in ongoing operations. At the same time, it has undertaken initiatives to increase the size of U.S. ground forces, and modernize and transform force capabilities, particularly in the Army. Although the cost to rebuild the U.S. ground forces is uncertain, it will likely require billions of dollars and take years to complete. For example, once operations end, the Army has estimated it will take $12 billion to $13 billion a year for at least 2 years to repair, replace, and rebuild its equipment used for operations in Iraq. Similarly, the Marine Corps has estimated it will cost about $2 billion to $3 billion to reset its equipment. Furthermore, current plans to grow, modernize, and transform the force will require hundreds of billions of dollars for the foreseeable future. Although the Army estimated in 2004 that it could largely equip and staff modular units by spending $52.5 billion through fiscal year 2011, the Army now believes it will require additional funding through fiscal year 2017 to fully equip its units. In addition, we found that the Army's $70 billion funding plan to increase its end strength by over 74,200 lacks transparency and may be understated because some costs were excluded and some factors are still evolving that could potentially affect this funding plan. We have also reported that the costs of the Army's Future Combat System are likely to grow. While the Army has only slightly changed its cost estimate of $160.7 billion since last year, independent cost estimates put costs at between $203 billion and nearly $234 billion. While our testimony today is focused on the readiness of the Army and Marine Corps, we recognize that DOD is continuing to deal with determining the requirements, size, and readiness of the Air Force and Navy and that Congress is engaged with that debate. The Air Force for example, is dealing with balancing the requirements and funding for strategic and intratheater lift as well as its needs for aerial refueling aircraft, tactical aircraft, and a new bomber fleet. The Navy is also reviewing its requirements and plans to modernize its fleet. Meeting these requirements will involve both new acquisitions as well upgrades to existing fleets, which will cost billions of dollars. A common theme in our work has been the need for DOD to take a more strategic approach to decision making that promotes transparency and ensures that programs and investments are based on sound plans with measurable goals, validated requirements, prioritized resource needs, and performance measures to gauge progress against the established goals. Due to the magnitude of current operational commitments and the readiness concerns related to the ground forces, we believe decision makers need to take a strategic approach in assessing current conditions and determining how best to rebuild the readiness of the Army and Marine Corps. As a result, in July 2007, we recommended that DOD develop near- term plans for improving the readiness of its active and reserve component ground forces, and specify the number of ground force units they plan to maintain at specific levels of readiness as well as the time frames for achieving these goals. Because significant resources will be needed to provide the personnel, equipment, and training necessary to restore and maintain readiness, and because DOD is competing for resources in an increasingly fiscally constrained environment, we also recommended that the plans contain specific investment priorities, prioritized actions that the services believe are needed to achieve the plans' readiness goals and time frames, and measures to gauge progress in improving force readiness. Such plans would be helpful to guide decision makers in considering difficult trade-offs when determining funding needs and making resource decisions. We have also recommended that DOD and the services take specific actions in a number of areas I have discussed today. These recommendations are contained in the products listed at the end of my statement. In summary The services need to collect and maintain comprehensive data on the various strategies they use to meet personnel and unit requirements for ongoing operations and determine the impact of these strategies on the nondeployed force. The Army needs to develop planning and funding estimates for staffing and equipping the modular force as well as assess its modular force. The Army needs to provide to Congress transparent information on its plan to increase the force size, including data on the force structure to be created by this initiative, implementation timelines, cost estimates, and a funding plan. DOD needs to identify mission essential services provided by contractors and include them in planning, and also develop doctrine to help the services manage contractors supporting deployed forces. The Army needs to revise and adjust its training strategy to include a plan to support full-spectrum training during extended operations, and clarify the capacity needed to support the modular force. DOD must develop a strategy and plans for managing near-term risks and management challenges related to its prepositioning programs. DOD must improve its methodology for analyzing mobility capabilities requirements to include development of models and data, an explanation of the impact of limitations on study results, and metrics in determining capabilities. DOD agreed with some recommendations, but has yet to fully implement them. For others, particularly when we recommended that DOD develop more robust plans linked to resources, DOD believed its current efforts were sufficient. We continue to believe such plans are needed. Given the challenges facing the department, we believe these actions will enhance DOD's ability to validate requirements, develop plans and funding needs, identify investment priorities and trade-offs, and ultimately to embark on a sustainable path to rebuild readiness and move forward with plans to modernize and transform force capabilities. In the absence of a strategic approach based on sound plans and measurable outcomes, neither Congress nor the department can be assured that it will have the information it needs to make informed investment decisions and to ensure that it is maximizing the use of taxpayer dollars in both the short and long terms. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to respond to any question you or other Members of the Committee or Subcommittee may have. For questions regarding this testimony, please call Sharon L. Pickup at (202) 512-9619 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Military Operations: Implementation of Existing Guidance and Other Actions Needed to Improve DOD's Oversight and Management of Contractors in Future Operations. GAO-08-436T. Washington, D.C.: January 24, 2008. Force Structure: Need for Greater Transparency for the Army's Grow the Force Initiative Funding Plan. GAO-08-354R. Washington, D.C.: January 18, 2008. Force Structure: Better Management Controls Are Needed to Oversee the Army's Modular Force and Expansion Initiatives and Improve Accountability for Results. GAO-08-145. Washington, D.C.: December 14, 2007. Defense Logistics: Army and Marine Corps Cannot Be Assured That Equipment Reset Strategies Will Sustain Equipment Availability While Meeting Ongoing Operational Requirements. GAO-07-814. Washington, D.C.: September 19, 2007. Military Training: Actions Needed to More Fully Develop the Army's Strategy for Training Modular Brigades and Address Implementation Challenges. GAO-07-936. Washington, D.C.: August 6, 2007. Military Personnel: DOD Lacks Reliable Personnel Tempo Data and Needs Quality Controls to Improve Data Accuracy. GAO-07-780. Washington, D.C.: July 17, 2007. Defense Acquisitions: Key Decisions to Be Made on Future Combat System. GAO-07-376. Washington, D.C.: March 15, 2007. Defense Logistics: Improved Oversight and Increased Coordination Needed to Ensure Viability of the Army's Prepositioning Strategy. GAO- 07-144. Washington, D.C.: February 15, 2007. Defense Logistics: Preliminary Observations on the Army's Implementation of Its Equipment Reset Strategies. GAO-07-439T. Washington, D.C.: January 31, 2007. Reserve Forces: Actions Needed to Identify National Guard Domestic Equipment Requirements and Readiness. GAO-07-60. Washington, D.C.: January 26, 2007. Securing, Stabilizing, and Rebuilding Iraq: Key Issues for Congressional Oversight. GAO-07-308SP. Washington, D.C.: January 9, 2007. Defense Transportation: Study Limitations Raise Questions about the Adequacy and Completeness of the Mobility Capabilities Study and Report. GAO-06-938. Washington, D.C.: September 20, 2006. Defense Logistics: Preliminary Observations on Equipment Reset Challenges and Issues for the Army and Marine Corps. GAO-06-604T. Washington, D.C.: March 30, 2006. Defense Logistics: Better Management and Oversight of Prepositioning Programs Needed to Reduce Risk and Improve Future Programs. GAO- 05-427. Washington, D.C.: September 6, 2005. Military Personnel: DOD Needs to Address Long-term Reserve Force Availability and Related Mobilization and Demobilization Issues. GAO- 04-1031. Washington, D.C.: September 15, 2004. Military Operations: Contractors Provide Vital Services to Deployed Forces but Are Not Adequately Addressed in DOD's Plans. GAO-03-695. Washington, D.C.: June 24, 2003. Military Personnel: DOD Actions Needed to Improve the Efficiency of Mobilizations for Reserve Forces. GAO-03-921. Washington, D.C.: August 21, 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

U.S. military forces, and ground forces in particular, have operated at a high pace since the attacks of September 11, 2001, including to support ongoing operations in Iraq and Afghanistan. Between 2001 and July 2007, approximately 931,000 U.S. Army and Marine Corps servicemembers deployed for overseas military operations, including about 312,000 National Guard or Reserve members. To support ongoing military operations and related activities, Congress has appropriated billions of dollars since 2001, and through September 2007, the Department of Defense (DOD) has reported obligating about $492.2 billion to cover these expenses, of which a large portion are related to readiness. In addition, DOD's annual appropriation, now totaling about $480 billion for fiscal year 2008, includes funds to cover readiness needs. GAO was asked to testify on (1) the readiness implications of DOD's efforts to support ongoing operations; and (2) GAO's prior recommendations related to these issues, including specific actions that GAO believes would enhance DOD's ability to manage and improve readiness. This statement is based on reports and testimonies published from fiscal years 2003 through 2008. GAO's work was conducted in accordance with generally accepted government auditing standards. While DOD has overcome difficult challenges in maintaining a high pace of operations over the past 6 years and U.S. forces have gained considerable combat experience, our work has shown that extended operations in Iraq and elsewhere have had significant consequences for military readiness, particularly with regard to the Army and Marine Corps. To meet mission requirements specific to Iraq and Afghanistan, the department has taken steps to increase the availability of personnel and equipment for deploying units, and to refocus their training on assigned missions. For example, to maintain force levels in theater, DOD has increased the length of deployments and frequency of mobilizations, but it is unclear whether these adjustments will affect recruiting and retention. The Army and Marine Corps have also transferred equipment from nondeploying units and prepositioned stocks to support deploying units, affecting the availability of items for nondeployed units to meet other demands. In addition, they have refocused training such that units train extensively for counterinsurgency missions, with little time available to train for a fuller range of missions. Finally, DOD has adopted strategies, such as relying more on Navy and Air Force personnel and contractors to perform some tasks formerly handled by Army or Marine Corps personnel. If current operations continue at the present level of intensity, DOD could face difficulty in balancing these commitments with the need to rebuild and maintain readiness. Over the past several years, GAO has reported on a range of issues related to military readiness and made numerous recommendations to enhance DOD's ability to manage and improve readiness. Given the change in the security environment since September 11, 2001, and demands on U.S. military forces in Iraq and Afghanistan, rebuilding readiness will be a long-term and complex effort. However, GAO believes DOD can take measures that will advance progress in both the short and long terms. A common theme is the need for DOD to take a more strategic decision-making approach to ensure programs and investments are based on plans with measurable goals, validated requirements, prioritized resource needs, and performance measures to gauge progress. Overall, GAO recommended that DOD develop a near-term plan for improving the readiness of ground forces that, among other things, establishes specific goals for improving unit readiness, prioritizes actions needed to achieve those goals, and outlines an investment strategy to clearly link resource needs and funding requests. GAO also made recommendations in several specific readiness-related areas, including that DOD develop equipping strategies to target shortages of items required to equip units preparing for deployment, and DOD adjust its training strategies to include a plan to support full-spectrum training. DOD agreed with some recommendations, but has yet to fully implement them. For others, particularly when GAO recommended that DOD develop more robust plans linked to resources, DOD believed its current efforts were sufficient. GAO continues to believe such plans are needed.

The Disability Insurance and Supplemental Security Income programs are the nation's largest providers of federal income assistance to disabled individuals, with SSA making payments of approximately $86 billion to about 10 million beneficiaries in 2002. The process through which SSA approves or denies disability benefits is complex and involves multiple partners at both the state and federal levels in determining a claimant's eligibility. Within SSA, these include its 1,300 field offices, which serve as the initial point of contact for individuals applying for benefits, and the Office of Hearings and Appeals, which, at the request of claimants, reconsiders SSA's decisions when benefits are denied. SSA also depends on 54 state Disability Determination Services (DDS) offices to help process claims under its disability insurance programs. State DDSs provide crucial support to the initial disability claims process-- one that accounts for most of SSA's workload--through their role in determining an individual's medical eligibility for disability benefits. DDSs make decisions regarding disability claims in accordance with federal regulations and policies; the federal government reimburses 100 percent of all DDS costs in making disability determination decisions. Physicians and other members of the medical community support the DDSs by providing the medical evidence to evaluate disability claims. The process begins when individuals apply for disability benefits at an SSA field office, where determinations are made about whether they meet nonmedical criteria for eligibility. The field office then forwards the applications to the appropriate state DDS, where a disability examiner collects the necessary medical evidence to make the initial determination of whether the applicant meets the definition of disability. Once the applicant's medical eligibility is determined, the DDS forwards this decision to SSA for final processing. Claimants who are initially denied benefits can ask to have the DDS reconsider its denial. If the decision remains unfavorable, the claimant can request a hearing before a federal administrative law judge at an SSA hearings office, and, if still dissatisfied, can request a review by SSA's Appeals Council. Upon exhausting these administrative remedies, the individual may file a complaint in federal district court. Each level of appeal, if undertaken, involves multi-step procedures for the collection of evidence, information review, and decision making. Many individuals who appeal SSA's initial decision will wait a year or longer--perhaps up to 3 years--for a final decision. To address concerns regarding the program's efficiency, in 1992 SSA initiated a plan to redesign the disability claims process, emphasizing the use of automation to achieve an electronic (paperless) processing capability. The automation project started in 1992 as the Modernized Disability System, and was redesignated the Reengineered Disability System (RDS) in 1994. RDS was to automate the entire disability claims process--from the initial claims intake in the field office to the gathering and evaluation of medical evidence at the state DDSs, to payment execution in the field office or processing center, and including the handling of appeals at the hearings offices. However, our prior work noted that SSA had encountered problems with RDS during its initial pilot testing. For example, systems officials had stated that, using RDS, the reported productivity of claims representatives in the SSA field offices dropped. They noted that before the installation of RDS, each field office claims representative processed approximately five case interviews per day. After RDS was installed, each claims representative could process only about three cases per day. As a result, following an evaluation by a contractor, SSA suspended RDS in 1999 after approximately 7 years and more than $71 million reportedly spent on the initiative. In August 2000 SSA issued a management plan with a renewed call for developing an electronic disability system by the end of 2005. The strategy was to incorporate three components: an electronic disability intake process that would include (1) a subset of the existing RDS software, (2) the existing DDS claims process, and (3) a new system for the Office of Hearings and Appeals. The management plan also provided for several pilot projects to test the viability and performance of each project component. SSA's work on this effort occurred through the spring of 2002, at which time the Commissioner announced that she had begun an accelerated initiative to more quickly automate the disability claims process. The agency anticipated that, with technologically advanced disability processing offices, it could potentially realize benefits of more than $1 billion, at an estimated cost of approximately $900 million, over the 10-year life of the accelerated initiative. In undertaking AeDib, SSA has embarked on a major initiative consisting of multiple projects that are intended to move all partners in its disability claims adjudication and review to an electronic business process. SSA envisions that AeDib will allow its disability components to stop relying on paper folders to process claims and to develop new business processes using legacy systems and information contained in an electronic folder to move and process all of its work. In so doing, SSA anticipates that AeDib will enable disability components to achieve processing efficiencies, improve data completeness, reduce keying errors, and save time and money. The AeDib strategy focuses on developing the capability for claimant information and large volumes of medical images, files, and other documents that are currently maintained in paper folders to be stored in electronic folders, and then accessed, viewed, and shared by the disability processing offices. SSA is undertaking five key projects to support the strategy: An Electronic Disability Collect System to provide the capability for SSA field offices to electronically capture information about the claimant's disability and collect this structured data in an electronic folder for use by the disability processing offices; A Document Management Architecture that will provide a data repository and scanning and imaging capabilities to allow claimant information and medical evidence to be captured, stored, indexed, and shared electronically between the disability processing offices. Internet applications that will provide the capability to obtain disability claims and medical information from the public via the Internet. A DDS systems migration and electronic folder interface that will migrate and enhance the existing case processing systems to allow the state disability determination services offices to operate on a common platform and prepare their legacy systems to share information in the electronic folder; and A Case Processing and Management System for the Office of Hearings and Appeals that will interface with the electronic folder and enable its staff to track, manage, and complete case-related tasks electronically. According to SSA, the Electronic Disability Collect System and the Document Management Architecture are the two fundamental elements needed to achieve the electronic disability folder. By late January 2004, SSA plans to have developed these two components. It also expects to have completed five Internet disability applications, enhanced the DDS legacy systems, and developed the software that will allow existing SSA and DDS systems to interface with the electronic folder. However, SSA will not yet have implemented the scanning and imaging capabilities and the interface software to enable each disability processing office to access and use the data contained in the electronic folder. SSA officials explained that, at the end of next January, the agency plans to begin an 18-month rollout period, in which it will implement the scanning and imaging capabilities and establish the necessary interfaces. SSA has drafted but not yet finalized the implementation strategy for the rollout. SSA has performed several important project tasks since beginning the accelerated initiative in 2002. For example, it has implemented limited claims-intake functionality as part of the Electronic Disability Collect System, and begun additional upgrades of this software. In addition, it has developed two Internet applications for on-line forms to aid claimants in filing for disability benefits and services. Further, to support electronic disability processing, SSA is in the process of migrating and upgrading hardware and case processing software to allow all of the 54 state DDSs to operate on a common platform, and has begun developing software to enable the DDS systems to interface with the electronic folder. SSA has also performed some initial tasks for the Document Management Architecture, including developing a system prototype, establishing requirements for the scanning capability, and drafting a management plan and training strategy. Nonetheless, the agency still has a significant amount of work to accomplish to achieve the electronic disability folder by the end of next January. While substantial work remains for each of the AeDib components, primary among SSA's outstanding tasks is completing the Document Management Architecture's development, testing, and installation at the agency's National Computer Center. Table 1 illustrates SSA's progress through last June in accomplishing tasks included in the AeDib initiative, along with the many critical actions still required to develop and implement the electronic disability processing capability. As the table reflects, SSA's electronic disability claims process hinges on accomplishing numerous critical tasks by the end of January 2004. In discussing the overall progress of the initiative, SSA officials in the Offices of Systems and Disability Programs acknowledge that the agency will be severely challenged to accomplish all of the tasks planned for completion by the end of January. Nonetheless, they believe that SSA will meet the targeted project completion dates, stating that the agency has conducted the necessary analyses to ensure that the accelerated schedule can accommodate the project's scope. Beyond meeting an ambitious project implementation schedule, SSA must ensure that the system it delivers successfully meets key business and technical requirements for reliably exchanging data among disability processing components and is protected from errors and vulnerabilities that can disrupt service. Accomplishing this necessitates that SSA conduct complete and thorough testing to provide reasonable assurance that systems perform as intended. These include tests and evaluations of pilot projects to obtain data on a system's functional performance and end-to- end tests to ensure that the interrelated systems will operate together effectively. In addition, the success of the system will depend on the agency identifying and mitigating critical project risks. SSA plans to rely on pilot tests and evaluations to help guide business and technical decisions about the electronic disability folder, including critical decisions regarding the document management technology. For example, SSA stated that the Document Management Architecture pilots will be used to test electronic folder interface requirements and DDS site configurations for AeDib national implementation. In addition, the pilots are expected to test the business process and work flow associated with incorporating the Document Management Architecture. SSA has stated that this information is crucial for determining whether the technology selected for the Document Management Architecture will adequately support the electronic folder. However, SSA may not be able to make timely and fully informed decisions about the system based on the pilot test results. The pilot tests were to begin this month, and some of the test results upon which decisions are to be based are not expected to be available until the end of December at the earliest, leaving little time to incorporate the results into the system that is to be implemented by late January. Further, even when completed, the pilot tests will provide only limited information about the electronic folder's functionality. SSA stated that they will not test certain essential aspects of the folder usage, such as the DDS's disability determination function. Thus, whether SSA will have timely and complete information needed to make decisions that are essential to developing and implementing the electronic disability folder is questionable. In addition, given the technological complexity of the AeDib project, the need for end-to-end testing is substantial. Our prior work has noted the need for such testing to ensure that interrelated systems that collectively support a core business area or function will work as intended in a true operational environment. End-to-end testing evaluates both the functionality and performance of all systems components, enhancing an organization's ability to trust the system's reliability. SSA's development and use of new electronic tools to integrate an electronic folder with its own and DDS legacy systems, along with Web-based applications and the new Document Management Architecture, elevates the importance of ensuring that all parts will work together as intended. However, the agency currently has not completed a test and evaluation strategy to conduct end-to-end testing to demonstrate, before deployment, that these systems will operate together successfully. They added that conducting end-to-end testing would require delaying system implementation to allow the time needed for a claim to be tested as it moved through all of the disability components--a process that could take up to 6 months to complete. However, determining that all AeDib components can correctly process disability claims when integrated is vital to SSA's knowing whether the electronic disability system can perform as intended. Compounding AeDib's vulnerability is that SSA has not yet undertaken a comprehensive assessment of project risks to identify facts and circumstances that increase the probability of failing to meet project commitments, and taking steps to prevent this from occurring. Best practices and federal guidance advocate risk management. To be effective, risk management activities should be (1) based on documented policies and procedures and (2) executed according to a written plan that provides for identifying and prioritizing risks, developing and implementing appropriate risk mitigation strategies, and tracking and reporting on progress in implementing the strategies. By doing so, potential problems can be avoided before they manifest themselves into cost, schedule and performance shortfalls. SSA has developed a risk management plan to guide the identification and mitigation of risks, and based on that plan, has developed a high-level risk assessment of program and project risks. The high-level assessment, which SSA issued last February, identified 35 risks that the agency described as general in nature and addressing only overall program management issues related to the project's costs, schedule, and hardware and software. For example, one of the high-level risks stated that the overall availability of the Document Management Architecture might not meet service-level commitments. The related mitigation strategy stated that the agency should continue to investigate various approaches to ensure the system's availability. SSA has acknowledged the potential for greater risks given the electronic case processing and technological capability required for AeDib. Further, in response to our inquiries, its officials stated that the agency would conduct and document a comprehensive assessment of project risks by June 30 of this year. The officials added that AeDib project managers would be given ultimate responsibility for ensuring that appropriate risk-mitigation strategies existed and that SSA had tasked a contractor to work with the managers to identify specific risks associated with each system component. However, at this time, SSA is still without a comprehensive assessment of risks that could affect the project. Until it has a sound analysis and mitigation strategy for AeDib, SSA will not be in a position to cost-effectively plan for and prevent circumstances that could impede a successful project outcome. Integral to AeDib's success are disability process stakeholders that SSA relies on to fulfill the program's mission, including state disability determination officials and medical providers. As primary partners in the disability determination process, stakeholders can offer valuable and much-needed insight regarding existing work processes and information technology needs, and their stake and participation in the systems development initiative is essential for ensuring its acceptance and use. In assessing lessons learned from SSA's earlier attempt to implement the failed Reengineered Disability System, Booz-Allen and Hamilton recommended that SSA at all times keep key stakeholders involved in its process to develop an electronic disability processing capability. SSA disability program and systems officials told us that the agency has involved its various stakeholders in developing AeDib. They stated that the agency has entered into memorandums of understanding for data sharing with state DDSs, established work groups comprising DDS representatives to obtain advice on development activities, and included these stakeholders in steering committee meetings to keep them informed of the project's status. In addition, SSA stated, it has met with representatives of major medical professional associations to seek their support for SSA's requests for releases of medical evidence. However, officials that we contacted in nine of the ten DDS offices stated that their concerns were not adequately heard and considered in the decision-making process for the development of AeDib, despite the critical and extensive role that states play in making disability determinations. Because of this limited involvement, the National Council of Disability Determination Directors, which represents the DDSs, stated that they were concerned that SSA may be pursuing an automated disability strategy that could negatively affect business operations by creating delays in the ability to make decisions on disability cases. The DDS representatives stated that SSA has not articulated a clear and cohesive vision of how the disability components will work to achieve the AeDib goal and that decisions about AeDib were being made without considering their perspectives. They explained, for example, that SSA's decision to use a scanning and imaging vendor to whom medical providers would have to submit evidence would introduce an additional step into the disability process, and might result in DDSs' not being able to effectively manage the critical information that they need to make disability determinations. Further, they have questions about how in the disability process evidence will be electronically stored, noting that SSA has proposed, but not yet decided among, three possible scenarios for establishing repositories to house medical evidence. Last March, the National Council of Disability Determination Directors made three suggestions to SSA aimed at allowing the DDSs to have greater responsibility for this aspect of the disability business process. Among their proposals was that DDSs (1) be allowed to manage the contractors who will be responsible for scanning and imaging all records received from medical providers; (2) have the choice of receiving electronic medical evidence at a repository maintained at their sites rather than at remote, centralized locations; and (3) be allowed to test the possibility of scanning records after, rather than before, the DDS adjudicates a claim. According to the council, this latter approach would ensure that the DDSs could make timely and accurate disability determinations, while also allowing SSA the time to perfect the electronic business process and transition to the initial case process. As of last week, however, SSA had not responded. For its part, SSA stated that it is reviewing, but has not yet taken a position on, the council's proposals. SSA's consultation with the medical community (physicians and other sources of medical evidence used to evaluate disability claims) also has been limited. These stakeholders are critical, as they represent the basic source of most of the information that states use to evaluate an individual's disability. One of the key savings that SSA anticipates from AeDib is based on physicians and other medical sources electronically transmitting or faxing medical evidence that is now mailed to the DDSs. SSA has estimated that as much as 30 percent of all medical evidence could be faxed or electronically received from these providers, with the majority of it being faxed. In speaking with American Health Information Management Association officials in Georgia and Wisconsin, however, they expressed concern about the possibility that SSA will want medical providers to fax evidence. They cited the voluminous nature of much of the medical evidence that they send to the DDSs, and believe that faxing it would be too costly and not secure. Our review to date has not assessed the validity of the concerns expressed by the stakeholders, or SSA's responses to them. Nonetheless, as long as such concerns exist, SSA must be diligent in pursuing a mutually agreed- upon understanding with its stakeholders about its vision and plan of action being pursued. SSA's success in implementing AeDib depends heavily on resolving all outstanding issues and concerns that could affect the use and, ultimately, the outcome of the intended electronic capability. Without stakeholders' full and effective involvement in AeDib's planning and development, SSA cannot be assured that the system will satisfy critical disability process requirements and be used as intended to achieve desired processing efficiencies and improved delivery of services to beneficiaries. To summarize, Mr. Chairman, in moving toward an electronic disability process, SSA has undertaken a positive and very necessary endeavor. Having the means to more effectively and efficiently provide disability benefits and services is essential to meeting the needs of a rapidly aging and disabled population, and we applaud the Commissioner's determination and proactive pursuit of this service-delivery enhancement. Nonetheless, SSA's accelerated strategy may involve risks of delivering a system that will not sufficiently address its needs. The execution of critical pilot tests that are not scheduled for completion until December or later, coupled with the lack of planned end-to-end testing and a comprehensive assessment of risks, may prevent SSA from delivering an information technology capability based on sound and informed decision making. Moreover, uncertainties about the successful outcome of this project are exacerbated by concerns that key stakeholders in the disability process continue to have. Given the importance of this project to SSA's future service-delivery capability, it is essential that the agency satisfy itself that AeDib will perform as intended with minimal risk before it is deployed nationwide. We will continue to monitor SSA's progress on this initiative as part of our ongoing review. This concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. For information regarding this testimony, please contact Linda D. Koontz, Director, or Valerie Melvin, Assistant Director, Information Management Issues at (202) 512-6240. Other individuals making key contributions to this testimony include Michael Alexander, Tonia D. Brown, Derrick Dicoi, and Mary J. Dorsey. 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.

Providing benefits to disabled individuals is one of the Social Security Administration's (SSA) most important service delivery obligations--touching the lives of about 10 million individuals. In recent years, however, providing this benefit in a timely and efficient manner has become an increasing challenge for the agency. This past January, in fact, GAO designated SSA's disability programs as highrisk. Following a prior unsuccessful attempt, the agency is now in the midst of a major initiative to automate its disability claims functions, taking advantage of technology to improve this service. Seeking immediate program improvements, SSA is using an accelerated approach--called AeDib--to develop an electronic disability claims processing system. At the request of the Subcommittee on Social Security, House Committee on Ways and Means, GAO is currently assessing the strategy that underlies SSA's latest initiative to develop the electronic disability system. For this testimony, GAO was asked to discuss its key observations to date regarding the AeDib initiative, including strategy, risks, and stakeholder involvement. GAO plans to discuss more fully the results of this continuing review in a subsequent report SSA's goal to establish a more efficient, paperless disability claims processing system is important, and one that could benefit millions. To achieve this goal, SSA's immediate focus is on developing an electronic folder to store claimant information and large volumes of medical images, files, and other documents that are currently maintained in paper folders, and then make this information accessible to all entities involved in disability determinations. SSA's accelerated strategy calls for development of this capability by January 2004 rather than in 2005, as originally planned. Since accelerating this effort, SSA has performed important tasks toward establishing this initial electronic capability. Nonetheless, it has substantial work to accomplish in order to develop the technologically complex electronic folder and begin implementation by late next January. While responsive to the agency's need for an operational system as soon as possible, SSA's accelerated strategy involves risks. For example, pilot tests that are to provide important information about the electronic folder's performance are not expected until late December--just 1 month before its planned implementation. In addition, a strategy for end-to-end testing to demonstrate that the individual components will work together reliably has not been completed. Further increasing the system's vulnerability is that SSA has not yet comprehensively assessed project risks. Unless addressed, these factors could ultimately derail the initiative. While SSA has taken steps to involve key stakeholders in the systems development process, officials in state Disability Determination Services offices that we contacted expressed concerns that they had only limited involvement in the development effort. They stated that their concerns were not adequately heard and considered in the decision-making process. Unless SSA addresses these issues, it cannot be assured of stakeholder agreement with and full use of the system.

In February 2005, Marine Corps combatant commanders identified an urgent operational need for armored tactical vehicles to increase crew protection and mobility of Marines operating in hazardous fire areas against improvised explosive devices, rocket-propelled grenades, and small arms fire. In response, the Marine Corps identified the solution as the up-armored high-mobility multi-purpose wheeled vehicle. Over the next 18 months, however, combatant commanders continued to identify a requirement for more robust mine-protected vehicles. According to the acquisition plan, in November 2006, the Marine Corps awarded a sole source indefinite delivery, indefinite quantity (IDIQ) contract and subsequently placed orders for the first 144 vehicles to respond to the urgent requirement while it conducted a competitive acquisition for the balance of the vehicles. In February 2007, the Assistant Secretary of the Navy for Research, Development, and Acquisition approved MRAPs entry into production as a rapid acquisition capability. In September of 2007, the Undersecretary of Defense for Acquisition, Technology, and Logistics designated MRAP as a major defense acquisition program with the Marine Corps Systems Command as the Joint Program Executive Officer. Quantities to be fielded quickly grew from the initial 1,169 vehicles for the Marine Corps identified in the 2005 urgent need statement to the current approved requirement of over 16,000 vehicles split among the Army, Marine Corps, Navy, Air Force, and Special Operations Command, plus others for ballistic testing. Three versions of the MRAP vehicle were acquired for different missions: Category I, the smallest version of MRAP, is primarily intended for operations in the urban combat environment, and can carry up to 7 personnel. Category II is a multi-mission platform capable of supporting security, convoy escort, troop or cargo transport, medical, explosive ordnance disposal, or combat engineer operations, and carries up to 11 personnel. Category III, the largest of the MRAP family, is primarily intended for the role of mine and IED clearance operations, and carries up to 13 personnel. MRAP vehicles were purchased without mission equipment--such as communications and situational awareness subsystems--that must be added before the vehicles can be fielded to the user. The military services buy the subsystems for their vehicles and provide them as government furnished equipment to be installed at a government integration facility located at the Space and Naval Warfare Systems Command in Charleston, South Carolina. DOD used a tailored acquisition approach to rapidly acquire and field MRAP vehicles. The program established minimal operational requirements, decided to rely on only proven technologies, and relied heavily on commercially available products. The program also undertook a concurrent approach to producing, testing, and fielding the most survivable vehicles as quickly as possible. To expand limited existing production capacity, the department expanded competition by awarding IDIQ contracts to nine commercial sources. To evaluate design, performance, producibility, and sustainability, DOD committed to buy at least 4 vehicles from each vendor. According to program officials, subsequent delivery orders were based on a phased testing approach with progressively more advanced vehicle test results and other assessments. To expedite the fielding of the vehicles, the government retained the responsibility for final integration of mission equipment packages including radios and other equipment into the vehicles after they were purchased. DOD also designated the MRAP program as DOD's highest priority acquisition, which helped contractors and other industry partners to more rapidly respond to the urgent need and meet production requirements. Finally, some of the contractors involved in the acquisition responded to the urgency communicated by the department by investing their own capital early to purchase needed steel and other critical components in advance of orders. The decision on the part of the contractors to purchase components in advance of orders was not required under their contracts and was done at their own risk. DOD leadership took several steps to communicate the importance of producing survivable vehicles as quickly as possible, for example In May 2007, the Secretary of Defense designated MRAP as DOD's single most important acquisition program and established the MRAP Task Force to integrate planning, analysis, and actions to accelerate MRAP acquisition. The Secretary also approved a special designation for MRAP--a DX rating-- that requires related contracts to be accepted and performed on a priority basis over other contracts without this rating. The Secretary of the Army waived a restriction on armor plate steel, which expanded the countries from which DOD could procure steel. DOD allocated funds to increase steel and tire production capacity for MRAP vehicles as these materials were identified as potential limiting factors for the MRAP industrial base. DOD recognized that no single vendor could provide all of the vehicles needed to meet requirements quickly enough and invited vendors to offer their non-developmental solutions. The request for proposal made clear that the government planned to award one or more IDIQ contracts to those vendors that were determined to be the best value to the government. The Marine Corps awarded IDIQ contracts to nine vendors and issued the first delivery orders in early 2007 for 4 vehicles from each vendor for initial limited ballistic and automotive testing. One vendor could not deliver test articles in the time required and the Marine Corps terminated that contract at no cost to the government. According to program officials, vehicles from another vendor did not meet minimum requirements and the Marine Corps terminated the contract for convenience. Conventional DOD acquisition policy dictates that weapons be fully tested before they are fielded to the user. However, the need to begin fielding survivable vehicles as quickly as possible resulted in a phased approach designed to quickly identify vehicles that met the requirement for crew protection so they could be rapidly fielded. This approach resulted in a high degree of overlap between testing and fielding of the MRAP vehicles; orders for thousands of vehicles were placed before operational testing began and orders for thousands more were placed before it was completed. Figure 1 shows the concurrent nature of the overall test plan. The Director, Operational Test & Evaluation approved the MRAP Test and Evaluation Master Plan in 2007. Candidate vehicles underwent ballistic and automotive testing beginning in March 2007. The test plan included three phases of developmental tests (DT) of increasing scope as well as initial operational test and evaluation (IOT&E). Phase I included a limited evaluation by users. Phase II further evaluated vehicles at the desired level of performance against the ballistic threat, added more endurance miles to the automotive portion of the test, and included mission equipment such as radios and other electronic systems. Phase III raised the bar for ballistic performance to the emerging threat and assessed non-ballistic protection to include near-lightning strikes, high-altitude electromagnetic pulse, and nuclear, biological, and chemical decontamination tests. The automotive portion of the test increased endurance to 12,000 miles per vehicle. Developmental and operational tests were conducted from March 2007 through June 2008. Each of the six MRAP variants have also undergone IOT&E. All vehicles were rated operationally survivable and operationally effective with limitations by the Army Evaluation Center. These limitations were comprised of vehicle size, weight, mobility, and weapon dead space. All vehicles were also rated operationally suitable with limitations. These limitations were due to logistic shortfalls, payload restrictions, and restricted fields of view. Schedule and performance results for the MRAP have been very good overall. At the time of our review in July 2008, nearly all of the developmental and operational testing had been completed; the Marine Corps, the buying command for the MRAP, had placed orders for 14,173 MRAPs; and, as of May 2008, a little more than a year after the first contracts were awarded, 9,121 vehicles had been delivered. As of July 2009, 16,204 vehicles have been produced and 13,848 vehicles have been fielded in two theaters of operation. Total procurement funding for the MRAP vehicles, mostly through supplemental appropriations, was about $22.7 billion. According to DOD officials, the MRAP is providing safe, sustainable, and survivable transport for troops in the theater. It recognizes that MRAPs have limitations, particularly in the area of off-road mobility and transportability. Nonetheless, MRAPs are considered outstanding vehicles for specific missions. Twenty-one months elapsed from the time the need was first identified in February 2005 until the sole source IDIQ contract was awarded and subsequent orders were placed for the first 144 vehicles in November 2006. Three months elapsed between the award of the sole source contract and the delivery of vehicles under the orders placed pursuant to the contract in February 2007--about the same time the IDIQ contracts were awarded to multiple vendors for more vehicles. Testing of vehicles delivered under orders placed pursuant to the newly awarded contracts began one month later in March 2007. Initial operational capability was accomplished in October 2007 or about 33 months after the need was first identified. Ultimately, MRAP vendors have successfully increased their production rates to meet the delivery requirement (see fig. 2). Production began in February 2007 with one vendor producing 10 vehicles. By March 2008--a little more than a year after the contracts were awarded--6,935 vehicles had been produced. According to DOD officials, the MRAP provides survivable, safe, and sustainable vehicles for troops in theater. It is recognized that MRAPs have limitations, particularly in the area of off-road mobility and transportability. Nevertheless, MRAPs met minimum requirements for specific missions. Based on an earlier survey of over 300 soldiers interviewed in the field, warfighters were satisfied with MRAP overall, which offers significant improvement in survivability. MRAP vehicles were seen as well suited for combat logistics patrols, route clearance missions, raids, quick reaction forces, and other missions requiring large, dismounted force. MRAP vehicles were seen as not well suited for mounted patrols in constrained urban areas or extensive operations in off- road operations. As with any acquisition of this nature, there are lessons to be learned. On the positive side, it appears that quick action by the Secretary of Defense to declare the MRAP program DOD's highest priority and give it a DX rating allowed the government and the contractors access to more critical materials than otherwise would have been available. The availability of funding mostly through supplemental appropriations was essential. In addition, the decisions to 1) use only proven technologies, 2) keep requirements to a minimum, 3) infuse significant competition into the contracting strategy, and 4) keep final integration responsibility with the government are all practices that led to positive outcomes. Challenges remain in the form of reliability, mobility, and safety, which have required some modifying of the designs, postproduction fixes, and adapting how vehicles were to be used. Also, long term sustainment costs for MRAP are not yet well understood and the services are only now deciding how MRAP will fit into their longer term organizations. This combination of actions executed to address the urgent need for accelerating the delivery of MRAP vehicles to theater was innovative and effective. Major vendors and key subcontractors responded to the urgency communicated by the department. According to vendor officials from four of the companies, they collectively invested a substantial amount of their own capital in anticipation of MRAP work. For example, some vendors purchased steel and other critical components in advance of delivery orders for MRAP vehicles in order to meet projected time lines. In other cases, vendors purchased or developed new facilities for MRAP production. Multiple vendors also formed teaming arrangements to meet the increase in vehicle delivery demands. As stated above, these actions on the part of the contractors were not required under their contracts and were done at their own risk. On the down side, because of unique designs, operating procedures, and maintenance for multiple vehicles from multiple vendors, vehicle maintenance and support has been somewhat complicated. To ease maintenance and support concerns in the near term, the MRAP program office established a centralized training entity where maintainers would be cross-trained on multiple vendors' vehicles. Longer term, a key challenge for DOD will be to effectively manage maintenance personnel and vehicle repair parts without sacrificing vehicle operational availability. Also, long term sustainment costs for MRAP are not yet projected and budgeted. The Services are only now deciding how to fit MRAP vehicles into their organizational structures. Another lesson, based on operational use of the MRAP vehicles, was their lack of maneuverability and off-road capability. As a result, DOD is in the process of acquiring an all terrain version of the MRAP to address the more difficult terrain and road conditions in Afghanistan. While most of the vehicles met ballistic requirements, other issues were identified (reliability, mobility and handling, and safety). These issues required some modifying of the designs, postproduction fixes, or adapting how vehicles were to be used. Testing of proposed solutions to more advanced threats continues. The program office continues to enhance MRAP vehicle system performance through capability insertion initiatives executed via engineering change proposals. Such changes are verified through testing. This testing will be an ongoing process as additional upgrades are applied. What were the keys in DOD meeting the urgent requirement for fielding MRAP in a timely manner? First, DOD kept the requirements simple, clear, and flexible and did not dictate a single acceptable solution. Second, DOD made sure that only mature technologies and stable designs were used by setting a very short and inflexible schedule. DOD acting as integrator of government furnished equipment after initial delivery eliminated some risk and uncertainty. Third, MRAP was also given the highest possible acquisition priority and the participating contractors responded in positive ways to meet the needs. Fourth, full and timely funding for the acquisition was a definite plus. The question is, can this formula be applied to all of DOD's major acquisitions and the broader acquisition process? The first two keys--simple requirements and mature technologies--certainly can be and, in fact, recent changes to the department's acquisition policies and acquisition reform legislation passed by the Congress should enable these practices to be implemented easier than in the past. However, the MRAP program also owes it success to the third and fourth key practices as well--a DX rating as the highest priority acquisition in the department and nearly unlimited funding to meet the urgent need--that are not scalable to the broader acquisition process. Not every program can be a highest priority and acquisition funds are constrained. While the MRAP acquisition benefited from all of the practices mentioned above, the biggest differentiator between that rapid acquisition and other more common acquisitions in DOD was that it established requirements that could be achieved with existing technologies. Recent studies by the Defense Science Board, the Defense Acquisition Performance Assessment Panel (DAPA), and GAO all indicate that the department can and should acquire and deliver weapon systems that fulfill urgent warfighter needs to the field much more quickly. The DSB study recommends a dual acquisition path that allows for a "rapid" acquisition process for urgent needs and "deliberate" acquisition processes for others. It recommends a new agency, proposed as the Rapid Acquisition and Fielding Agency, that would be focused on speed, utilizing existing technologies, and acquisition flexibility to achieve the "75 percent solution" quickly. The DAPA Panel report, among other things, recommended that the acquisition process should never exceed 6 years from its beginning to initial operational capability of the acquired weapon system. It stated that mature technologies and achievable requirements are critical to the success of such time certain development efforts. GAO has issued multiple reports under our "best practices" body of work that underscore the need for faster development cycles and the need for mature technologies, well understood requirements, systems engineering knowledge, and incremental delivery of capabilities to enable quicker deliveries. As early as 1999, we concluded that successful product developments separated technology development from product development, invested time and money in ensuring that their technology base was vibrant and cutting edge, and eliminated technology risk from acquisitions. We noted that the DOD's science and technology (S&T) organization would need to be organized and structured differently, provided more funding to take new technologies to higher levels of maturity, and would have to coordinate better with the department's acquisition community to achieve the synergies necessary to reduce cycle times. We made recommendations along those lines. We believe that the "game changer" today in achieving rapid acquisition is the technology base. Finally, a broader lesson learned is that it may be time to invest the time, money, and management skills in the S&T community to enable the effectiveness we expect from the acquisition community. Mr. Chairman, that concludes my prepared statement. I will be happy to answer any of your questions. 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 of July 2008, about 75 percent of casualties in combat operations in Iraq and Afghanistan were attributed to improvised explosive devices. To mitigate the threat from these weapons, the Department of Defense (DOD) initiated the Mine Resistant Ambush Protected (MRAP) program in February 2007, which used a tailored acquisition approach to rapidly acquire and field the vehicles. In May 2007, the Secretary of Defense affirmed MRAP as DOD's most important acquisition program. To date, about $22.7 billion has been appropriated for the procurement of more than 16,000 MRAP vehicles. This testimony today describes the MRAP acquisition process, the results to date, lessons learned from that acquisition, and potential implications for improving the standard acquisition process. It is mostly based on the work we have conducted over the past few years on the MRAP program. Most prominently, in 2008, we reported on the processes followed by DOD for the acquisition of MRAP vehicles and identified challenges remaining in the program. To describe DOD's approach for and progress in implementing its strategy for rapidly acquiring and fielding MRAP vehicles, we reviewed DOD's plans to buy, test, and field the vehicles and discussed the plans with cognizant department and contractor officials. To identify the remaining challenges for the program, we reviewed the results of testing and DOD's plans to upgrade and sustain the vehicles DOD use of a tailored acquisition approach to rapidly acquire and field MRAP vehicles was successful. The program relied only on proven technologies and commercially available products; established minimal operational requirements; and undertook a concurrent approach to producing, testing, and fielding the vehicles. To expand limited production capacity, indefinite delivery, indefinite quantity contracts were awarded to nine commercial sources, with DOD agreeing to buy at least 4 vehicles from each. Subsequent orders were based on a concurrent testing approach with progressively more advanced vehicle test results and other assessments. To expedite fielding of the vehicles, the government retained the responsibility for final integration in them of mission equipment packages including radios and other equipment. DOD also made MRAP its highest priority acquisition, which helped contractors and others more rapidly respond to the need and meet production requirements, in part by early investing of their own capital to purchase steel and other critical components in advance of orders. Schedule and performance results for MRAP were very good overall. In July 2008, nearly all testing was completed; the Marine Corps had placed orders for 14,173 MRAPs; and, as of May 2008, 9,121 vehicles had been delivered. As of July 2009, 16,204 vehicles have been produced and 13,848 vehicles fielded in two theaters of operation. Total MRAP production funding was about $22.7 billion, mostly through supplemental appropriations. In terms of lessons learned, MRAP's success was driven by several factors, including quick action to declare its acquisition DOD's highest priority and giving it a DX rating, which allowed access to more critical materials than was otherwise available. The availability of supplemental appropriations was also essential. However, while neither of these factors are practically transferable to other programs, decisions to 1) use only proven technologies, 2) keep requirements to a minimum, 3) infuse significant competition into contracting, and 4) keep final integration responsibility with the government all led to positive outcomes and may be transferable. Challenges to MRAP remain in its reliability, mobility, and safety, which required some modifying of designs and postproduction fixes, and adapting how vehicles were used. Also, long term sustainment costs are not understood and the services are only now deciding how MRAP fits them in the longer term. GAO's multiple best practices reports have underscored the need for the use of mature technologies, well understood requirements, systems engineering knowledge, and incremental delivery of capabilities to enable quicker deliveries. Finally, a broader lesson learned is that it is time to invest the time, money, and management skills in the science and technology community to enable the effectiveness we expect from the acquisition community.

Between July 1985 and June 1999, we reviewed, reported, and testified on the SBIR program many times at the request of the Congress. While our work focused on many different aspects of the program, we generally found that SBIR is achieving its goals to enhance the role of small businesses in federal R&D, stimulate commercialization of research results, and support the participation of small businesses owned by women and/or disadvantaged persons. Participating agencies and companies that we surveyed during the course of our reviews generally rated the program highly. Specific examples of program success that we identified include the following: High-quality research. Throughout the life of the program, awards have been based on technical merit and are generally of good quality. For example, in 1989 we reported that according to agency officials, more than three-quarters of the research conducted with SBIR funding was as good as or better than other agency-funded research. Agency officials also rated the research as more likely than other research they oversaw to result in the invention and commercialization of new products. When we again looked at the quality of research proposals in 1995, we found that while it was too early to make a conclusive judgment about the long-term quality of the research, the quality of proposals remained good, according to agency officials. Widespread competition. The SBIR program successfully attracts many qualified companies, has had a high level of competition, and consistently has had a high number of first-time participants. Specifically, we reported that the number of proposals that agencies received each year had been increasing. In addition, as we reported in 1998, agencies rarely received only a single proposal in response to a solicitation, indicating a sustained level of competition for the awards. We also found that the agencies deemed many more proposals worthy of awards than they were able to fund. For example, the Air Force deemed 1,174 proposals worthy of awards in fiscal year 1993 but funded only 470. Moreover, from fiscal years 1993 through 1997, one third of the companies that received awards were first-time participants. This suggests that the program attracts hundreds of new companies annually. Effective outreach. SBIR agencies consistently reach out to foster participation by women-owned or socially and economically disadvantaged small businesses. For example, we found that DOD's SBIR managers participated in a number of regional small business conferences and workshops that are specifically designed to foster increased participation by women-owned and socially and economically disadvantaged small businesses. Successful commercialization. SBIR successfully fosters commercialization of research results. At various points in the life of the program we have reported that SBIR has been successful in increasing private sector commercialization of innovations. For example, past GAO and DOD surveys of companies that received SBIR Phase II funding have determined that approximately 35 percent of the projects resulted in the sales of products or services, and approximately 45 percent of the projects received additional developmental funding. We have also reported that agencies were using various techniques to foster commercialization. For example, in an attempt to get those companies with the greatest potential for commercial success to the marketplace sooner, DOD instituted a Fast Track Program, whereby companies that are able to attract outside commitments/capital for their research during phase I are given higher priority in receiving a phase II award. Helping to serve mission needs. SBIR has helped serve agencies' missions and R&D needs. Agencies differ in the emphasis they place on funding research to support their mission and to support more generalized research. Specifically, we found that DOD links its projects more closely to its mission. In comparison, other agencies emphasize research that will be commercialized by the private sector. Many of the projects DOD funded have specialized military applications while NIH projects have access to the biomedical market in the private sector. Moreover, we found that SBIR promotes research on the critical technologies identified in lists developed by DOD and/or the National Critical Technologies Panel. Generally agencies reviewed these listings of critical technologies to develop research topics or conducted research that fell within one of the two lists. We have also identified areas of weaknesses and made recommendations that, if addressed, could strengthen the program further. Many of our recommendations for program improvement have been either fully or partially addressed by the Congress in various reauthorizations of the program or by the agencies themselves. For example, Duplicate funding. In 1995, we identified duplicate funding for similar, or even identical, research projects by more than one agency. A few companies received funding for the same proposals two, three, and even five times before agencies became aware of the duplication. Contributing factors included the fraudulent evasion of disclosure by companies applying for awards, the lack of a consistent definition for key terms such as "similar research," and the lack of interagency sharing of data on awards. In response to our recommendations, SBA strengthened the language agencies use in their application packages to clearly warn applicants about the illegality of entering into multiple agreements for essentially the same effort and developed Internet capabilities to access SBIR data for all of the agencies. In SBA's view, the stronger language regarding the illegality of seeking funding for similar or identical projects addresses the need to develop consistent definitions to help agencies determine when projects are "similar." Inconsistent interpretations of extramural research budgets. In 1998, we found that while agency officials adhered to SBIR's program and statutory funding requirements, they used differing interpretations of how to calculate their "extramural research budgets." As a result some agencies were inappropriately including or excluding some types of expenses. To address our recommendation that SBA provide additional guidance on how participating agencies were to calculate their extramural research budgets, the Congress in 2000 required that the agencies report annually to SBA on the methods used to calculate their extramural research budgets. Geographical concentration of awards. In 1999, in response to congressional concerns about the geographical concentration of SBIR awards, we reported that companies in a small number of states, especially California and Massachusetts, have submitted the most proposals and won the majority of awards. The distribution of awards generally followed the pattern of distribution of non-SBIR expenditures for R&D, venture capital investments, and academic research funds. We reported that some agencies had undertaken efforts to broaden the geographic distribution of awards and that the program implemented by the National Science Foundation had been particularly effective. Although we did not make any recommendations on how to improve the program's outreach to states receiving fewer awards, in the 2000 reauthorization of the program, Congress established the Federal and State Technology Partnership Program to help strengthen the technological competitiveness of small businesses, especially in those states that receive fewer SBIR grants. Clarification on commercialization and other SBIR goals. Finally, in response to our continuing concern that clarification was needed on the relative emphasis that agencies should give to a company's commercialization record and SBIR's other goals when evaluating proposals, in 2000 the Congress required companies applying for a second phase award to include a commercialization plan with their SBIR proposals. This requirement partially addressed our concern. Moreover, in the spring of 2001, SBA initiated efforts to respond to our recommendation to develop standard criteria for measuring commercial and other outcomes of the SBIR program, such as uniform measures of sales and developmental funding, and incorporate these criteria into its Tech-Net database. Specifically, SBA began implementing a reporting system to measure the program's commercialization success. In fiscal year 2002, SBA further enhanced the reporting system to include commercialization results that would help establish an initial baseline rate of commercialization. In addition, small business firms participating in the SBIR program are required to provide information annually on sales and investments associated with their SBIR projects. One issue that continues to remain somewhat unresolved after almost two decades of program implementation is how to assess the performance of the SBIR program. As the program has matured, the Congress has emphasized the potential for commercialization as an important criterion in awarding funds and the commercialization of a product as a measure of success for the program. However, in 1999, we reported that the program's other goals also remain important to the agencies. By itself, according to some program managers, limited commercialization may not signal "failure" because a company may have achieved other goals, such as innovation or responsiveness to an agency's research needs. We identified a variety of reasons why assessing the performance of the SBIR program has remained a challenge. First, because the authorizing legislation and SBA's policy directives do not define the role of the company's commercialization record in determining commercial potential and the relative importance of the program's goals, different approaches have emerged in agencies' evaluations of proposals. As a result, the relative weight that should be given to the program's goals when evaluating proposals remains unclear. Innovation and responsiveness to an agency's needs, for example, may compete with the achievement of commercialization. In the view of many program managers, innovation involves a willingness to undertake R&D with a higher element of risk and a greater chance that it may not lead to a commercial product; responsiveness to an agency's needs involves R&D that may be aimed at special niches with limited commercial potential. Striking the right balance between achieving commercial sales and encouraging new, unproven technologies is, according to the program managers, one of the key ingredients in the program's overall success. Second, we found that it has been difficult to find practical ways to define and measure the SBIR program's goals in order to evaluate proposals. For example, the authorizing legislation lacks a clear definition of "commercialization," and agencies sometimes differed on its meaning. This absence of a definition makes it more difficult to determine when a frequent winner is "failing" to achieve a sufficient level of commercialization and how to include this information in an agency's review of the company's proposal. Similarly, efforts to define and measure technological innovation, which was one of the program's original goals, have posed a challenge. Although definitions vary, there is widespread agreement that technological innovation is a complex process, particularly in the development of sophisticated modern technologies. Finally, we reported that as the emphasis on commercialization had grown, so had concerns that noncommercial successes may not be adequately recognized. For example, program managers identified various projects that met special military or medical equipment needs but that had limited sales potential. These projects would be helpful in reducing the agency's expenditures and meeting the mission of the agency but may not be appropriately captured in typical measurements of commercialization. In general, we found that program managers valued both noncommercial and commercial successes and feared that the former might be ignored in emphasizing the latter. To help evaluate the performance of the program, in the 2000 reauthorization of SBIR, Congress required SBA to develop a database that would help the agency collect and maintain in common format necessary program output and outcome information. The database is to include the following information on all phase II awards: (1) revenue from the sale of new products or services resulting from the SBIR funded research, (2) additional investment from any non-SBIR source for further research and development, and (3) any other description of outputs and outcomes of the awards. In addition, the database is to include general information for all applicants not receiving an award including an abstract of the project. In conclusion, Mr. Chairman, our work has shown that, overall, the SBIR program has been successful in meeting its goals and that the Congress and the agencies have implemented actions to strengthen the program over time. However, an assessment of the program's results remains a challenge because of the lack of clarity on how much emphasis the program should place on commercialization versus other goals. For further information, please contact Anu Mittal at (202) 512-3841 or [email protected]. 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.

Since it was established in 1982, GAO has consistently reported on the success of the Small Business Innovation Research (SBIR) program in benefiting small, innovative companies, strengthening their role in federal research and development (R&D), and helping federal agencies achieve their R&D goals. However, through these reviews GAO has also identified areas where action by participating agencies or the Congress could build on the program's successes and improve its operations. This statement for the record summarizes the program's successes and improvements over time, as well as the continuing challenge of assessing the long term results of the program. Between July 1985 and June 1999, GAO reviewed, reported, and testified on the SBIR program many times at the request of the Congress. While GAO's work focused on many different aspects of the program, it generally found that SBIR is achieving its goals to enhance the role of small businesses in federal R&D, stimulate commercialization of research results, and support the participation of small businesses owned by women and/or disadvantaged persons. Participating agencies and companies that GAO surveyed during the course of its reviews generally rated the program highly. GAO also identified areas of weaknesses and made recommendations that, if addressed, could strengthen the program further. Some of these concerns related to (1) duplicate funding for similar, or even identical, research projects by more than one agency, (2) inconsistent interpretations of extramural research budgets by participating agencies, (3) geographical concentration of awards in a small number of states, and (4) lack of clarification on the emphasis that agencies should give to a company's commercialization record when assessing its proposals. Most of GAO's recommendations for program improvement have been either fully or partially addressed by the Congress in various reauthorizations of the program or by the agencies themselves. One issue that continues to remain somewhat unresolved after almost two decades of program implementation is how to assess the performance of the SBIR program. As the program has matured, the Congress has emphasized the potential for commercialization as an important criterion in awarding funds and the commercialization of a product as a measure of success for the program. However, in 1999, GAO reported that the program's other goals also remain important to the agencies. By itself, according to some program managers, limited commercialization may not signal "failure" because a company may have achieved other goals, such as innovation or responsiveness to an agency's research needs. GAO identified a variety of reasons why assessing the performance of the SBIR program has remained a challenge. First, because the authorizing legislation and the Small Business Administration's (SBA) policy directives do not define the role of the company's commercialization record in determining commercial potential and the relative importance of the program's goals, different approaches have emerged in agencies' evaluations of proposals. Second, GAO found that it has been difficult to find practical ways to define and measure the SBIR program's goals in order to evaluate proposals. For example, the authorizing legislation lacks a clear definition of "commercialization," and agencies sometimes differed on its meaning. Finally, GAO reported that as the emphasis on commercialization had grown, so had concerns that noncommercial successes may not be adequately recognized. For example, program managers identified various projects that met special military or medical equipment needs but that had limited sales potential.

The federal government invests more than $80 billion annually in IT, but many of these investments fail to meet cost and schedule expectations or make significant contributions to mission-related outcomes. We have previously testified that the federal government has spent billions of dollars on failed IT investments, such as the Department of Defense's (DOD) Expeditionary Combat Support System, which was canceled in December 2012, after spending more than a billion dollars and failing to deploy within 5 years of initially obligating funds; the Department of Homeland Security's Secure Border Initiative Network program, which was ended in January 2011, after the department obligated more than $1 billion to the program, because it did not meet cost-effectiveness and viability standards; the Department of Veterans Affairs' (VA) Financial and Logistics Integrated Technology Enterprise program, which was intended to be delivered by 2014 at a total estimated cost of $609 million, but was terminated in October 2011 due to challenges in managing the program; the Farm Service Agency's Modernize and Innovate the Delivery of Agricultural Systems program, which was to replace aging hardware and software applications that process benefits to farmers, was halted after investing about 10 years and at least $423 million, while only delivering about 20 percent of the functionality that was originally planned. the Office of Personnel Management's Retirement Systems Modernization program, which was canceled in February 2011, after spending approximately $231 million on the agency's third attempt to automate the processing of federal employee retirement claims; the National Oceanic and Atmospheric Administration, DOD, and the National Aeronautics and Space Administration's National Polar- orbiting Operational Environmental Satellite System, which was a tri- agency weather satellite program that the White House Office of Science and Technology stopped in February 2010 after the program spent 16 years and almost $5 billion; and the VA Scheduling Replacement Project, which was terminated in September 2009 after spending an estimated $127 million over 9 years. These and other failed IT projects often suffered from a lack of disciplined and effective management, such as project planning, requirements definition, and program oversight and governance. In many instances, agencies had not consistently applied best practices that are critical to successfully acquiring IT investments. Federal IT projects have also failed due to a lack of oversight and governance. Executive-level governance and oversight across the government has often been ineffective, specifically from chief information officers (CIO). For example, we have reported that not all CIOs had the authority to review and approve the entire agency IT portfolio and that CIOs' authority was limited. Recognizing the severity of issues related to government-wide management of IT, in December 2014, Congress enacted IT reform legislation, FITARA. The law holds promise for improving agencies' acquisition of IT and enabling Congress to monitor agencies' progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes specific requirements related to seven areas. Agency CIO authority enhancements. Agency CIOs are required to (1) approve the IT budget requests of their respective agencies, (2) certify that IT investments are adequately implementing the Office of Management and Budget's (OMB) incremental development guidance, (3) review and approve contracts for IT, and (4) approve the appointment of other agency employees with the title of CIO. Enhanced transparency and improved risk management. OMB and agencies are to make publicly available detailed information on federal IT investments, and agency CIOs are to categorize their IT investments by risk. Additionally, in the case of major IT investments rated as high risk for 4 consecutive quarters, the law requires that the agency CIO and the investment's program manager conduct a review aimed at identifying and addressing the causes of the risk. Portfolio review. Agencies are to annually review IT investment portfolios in order to, among other things, increase efficiency and effectiveness, and identify potential waste and duplication. In developing the associated process, the law requires OMB to develop standardized performance metrics, to include cost savings, and to submit quarterly reports to Congress on cost savings. Federal data center consolidation initiative (FDCCI). Agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing the data centers (to include planned cost savings), and quarterly updates on progress made. The law also requires OMB to develop a goal of how much is to be saved through this initiative, and provide annual reports on cost savings achieved. Expansion of training and use of IT cadres. Agencies are to update their acquisition human capital plans to address supporting the timely and effective acquisition of IT. In doing so, the law calls for agencies to consider, among other things, establishing IT acquisition cadres or developing agreements with other agencies that have such cadres. Maximizing the benefit of the federal strategic sourcing initiative. Federal agencies are required to compare their purchases of services and supplies to what is offered under the Federal Strategic Sourcing initiative. OMB is also required to issue related regulations. Government-wide software purchasing program. The General Services Administration is to develop a strategic sourcing initiative to enhance government-wide acquisition and management of software. In doing so, the law requires that, to the maximum extent practicable, the General Services Administration should allow for the purchase of a software license agreement that is available for use by all Executive Branch agencies as a single user. In addition, in June 2015, OMB released guidance describing how agencies are to implement the law. OMB's guidance states that it is intended to, among other things: assist agencies in aligning their IT resources to statutory requirements; establish government-wide IT management controls that will meet the law's requirements, while providing agencies with flexibility to adapt to unique agency processes and requirements; clarify the CIO's role and strengthen the relationship between agency CIOs and bureau CIOs; and strengthen CIO accountability for IT cost, schedule, performance, and security. In this regard, the guidance reiterates OMB's existing guidance on PortfolioStat, the IT Dashboard, and the federal data center consolidation initiative, and expands its existing guidance on TechStat sessions. The guidance includes several actions agencies are to take to establish a basic set of roles and responsibilities (referred to as the "common baseline") for CIOs and other senior agency officials that are needed to implement the authorities described in the law. For example, agencies were required to conduct a self-assessment and submit a plan describing the changes they will make to ensure that common baseline responsibilities are implemented. Agencies were to submit their plans to OMB's Office of E-Government and Information Technology by August 15, 2015, and make portions of the plans publicly available on agency websites no later than 30 days after OMB approval. As of October 30, 2015, none of the 24 Chief Financial Officers Act agencies had made their plans publicly available. The guidance also noted that OMB will help support agency implementation of the common baseline by, for example, requiring the Federal CIO Council to, on quarterly basis, discuss topics related to the implementation of the common baseline and to assist agencies by sharing examples of agency governance processes and IT policies. Further, by June 30, 2015, the President's Management Council was to select three members from the council to provide an update on government-wide implementation of FITARA on a quarterly basis through September 2016. However, as of October 28, 2015, OMB officials stated that the President's Management Council had not yet selected members to provide these updates. In addition, OMB recently issued a memorandum regarding commodity IT acquisitions and noted that agencies buy and manage their IT in a fragmented and inefficient manner which conflicts with the goals of FITARA. Among other things, the memorandum directed agencies to standardize laptop and desktop configurations for common requirements and reduce the number of contracts for laptops and desktops by consolidating purchasing. The memorandum notes that OMB intends for agencies to implement standard configurations over time by using approved contracts, with a government-wide goal of 75 percent of agencies using approved contracts by fiscal year 2018. The memorandum requires agencies to develop transition plans to achieve this goal and submit them to OMB by February 28, 2016. Our government-wide high-risk area Improving the Management of IT Acquisitions and Operations highlights critical IT initiatives, four of which align with provisions in FITARA: (1) an emphasis on incremental development, (2) a key transparency initiative, (3) efforts to consolidate data centers, and (4) efforts to streamline agencies' portfolios of IT investments. Our high-risk report notes that implementation of these initiatives had been inconsistent, and more work remained to demonstrate progress in achieving IT acquisition outcomes. Implementing the provisions from the law, along with our outstanding recommendations, will be necessary for agencies to demonstrate progress in addressing this high-risk area. OMB has emphasized the need to deliver investments in smaller parts, or increments, in order to reduce investment risk, deliver capabilities more quickly, and facilitate the adoption of emerging technologies. In 2010, it called for agencies' major investments to deliver functionality every 12 months and, since 2012, every 6 months. However, we recently reported that less than half of selected investments at five major agencies planned to deliver capabilities in 12-month cycles. Accordingly, we recommended that OMB develop and issue clearer guidance on incremental development and that selected agencies update and implement their associated policies. Most agencies agreed with our recommendations or had no comment. In January 2010, the Federal CIO began leading TechStat sessions-- face-to-face meetings to terminate or turn around IT investments that are failing or are not producing results. These meetings involve OMB and agency leadership and are intended to increase accountability and improve performance. OMB reported that federal agencies achieved over $3 billion in cost savings or avoidances as a result of these sessions in 2010. Subsequently, OMB empowered agency CIOs to hold their own TechStat sessions within their respective agencies. We have since reported that OMB and selected agencies held multiple TechStats, but additional OMB oversight was needed to ensure that these meetings were having the appropriate impact on underperforming projects and that resulting cost savings were valid. We concluded that until OMB and agencies develop plans to address these investments, the investments would likely remain at risk. Among other things, we recommended that OMB require agencies to address high-risk investments. OMB generally agreed with this recommendation. However, as of October 28, 2015, OMB has only conducted one TechStat review in the last 2 years. In particular, between March 2013 and October 2015, OMB held one TechStat on the Department of State's legacy consular systems investment in July 2015. Moreover, OMB has not listed any savings from TechStats in any of its required quarterly reporting to Congress since June 2012. To help the government achieve transparency while managing legacy investments, in June 2009, OMB established a public website (referred to as the IT Dashboard) that provides detailed information on major IT investments at 27 federal agencies, including ratings of their performance against cost and schedule targets. Among other things, agencies are to submit ratings from their CIOs, which, according to OMB's instructions, should reflect the level of risk facing an investment relative to that investment's ability to accomplish its goals. As of August 2015, according to the IT Dashboard, 163 of the federal government's 738 major IT investments--totaling $9.8 billion--were in need of management attention (rated "yellow" to indicate the need for attention or "red" to indicate significant concerns). (See fig. 1.) Over the past several years, we have made over 20 recommendations to help improve the accuracy and reliability of the information on the IT Dashboard and to increase its availability. Most agencies agreed with our recommendations or had no comment. In addition to spending money on new IT development, agencies also plan to spend a significant amount of their fiscal year 2016 IT budgets on the operations and maintenance (O&M) of legacy (i.e., steady-state) systems. From fiscal year 2010 to fiscal year 2016, this amount has increased, while the amount invested in developing new systems has decreased by about $7.1 billion. (See figure 2.) This raises concerns about agencies' ability to replace systems that are no longer cost- effective or that fail to meet user needs. Of the more than $79 billion budgeted for federal IT in fiscal year 2016, 26 federal agencies plan to spend about $60 billion, more than three- quarters of the total budgeted, on the O&M of legacy investments. Figure 3 provides a visual summary of the relative cost of major and nonmajor investments, both in development and O&M. Given the size and magnitude of these investments, it is important that agencies effectively manage the O&M of existing investments to ensure that they (1) continue to meet agency needs, (2) deliver value, and (3) do not unnecessarily duplicate or overlap with other investments. To accomplish this, agencies are required by OMB to perform annual operational analyses of these investments, which are intended to serve as periodic examination of an investment's performance against, among other things, established cost, schedule, and performance goals. However, we have reported that agencies were not consistently performing such analyses and that billions of dollars in O&M investments had not undergone needed analyses. Specifically, as detailed in our November 2013 report, only 1 of the government's 10 largest O&M investments underwent an OMB-required operational analysis. We recommended that operational analyses be completed on the remaining 9 investments. Most agencies generally agreed with our recommendations. To improve the efficiency, performance, and environmental footprint of federal data center activities, OMB established the federal data center consolidation initiative in February 2010. In a series of reports, we found that, while data center consolidation could potentially save the federal government billions of dollars, weaknesses existed in the execution and oversight of the initiative. Most recently, we reported that, as of May 2014, agencies collectively reported that they had a total of 9,658 data centers; as of May 2015, they had closed 1,684 data centers and were planning to close an additional 2,431--for a total of 4,115--by the end of September 2015. We also noted that between fiscal years 2011 and 2017, agencies reported planning a total of about $5.3 billion in cost savings and avoidances due to the consolidation of federal data centers. In correspondence subsequent to the publication of our report, DOD's Office of the CIO identified an additional $2.1 billion in savings to be realized beyond fiscal year 2017, which increased the total savings across the federal government to about $7.4 billion. Further, since our May 2014 report we received additional information from other agencies about their actual 2014 cost savings and revised plans for future savings. This information is shown in table 1, which provides a summary of agencies' total data center cost savings and cost avoidances between fiscal years 2011 and 2017, as well as DOD cost savings and cost avoidances to be realized beyond 2017. However, in our September 2014 report, we noted that planned savings may be understated because of difficulties agencies encountered when calculating savings and communicating their estimates to OMB. We made recommendations to ensure the initiative improves efficiency and achieves cost savings. Most agencies agreed with our recommendations or did not comment. To better manage existing IT systems, OMB launched the PortfolioStat initiative, which requires agencies to conduct an annual, agency-wide IT portfolio review to, among other things, reduce commodity IT spending and demonstrate how their IT investments align with the agency's mission and business functions. In November 2013, we reported that agencies continued to identify duplicative spending as part of PortfolioStat and that this initiative had the potential to save at least $5.8 billion through fiscal year 2015; however, weaknesses existed in agencies' implementation of the initiative, such as limitations in the CIOs' authority. We made more than 60 recommendations to improve OMB's and agencies' implementation of PortfolioStat. OMB partially agreed with our recommendations, and responses from 21 of the agencies varied, with some agreeing and others not. In April 2015, we reported that agencies decreased their planned PortfolioStat savings to approximately $2 billion--a 68 percent reduction from the amount they reported to us in 2013. Additionally, although agencies also reported having achieved approximately $1.1 billion in savings, inconsistencies in OMB's and agencies' reporting made it difficult to reliably measure progress in achieving savings. Among other things, we made recommendations to OMB aimed at improving the reporting of achieved savings, with which it agreed. We have also recently reported on two additional key areas of agency's IT spending portfolio: software licensing and mobile devices. Regarding software licensing, we recently reported that better management was needed to achieve significant savings government- wide. In particular, 22 of the 24 major agencies we reviewed did not have comprehensive license policies, and only 2 had comprehensive license inventories. We recommended that OMB issue needed guidance to agencies and made more than 130 recommendations to the agencies to improve their policies and practices for managing software licenses. OMB disagreed with the need for guidance. However, we believe that without such guidance, agencies will likely continue to lack the visibility into what needs to be managed. Most agencies generally agreed with the recommendations or had no comments. We have also reported that most of the 15 agencies in our mobile devices review did not have an inventory of mobile devices and associated services, and only 1 of the 15 agencies we reviewed had documented procedures for monitoring spending. Accordingly, we recommended that the agencies take actions to improve their inventories and control processes and that OMB measure and report progress in achieving cost savings. OMB and 14 of the agencies generally agreed with the recommendations or had no comment. The Department of Defense partially agreed, and we maintained that actions were needed. In our February 2015 high-risk report, we identified actions that OMB and the agencies need to take to make progress in this area. These include implementing the recently enacted statutory requirements promoting IT acquisition reform, as well as implementing our previous recommendations, such as updating the public version of the IT Dashboard throughout the year. As noted in that report, we have made multiple recommendations to improve agencies' management of their IT acquisitions, many of which have been discussed in this statement. In the last 6 years we made approximately 800 recommendations to multiple agencies. As of October 2015, about 32 percent of these recommendations had been implemented. Also in our high-risk report, we stated that OMB and agencies will need to demonstrate measurable government-wide progress in the following key areas: implement at least 80 percent of GAO's recommendations related to the management of IT acquisitions and operations within 4 years. ensure that a minimum of 80 percent of the government's major acquisitions deliver functionality every 12 months. achieve no less than 80 percent of the planned PortfolioStat savings and 80 percent of the planned savings planned for data center consolidation. In conclusion, with the recent passage of IT reform legislation, the federal government has an opportunity to improve the transparency and management of IT acquisition and operations, and strengthen the authority of CIOs to provide needed direction and oversight. Further, by identifying the management of IT acquisitions and operations as a new government-wide high-risk area we are bringing necessary attention to several critical IT initiatives in need of additional congressional oversight. OMB and federal agencies should expeditiously implement the requirements of the legislation and continue to implement our previous recommendations. To help ensure that these improvements are achieved, continued congressional oversight of OMB's and agencies' implementation efforts is essential. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For additional information about this high-risk area, contact David A. Powner at (202) 512-9286 or [email protected], Carol Cha at (202) 512- 4456 or [email protected], or Valerie Melvin at (202) 512-6304 or [email protected]. Individuals who made key contributions to this testimony are Kevin Walsh (Assistant Director), Chris Businsky, Rebecca Eyler, Kaelin Kuhn, and Jessica Waselkow. Telecommunications: Agencies Need Better Controls to Achieve Significant Savings on Mobile Devices and Services. GAO-15-431. May 21, 2015. Information Technology: Additional OMB and Agency Actions Needed to Ensure Portfolio Savings Are Realized and Effectively Tracked. GAO-15-296. April 16, 2015. Federal Chief Information Officers: Reporting to OMB Can Be Improved by Further Streamlining and Better Focusing on Priorities. GAO-15-106. April 2, 2015. High-Risk Series: An Update. GAO-15-290. February 11, 2015. Data Center Consolidation: Reporting Can be Improved to Reflect Substantial Planned Savings. GAO-14-713. September 25, 2014. Federal Software Licenses: Better Management Needed to Achieve Significant Savings Government-Wide. GAO-14-413. May 22, 2014. Information Technology: Agencies Need to Establish and Implement Incremental Development Policies. GAO-14-361. May 1, 2014. IT Dashboard: Agencies Are Managing Investment Risk, but Related Ratings Need to Be More Accurate and Available. GAO-14-64. December 12, 2013. Information Technology: Agencies Need to Strengthen Oversight of Multibillion Dollar Investments in Operations and Maintenance. GAO-14-66. November 6, 2013. Information Technology: Additional OMB and Agency Actions Are Needed to Achieve Portfolio Savings. GAO-14-65. November 6, 2013. Information Technology: Additional Executive Review Sessions Needed to Address Troubled Projects. GAO-13-524. June 13, 2013. Information Technology: Agencies Need to Strengthen Oversight of Billions of Dollars in Operations and Maintenance Investments. GAO-13-87. October 16, 2012. IT Dashboard: Accuracy Has Improved, and Additional Efforts Are Under Way to Better Inform Decision Making. GAO-12-210. November 7, 2011. 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 federal government invests more than $80 billion annually in IT. However, these investments frequently fail, incur cost overruns and schedule slippages, or contribute little to mission-related outcomes. As GAO has previously reported, this underperformance of federal IT projects can be traced to a lack of disciplined and effective management and inadequate executive-level oversight. Accordingly, in December 2014, IT reform legislation was enacted, aimed at improving agencies' acquisition of IT. Further, earlier this year GAO added improving the management of IT acquisitions and operations to its high-risk list--a list of agencies and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse, and mismanagement, or are most in need of transformation. This statement provides information on FITARA and GAO's designation of IT acquisitions and operations as a high-risk area. In preparing this statement, GAO relied on its previously published work in these areas. The law commonly known as the Federal Information Technology Acquisition Reform Act (FITARA) was enacted in December 2014 and aims to improve federal information technology (IT) acquisition and operations. The law includes specific requirements related to seven areas. For example, it addresses Agency Chief Information Officer (CIO) authority enhancements . Among other things, agency CIOs are required to approve the IT budget requests of their respective agencies and certify that IT investments are adequately implementing the Office of Management and Budget's (OMB) incremental development guidance. Enhanced transparency and improved risk management . OMB and agencies are to make publicly available detailed information on federal IT investments, and agency CIOs are to categorize IT investments by risk. Additionally, if major IT investments are rated as high risk for 4 consecutive quarters, the agencies are to conduct a review of the investment. Portfolio review. Agencies are to annually review IT investment portfolios in order to, among other things, increase efficiency and effectiveness, and identify potential waste and duplication. OMB is required to develop standardized performance metrics, to include cost savings, and to submit quarterly reports to Congress on cost savings. Federal data center consolidation initiative. Agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing the data centers (to include planned cost savings), and quarterly updates on progress made. OMB is required to develop a goal of how much is to be saved through this initiative, and report on progress annually. Maximizing the benefit of the federal strategic sourcing initiative . Federal agencies are required to compare their purchases of services and supplies to what is offered under the Federal Strategic Sourcing initiative. OMB has released guidance for agencies to implement provisions of FITARA, which includes actions agencies are to take regarding responsibilities for CIOs. The guidance also reiterates OMB's existing guidance on IT portfolio management, a key transparency website, and the federal data center consolidation initiative; and expands its existing guidance on reviews of at-risk investments. Agencies were to conduct a self-assessment and submit a plan to OMB by August 2015 describing the changes they will make to ensure that responsibilities are implemented. Further, portions of these plans are required to be made publicly available 30 days after OMB's approval; as of October 30, 2015, none of the 24 Chief Financial Officers Act agencies had done so. Further, FITARA's provisions are similar to areas covered by GAO's high-risk area to improve the management of IT acquisitions and operations. For example, GAO has noted that improvements are needed in federal efforts to enhance transparency, consolidate data centers, and streamline agencies' IT investment portfolios. To demonstrate progress in addressing this high-risk area, agencies will need to implement the legislation's provisions and GAO's outstanding recommendations. Over the last 6 years, GAO made about 800 recommendations to OMB and agencies to improve acquisition and operations of IT. As of October 2015, about 32 percent of these had been implemented. It will be critical for agencies to implement the remaining GAO recommendations and the requirements of FITARA to achieve improvements. , Carol Cha at (202) 512-4456 or [email protected] , or Valerie Melvin at (202) 512-6304 or [email protected] .

The 2008 Leadership Act called on the U.S. Global AIDS Coordinator to develop a 5-year strategy to combat global HIV/AIDS, including a plan to achieve a number of prevention, treatment, and care program goals. The 5-year PEPFAR strategy, which OGAC released in December 2009, specifies multiyear program goals and outlines multiyear targets including those listed in the Leadership Act. The 2008 Leadership Act, which amends the 2003 Leadership Act, requires that OGAC submit an annual report to Congress, including an assessment of progress toward the achievement of annual goals. If annual goals are not being met, the 2008 Leadership Act states that the report should identify the reasons for such failure. GPRA and our prior work identify practices related to performance planning and reporting. GPRA calls for the use of several performance management practices intended to improve federal program effectiveness, accountability, and service delivery and to enhance congressional decision making by requiring federal agencies to provide more objective information on program performance. In addition, our prior work suggests the use of a practice to bolster program performance reporting. These practices include the following, among others: Performance planning. GPRA calls for preparation of public annual performance plans that articulate goals for the upcoming fiscal year. These plans should link annual program goals to program activities, include indicators that will be used to measure performance, provide information on the operational processes and resources required to meet the performance goals, and identify the procedures that will be used to verify and validate performance information. Performance reporting. GPRA calls for annual performance reports reviewing the success of achieving the performance goals of the fiscal year. The reports are to describe and review results compared with performance goals, provide explanations for any unmet goals and actions needed to address them, and include summaries of completed program evaluations. In addition, our prior work found that explaining any limitations of performance information can provide context for understanding and assessing program performance and the costs and challenges faced in gathering, processing, and analyzing data. This practice can help identify the actions needed to address any inadequacies in the completeness and reliability of performance data and thereby improve program performance reporting. In August 2009, OGAC issued its Next Generation Indicators Reference Guide, providing an updated list of indicators for establishing targets and reporting on results of PEPFAR prevention, care, treatment, and health systems strengthening programs. The guidance classifies 32 indicators as essential and reported--that is, indicators that PEPFAR country or regional teams must use in submitting data on program results to OGAC. (See app. III for a list of the 32 essential reported PEPFAR indicators.) The guidance advises PEPFAR country and regional teams to require PEPFAR implementing partners to submit data for an additional set of indicators, if applicable, but does not require country and regional teams to submit these data to OGAC. The guidance also provides a list of recommended indicators for implementing partners and PEPFAR program managers who need additional information for program management. The guidance states that PEPFAR interagency country or regional teams determine how to collect data from PEPFAR implementing partners and relevant national systems, as well as how to aggregate, store, and use the PEPFAR program monitoring indicators in country. OGAC, USAID, and CDC officials share responsibility for PEPFAR planning and reporting activities--including developing and approving PEPFAR operational plans and reports--and conduct agency-specific planning and reporting procedures. The procedures support agencies' internal program management and provide data for external reporting on PEPFAR results. OGAC's Strategic Information (SI) office guides and coordinates PEPFAR performance planning and reporting for countries and regions receiving U.S. HIV/AIDS assistance. SI advisors--as of July 2011, 20 CDC and USAID officials--provide technical support and assistance to country and regional teams for developing annual operational plans for PEPFAR programs. In helping to develop the country-level and regional operational plans, when requested, SI advisors work with the country and regional teams to describe partner-level PEPFAR activities during the preceding fiscal year and establish country-level and regional targets for the coming year. When OGAC receives the operational plans (typically in October), SI advisors review the performance targets. After the plans are approved by the U.S. Global AIDS Coordinator, OGAC aggregates budget, program activity, and planned performance information in the plans to create an annual PEPFAR operational plan to be submitted to Congress. When requested, OGAC's SI office also guides and assists PEPFAR teams in preparing and submitting data on program results to the U.S. Global AIDS Coordinator. SI advisors work with PEPFAR country and regional teams to submit data on program results semi-annually (typically in May) and annually (typically in November). The semi-annual data consist of targets and results for a subset of eight PEPFAR essential indicators; the annual data consist of targets and results for all 32 essential reported PEPFAR indicators. SI advisors review the submitted data, and SI office staff further review and reconcile treatment data with data from the Global Fund, UNAIDS, and the World Health Organization. Once the data are confirmed, OGAC considers them to be PEPFAR's final results for the year. These data, which OGAC maintains internally, are intended to support PEPFAR program monitoring, midcourse correction, and planning for subsequent fiscal years. PEPFAR program results data also supply information for public reports and other documents, including OGAC's annual report to Congress on PEPFAR performance, typically published in February, as well as a World AIDS Day (December 1) press release on PEPFAR results. USAID's Office of HIV/AIDS, in Washington, D.C., and USAID officials in regional and country missions share responsibility for global HIV/AIDS performance planning and reporting, including oversight of USAID implementing partners. The Office of HIV/AIDS comprises four divisions, two of which--the Implementation Support Division and the Strategic Planning, Evaluation, and Reporting Division--provide assistance to the agency and field missions in managing programs and incorporating programmatic best practices. USAID uses PEPFAR program results data for its annual performance plans and reports. USAID also conducts foreign assistance performance planning and reporting jointly with State's Office of the Director of U.S. Foreign Assistance, using State's and USAID's Foreign Assistance Framework. In addition to producing multiyear country assistance strategies and mission strategic plans, USAID country or regional missions complete annual operational plans and annual performance plans and reports for monitoring, evaluating, and reporting progress in achieving the agency's foreign assistance objectives. USAID guidance further specifies required elements of mission performance management plans, including indicators, baseline values and targets, data sources, any known data limitations, and data quality assessment procedures. State's and USAID's master list of standard indicators specifies 46 HIV/AIDS- related indicators for setting targets and reporting results. According to USAID officials, the HIV/AIDS-related indicator descriptions are aligned with those for PEPFAR. Through its audits of USAID's global HIV/AIDS program activities, from fiscal year 2008 to 2011, USAID's OIG has made recommendations related to performance planning and reporting. We identified 130 USAID OIG recommendations regarding performance monitoring of USAID- administered PEPFAR activities for fiscal years 2008 to 2011, which we categorized using 12 components of HIV/AIDS program monitoring and evaluations systems, as defined by UNAIDS. Of these recommendations, 94 recommendations, or 72 percent, are related to routine program monitoring or data quality--specifically, 39 percent are related to routine program monitoring (producing timely and high-quality program monitoring data); 11 percent are related to supportive supervision and data auditing (monitoring data quality periodically and addressing any obstacles to producing high-quality data); and 22 percent are related to both routine program monitoring and supportive supervision and data auditing. (See fig. 1.) For example, the OIG reported in 2009 that the USAID mission in one country did not sufficiently verify and validate implementing partner performance data and, as a result, recommended that the mission establish procedures, including site visits, for validating these data. (We categorized this recommendation as relating to both routine program monitoring and supportive supervision and data auditing.) In addition, we found that a number of recommendations related to human capacity for monitoring and evaluation, often in combination with recommendations for improving program monitoring. For example, a 2010 audit of another USAID country mission's PEPFAR program found that inadequate training of implementing partner staff resulted in weak data collection methods and reporting of inaccurate performance data. The OIG recommended that the mission develop a training plan for implementing partner staff in charge of data collection and reporting. Routine program monitoring (51 recommendations) Routine program monitoring and supportive supervision and data auditing (29 recommendations) Supportive supervision and data auditing (14 recommendations) Supportive supervision and data auditing and human capacity (10 recommendations) Human capacity (5 recommendations) Human capacity and routine program monitoring (6 recommendations) Partnerships for monitoring and evaluation (3 recommendations) Routine program monitoring and partnerships for monitoring and evaluation (2 recommendations) Organizational structures and routine program monitoring (2 recommendations) According to data provided by USAID, as of June 2011, the agency had implemented about two-thirds (65 percent) of USAID OIG report recommendations related to program performance monitoring and evaluation; about a third (35 percent) of the remaining recommendations are due for final action by December 2011. (See fig. 2.) CDC's Division of Global HIV/AIDS (DGHA), in Atlanta, Georgia, is responsible, along with CDC officials in 41 overseas offices, for global HIV/AIDS programs in more than 75 countries. DGHA comprises a regional and country management office and eight headquarters-based technical and operational branches, including epidemiology and strategic information; health economics, systems, and integration; and country operations. These offices and branches manage and provide technical assistance and support to CDC country teams and partner governments, coordinate DGHA involvement in PEPFAR interagency activities and partnerships with international organizations, and support regional and country offices with implementing partner selection and performance monitoring. CDC uses PEPFAR program results data for its annual performance plans and reports. In addition, in 2010, CDC instituted quarterly program reviews for all CDC divisions, and DGHA underwent its first quarterly program review in November 2010. For these CDC management reviews, DGHA selected 16 1-year and 14 4-year goals under four priority strategies: strengthen public health systems globally; scale up combination prevention programs and treat HIV globally in a cost- effective manner; transition HIV/AIDS treatment programs to host-country governments; and support the Global Health Initiative. DGHA reports quarterly to the Office of the Associate Director for Program on eight PEPFAR indicators, representing 31 PEPFAR countries and three regions. According to CDC officials, the quarterly program review is intended to inform CDC's annual performance plan and report. Beginning in February 2011, DGHA officials initiated a series of in-country reviews--called country management and support visits--of CDC country office management of global HIV/AIDS programs. DGHA officials completed eight visits by the end of June 2011 and planned to complete up to 17 additional visits over the next several months, with up to 34 country visits being completed by the end of fiscal year 2012. DGHA plans to make summaries of the country visits available to the public. In addition, CDC develops annual interagency programmatic planning and monitoring documents called country assistance plans. In February 2010, CDC technical and budget officials and senior management reviewed country assistance plans for seven countries: Afghanistan, Brazil, Laos, Mali, Papua New Guinea, Senegal, and Sierra Leone. These plans provide information on planned activities and country targets and results, among other things. CDC's country assistance plan guidance recommends that CDC country offices refer to PEPFAR indicators in the plans, as appropriate, when reporting results. During a pilot project for assessing the quality of treatment program data, CDC found that data quality varied across CDC-funded treatment sites. CDC examined the reliability of the numbers of patients reported as currently on treatment at 31 CDC-funded PEPFAR treatment sites in Mozambique, Tanzania, and Cote d'Ivoire. CDC found that counting actual patient visit or drug pickup data at the 31 sites yielded a lower total than the method used by some implementing partners (39,577 patients versus 48,796 patients, respectively). The implementing partners sometimes summed the number of people who ever started treatment and subtracted those known to have left the program, resulting in misclassification of patients' treatment status and inflation of reported results. Based on these assessments, CDC recommended (1) refining definitions of indicators and acceptable methods for deriving the information; (2) developing a data quality assessment program with a standardized protocol for evaluating data; (3) completing the treatment data quality assessment at all PEPFAR-supported sites; and (4) sharing the assessments' findings with all PEPFAR country teams, implementing partners, and ministries of health. OGAC, USAID, and CDC have issued several performance management planning and reporting documents in response to the requirements included in the 2008 Leadership Act and practices specified in GPRA. (See app. IV for a list of targets and results reported by OGAC, USAID, and CDC.) OGAC. OGAC has issued annual PEPFAR operational plans for fiscal years 2009 and 2010. According to OGAC officials, the PEPFAR operational plan--which aggregates information from country and regional operational plans--serves as its annual performance plan. OGAC also issues an annual PEPFAR performance report to Congress. OGAC's most recent annual report to Congress, for fiscal year 2010, includes a series of tables showing programwide PEPFAR results for prevention, treatment, and care indicators; the annual report for fiscal year 2009 also includes results for health systems strengthening indicators. In most cases, these results are also displayed by country or region. USAID. In March 2011, USAID issued, jointly with State, the "Foreign Operations FY 2010 Performance Report, FY 2012 Performance Plan" (State-USAID APR/APP) as part of State's and USAID's congressional budget justification for fiscal year 2012. The document provides, among other things, information on 2010 targets and results for two PEPFAR indicators: (1) number of individuals receiving antiretroviral treatment, and (2) number of individuals infected or affected by HIV/AIDS, including orphans and vulnerable children, who were receiving care and support services. The State-USAID APR/APP cites PEPFAR's 5-year target for number of HIV infections averted and provides an annual target for 2010 but does not report on annual results. CDC. CDC's "Fiscal Year 2012 Justification of Estimates for Appropriation Committees" and "FY 2012 Online Performance Appendix" constitute its performance report and performance plan for fiscal years 2010 and 2012, respectively. In these documents, CDC reports on 2010 targets and results using four PEPFAR indicators: (1) number of individuals receiving antiretroviral treatment; (2) number of individuals infected and affected by HIV/AIDS, including orphans and vulnerable children, receiving care and support services; (3) number of pregnant women receiving HIV counseling and testing; and (4) number of HIV-positive pregnant women receiving antiretroviral prophylaxis. OGAC's most recent annual performance documents do not provide information related to annual targets, as required by the 2008 Leadership Act and consistent with GPRA. (See fig. 3.) PEPFAR country and regional operational plans contain country-level and regional targets for the coming year and data showing program targets and results, measured by PEPFAR indicators. However, the annual PEPFAR operational plans and reports that OGAC submitted to Congress for fiscal years 2009 and 2010 do not contain any information on annual targets. Moreover, OGAC's annual reports to Congress for fiscal years 2009 and 2010 do not compare annual results with annual targets. According to the 2008 Leadership Act, these reports are to include an assessment of progress toward the achievement of annual goals and, if annual goals are not being met, the reasons for such failures. In addition, GPRA calls for annual performance reports to compare results with previously established targets. State-USAID's and CDC's annual performance documents present some information on PEPFAR targets and results (see fig. 3). The State-USAID APR/APP cites two targets for treatment and care programs for fiscal year 2010. CDC's fiscal year 2010 performance report and fiscal year 2012 performance plan cite four fiscal year targets--two for prevention, and one each for treatment and care programs. Both agencies' performance documents compare PEPFAR 2010 results with targets set for the same year and rate PEPFAR's performance against those targets. For example, the documents report that PEPFAR exceeded its 2010 target for number of individuals on antiretroviral treatment but did not meet its target for number of individuals receiving care and support services. The State- USAID APR/APP states that the reason for the shortfall is being evaluated, while CDC's fiscal year 2010 performance report and fiscal year 2012 performance plan states that trend analysis shows constant progress in expanding care with significant increases each year. In addition, CDC reports that PEPFAR exceeded its 2010 targets for number of pregnant women receiving counseling and testing and number of pregnant women receiving antiretrovirals. For the 2010 PEPFAR prevention target reported in the State-USAID APR/APP, the document states that data are not available for the indicator. Further, the document states that, because an infection averted is a nonevent, this estimate needs to be modeled based on surveillance reports and that the estimate of impact through 2010 is expected to be available in 2012 at the earliest. OGAC has not publicly provided, consistent with GPRA practices, information on efforts to verify and validate reported performance data. However, State-USAID's and CDC's annual performance documents cite OGAC efforts to verify and validate some PEPFAR performance data. OGAC. Although OGAC internal guidance summarizes PEPFAR country teams' and OGAC's roles in verifying and validating reported data, OGAC's two most recent PEPFAR operational plans and annual reports to Congress, covering fiscal years 2009 and 2010, contain no information on these efforts. USAID. The State-USAID APR/APP states that the results data reported for the two PEPFAR indicators are corroborated with data from other sources. The document also notes that OGAC expects to report the estimated number of HIV infections averted using a U.S. Census Bureau model. CDC. CDC's fiscal year 2010 performance report and fiscal year 2012 performance plan sources the data it reports to PEPFAR annual program results data, noting that OGAC manages and validates results data at the headquarters level. Moreover, even with the data reliability weaknesses noted by USAID OIG reviews and CDC's treatment program data quality pilot project, OGAC's, USAID's, and CDC's performance reports do not contain information on these weaknesses or on steps taken to address the weaknesses. Credible performance information is essential for accurately assessing agencies' progress toward the achievement of their goals and, in cases where goals are not met, identifying opportunities for improvement or whether goals need to be adjusted. As we have reported previously, without such information, and absent strategies to address identified limitations, Congress and other decision makers cannot assess the validity and reliability of reported performance information. PEPFAR's commitment to transparent reporting of program results, clearly stated in its 5-year strategy, is also reflected in OGAC planning, reporting, and indicator guidance to PEPFAR country teams. In addition, OGAC, USAID, and CDC procedures for program performance planning and reporting are intended to help a broad range of stakeholders-- including PEPFAR implementing agency headquarters and country team officials, partner country governments, and Congress--manage and oversee PEPFAR programs and demonstrate the U.S. government's contribution to the global fight against HIV/AIDS. OGAC, USAID, and CDC performance plans and reports serve as key sources of public information on their efforts to monitor PEPFAR program performance. However, OGAC can improve its annual performance planning and reporting. First, by discussing annual results alongside established targets in its annual report to Congress, OGAC would provide important context for understanding PEPFAR's annual achievements and areas needing attention. Second, by providing information on its own and implementing agencies' efforts to ensure the quality of their performance data, OGAC would give decision makers greater insight into the quality and value of the reported performance information. In accordance with requirements and practices set forth in the 2008 Leadership Act and GPRA, and to improve transparency and accountability, we recommend that the Secretary of State direct the U.S. Global AIDS Coordinator to modify the annual report to Congress on PEPFAR performance in the following two ways: (1) include comparisons of annual PEPFAR results with previously established annual targets and (2) include information on efforts to verify and validate PEPFAR performance data and address data limitations. We provided a draft of this report to State, USAID, and HHS for comment. Responding jointly with HHS and USAID, OGAC provided written comments (see app. V for a copy of these comments). OGAC agreed with our second recommendation to include in PEPFAR's annual report to Congress information on efforts to verify and validate PEPFAR performance data and address data limitations, and stated that PEPFAR will provide this information in future annual reports and on its Web site. Citing the need to consider various related issues and their consequences in consultation with Congress and other stakeholders, OGAC partially agreed with our first recommendation to include in PEPFAR's annual report to Congress comparisons of annual PEPFAR results with previously established targets, consistent with a 2008 Leadership Act requirement and a key GPRA practice. OGAC's comments suggested that specific action in response to this recommendation would be contingent on the outcome of these discussions. OGAC also provided additional background information on PEPFAR indicators and data validation efforts. Finally, OGAC, in coordination with HHS and USAID, provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of State, the Office of the U.S. Global AIDS Coordinator, USAID Office of HIV/AIDS, HHS Office of Global Affairs, CDC Division of Global HIV/AIDS, and appropriate congressional committees. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3149 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 VI. In response to directives in the Consolidated Appropriations Act of 2008 and the Tom Lantos and Henry J. Hyde United States Global Leadership Against HIV/AIDS, Tuberculosis, and Malaria Reauthorization Act of 2008 (2008 Leadership Act) to review global HIV/AIDS program monitoring, this report (1) describes the Office of the U.S. Global AIDS Coordinator's (OGAC), U.S. Agency for International Development's (USAID), and the Centers for Disease Control and Prevention's (CDC) key procedures for planning and reporting on the President's Emergency Plan for AIDS Relief (PEPFAR) program performance and (2) examines published PEPFAR performance plans and reports. To describe OGAC, USAID, and CDC procedures for planning for, and reporting on, PEPFAR program performance, we reviewed PEPFAR and agency-specific guidance documents such as PEPFAR country operational plan guidance for fiscal years 2009 and 2010, Next Generation Indicators guidance, and semi-annual and annual program results guidance; USAID's Automated Directives System guidance; and CDC's quarterly program measures guidance. We also reviewed documents provided by OGAC, USAID, and CDC to describe their organizational structures and procedures, and we interviewed OGAC and USAID officials in Washington, D.C., as well as CDC officials in Atlanta, Georgia. To categorize USAID Office of Inspector General (OIG) audit report recommendations related to program performance planning and reporting, we identified 24 USAID OIG reports from fiscal years 2008 through 2011 published on USAID's Web site. We also interviewed cognizant USAID OIG officials in Washington, D.C., and two regional offices in Africa (Pretoria, South Africa, and Dakar, Senegal) to gain additional information on past and current USAID OIG audit work on PEPFAR. We identified the countries and programs covered by each report and found that the 24 reports covered prevention, treatment, and care programs in 19 PEPFAR countries: Botswana, Cambodia, Cote d'Ivoire (two reports), Dominican Republic, Ethiopia, Ghana, Guyana, Haiti, Kenya (two reports), Mozambique (two reports), Namibia, Nigeria, Rwanda, South Africa, Tanzania, Uganda, Vietnam, Zambia (two reports), and Zimbabwe. In addition, one USAID OIG report reviewed USAID's implementation of PEPFAR's New Partners Initiative. We identified the recommendations in these reports and entered this information into a spreadsheet database. To identify and describe types of performance management-related themes, we utilized the Joint United Nations Programme on HIV/AIDS (UNAIDS) 12 components of a national HIV monitoring and evaluation system as categories. (See app. II for a list of these categories and their definitions.) Two analysts independently assigned each recommendation to not more than two of these categories. The two analysts then met to discuss the results of their analysis; in cases where the analysts' categorizations differed, the analysts discussed and came to agreement on final categories. We determined that 74 recommendations addressed one category, and 56 addressed two of the categories--totaling 130 recommendations. We also determined that 43 recommendations--related, for example, to disposal of expired medications and to requirements for USAID branding and marking--did not fall into any of the categories. Furthermore, three of the 12 categories--national multisectoral monitoring and evaluation plan; annual costed national monitoring and evaluation workplan; and advocacy, communication, and culture for monitoring and evaluation--were not used to categorize any of the recommendations. To determine the extent to which USAID has taken steps to implement the recommendations, we interviewed cognizant USAID OIG officials in Washington, D.C., to gain understanding of recommendation tracking, and we analyzed data provided by USAID specifying dates for final action, target dates for final action, and target dates for management decisions. To examine published PEPFAR performance plans and reports and the extent to which they adhere to established practices, we identified OGAC's, USAID's, and CDC's most recent publicly available annual performance plans and reports: for OGAC, the PEPFAR annual operational plans and annual reports to Congress for fiscal years 2009 and 2010; for USAID, the "Foreign Operations FY 2010 Performance Report, FY 2012 Performance Plan" that it issued with the Department of State as part of their joint congressional budget justification for fiscal year 2012; and for CDC, the "Fiscal Year 2012 Justification of Estimates for Appropriation Committees" and "FY 2012 Online Performance Appendix." We systematically reviewed these documents using a matrix with a series of questions about key performance management practices, as defined by the 2008 Leadership Act, the Government Performance and Results Act of 1993, and previous GAO work. We also interviewed OGAC, USAID, and CDC officials in Washington, D.C., and Atlanta, Georgia, regarding the information contained in these documents and the procedures they followed to produce them. We conducted this performance audit from October 2010 to July 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To identify and describe types of performance management-related themes in our analysis of USAID OIG report recommendations (see app. I), we used as categories 12 components of a national HIV monitoring and evaluation system established by UNAIDS. Table 1 provides a list of these categories and their descriptions. According to OGAC's Next Generation Indicators guidance and OGAC officials, PEPFAR country and regional teams are to use 32 essential indicators for annual target setting and regular reporting to OGAC. The guidance distinguishes between direct and national indicators. National indicators are intended to measure the collective achievements of all contributors (i.e., host country government, donors, and civil society) to a program or project, while direct indicators are intended to measure results attributable to PEPFAR alone. Table 2 provides a list of these indicators. OGAC provides information on PEPFAR program results in its annual reports to Congress, which are typically published in February. USAID reports on PEPFAR program results in the "Foreign Operations FY 2010 Performance Report FY 2012 Performance Plan" that it issued with the Department of State as part of their joint congressional budget justification for fiscal year 2012 (State-USAID APR/APP). CDC reports on PEPFAR program results in its "Fiscal Year 2012 Justification of Estimates for Appropriation Committees" and "FY 2012 Online Performance Appendix." The indicators used to report on PEPFAR results are a subset of the 32 essential reported indicators listed in appendix III. Table 3 summarizes PEPFAR results for fiscal year 2010 reported by OGAC, USAID, and CDC in their most recent performance reports. In addition to the contact named above, Audrey Solis (Assistant Director), Todd M. Anderson, David Dornisch, Lorraine Ettaro, Brian Hackney, Fang He, Reid Lowe, Grace Lui, and Reina Nunez made key contributions to this report. Lisa Helmer and Keesha Egebrecht provided technical assistance. Global Health: Trends in U.S. Spending for Global HIV/AIDS and Other Health Assistance in Fiscal Years 2001-2008. GAO-11-64. Washington, D.C.: October 8, 2010. President's Emergency Plan for AIDS Relief: Efforts to Align Programs with Partner Countries' HIV/AIDS Strategies and Promote Partner Country Ownership. GAO-10-836. Washington, D.C.: September 20, 2010. President's Emergency Plan for AIDS Relief: Partner Selection and Oversight Follow Accepted Practices but Would Benefit from Enhanced Planning and Accountability. GAO-09-666. Washington, D.C.: July 15, 2009. Global HIV/AIDS: A More Country-Based Approach Could Improve Allocation of PEPFAR Funding. GAO-08-480. Washington, D.C.: April 2, 2008. Global Health: Global Fund to Fight AIDS, TB and Malaria Has Improved Its Documentation of Funding Decisions but Needs Standardized Oversight Expectations and Assessments. GAO-07-627. Washington, D.C.: May 7, 2007. Global Health: Spending Requirement Presents Challenges for Allocating Prevention Funding under the President's Emergency Plan for AIDS Relief. GAO-06-395. Washington, D.C.: April 4, 2006. Global Health: The Global Fund to Fight AIDS, TB and Malaria Is Responding to Challenges but Needs Better Information and Documentation for Performance-Based Funding. GAO-05-639. Washington, D.C.: June 10, 2005. Global HIV/AIDS Epidemic: Selection of Antiretroviral Medications Provided Under U.S. Emergency Plan is Limited. GAO-05-133. Washington, D.C.: January 11, 2005. Global Health: U.S. AIDS Coordinator Addressing Some Key Challenges to Expanding Treatment, but Others Remain. GAO-04-784. Washington, D.C.: June 12, 2004. Global Health: Global Fund to Fight AIDS, TB, and Malaria Has Advanced in Key Areas, but Difficult Challenges Remain. GAO-03-601. Washington, D.C.: May 7, 2003.

U.S. assistance through the President's Emergency Plan for AIDS Relief (PEPFAR) has helped provide treatment, care, and prevention services overseas to millions affected by HIV/AIDS. In 2008, Congress reauthorized PEPFAR with the Tom Lantos and Henry J. Hyde United States Global Leadership Against HIV/AIDS, Tuberculosis, and Malaria Reauthorization Act of 2008 (2008 Leadership Act). The act requires the Department of State's Office of the U.S. Global AIDS Coordinator (OGAC) to report to Congress annually on PEPFAR performance. The U.S. Agency for International Development (USAID) and the Health and Human Services (HHS) Centers for Disease Control and Prevention (CDC) also report on PEPFAR program performance. Responding to legislative directives, GAO (1) described key procedures for planning and reporting on PEPFAR performance and (2) examined published PEPFAR performance plans and reports. GAO analyzed performance management documents and interviewed officials at OGAC, USAID, and CDC. Officials in several offices and divisions in OGAC, USAID, and CDC coordinate and manage PEPFAR program planning and reporting procedures at headquarters and in PEPFAR countries and regions. These procedures, which include PEPFAR-wide annual operational planning and periodic results reporting, support internal agency-specific program management as well as provide information for external reporting on PEPFAR results. OGAC, USAID, and CDC publicly issued plans and reports on PEPFAR performance in recent years consistent with 2008 Leadership Act requirements and GPRA practices; however, two key elements are lacking. First, although OGAC has internally specified annual performance targets, its most recent annual reports to Congress did not identify these targets or compare annual results with them. According to the 2008 Leadership Act, OGAC's annual reports on PEPFAR program results must include an assessment of progress toward annual goals and reasons for any failure to meet these goals. In addition, the Government Performance and Results Act (GPRA) of 1993 calls for federal agency performance reports to compare program results with established targets. Performance documents published by USAID, jointly with State, and by CDC report program targets and results for two and four PEPFAR indicators, respectively. Second, OGAC's most recently published performance plans and reports do not provide information on efforts to validate and verify reported data, while USAID's and CDC's published performance documents cite such efforts by OGAC. In addition, none of the plans or reports refers to noted data reliability weaknesses or efforts to address these weaknesses. GPRA and prior GAO work emphasize the importance of providing information in public performance documents on data verification and other efforts to address identified weaknesses. GAO recommends that OGAC include in its annual report to Congress (1) comparisons of annual PEPFAR results with established targets and (2) information on efforts to verify and validate PEPFAR performance data and address data limitations. OGAC partially agreed with the first recommendation, pending discussions with stakeholders about implementation issues and consequences, and agreed with the second recommendation.

Under Superfund, the federal government can pay for site cleanups or may require the responsible parties to pay for and perform them. Often the construction of cleanup remedies will also require subsequent operations and maintenance (O&M) activities to ensure that the remedy continues to protect human health and the environment. The costs of O&M are borne by the federal government, states, and responsible parties. When the federal government pays for the cleanup, EPA's regulations require that the states pay for most of the O&M activities. If groundwater treatment is necessary at these sites, the federal government pays 90 percent of the O&M costs for the first 10 years of such treatment and the states pay the remaining costs.At sites where no groundwater treatment is needed, EPA turns the responsibility for O&M over to the state after ensuring that the remedy is working properly. The federal government also pays for O&M activities at federal facilities that have sites on their property on the National Priorities List (NPL). When the responsible parties clean up a site, they also pay the costs of O&M activities. EPA monitors conditions and O&M activities at all these sites to determine if the sites' O&M plan is being followed. At those sites that currently can be used only in a limited way because waste remains in the soil or groundwater, EPA's site project managers are also required to conduct a formal review of conditions at least every 5 years--known as a "5-year review." When Superfund was reauthorized in 1986, it called for EPA to prefer treating the waste in the highly contaminated areas of a site over containing such waste because treatment was considered to be a permanent remedy. For example, in areas where soil is highly contaminated, EPA is to prefer treating the soil (by, for example, solidifying it to immobilize contaminants or applying a vacuum system to remove contaminants) instead of containing the soil (by, for example, installing a waterproof cover over it). Nevertheless, EPA sometimes selects containment for less-contaminated areas or for waste that cannot be treated successfully or cost-effectively--for example, large volumes of landfill waste. At sites where groundwater is an actual or potential source of drinking water, the law requires that the groundwater be treated until it reaches the standards established in the Safe Drinking Water Act. Almost two-thirds, or 173, of the 275 sites we reviewed where the cleanup remedy is in place will require long-term O&M activities to ensure that the cleanup remedy continues to protect human health and the environment. Specifically, we found the following: 60 of the sites use waterproof covers of clay or other materials to physically contain hazardous waste or contaminated soil. These covers prevent exposure to the waste and reduce the level of contaminants entering the groundwater. At these sites, maintenance--such as erosion control and periodic inspections--is required for an indefinite period. (See app. I for more details on O&M activities at specific sites.) 61 of the sites pump and, in some cases, treat groundwater as the primary cleanup remedy. At these sites, pumps and treatment systems will need to be operated and maintained, the equipment kept in repair, and the groundwater's quality monitored until the cleanup standards are reached. 30 of the sites use both waste containment and groundwater treatment technologies in combination to address surface and groundwater contamination. At these sites, erosion control, inspections, operation of pumps and treatment systems, and groundwater monitoring will be required. 22 of the sites require local governments or landowners to restrict land or water use on or near the site to protect the cleanup remedy or to prevent the public from being exposed to hazardous waste. Such controls include closing drinking water wells, prohibiting the drilling of new wells, and/or imposing restrictions on deeds. 102 of the sites require little or no O&M because EPA decided no cleanup was needed or selected a remedy that required no O&M, such as treating surface waste. Figure 1 shows the distribution of the O&M activities that will be required at the 275 sites. Containment and Groundwater Pump and Treat (30 Sites) Groundwater Pump and Treat (61 Sites) 8% Use Controls (22 Sites) Groundwater "pump and treat" requires extracting water through pumps and treating the water to reduce contaminants. Use controls require monitoring and controlling local land or water use through fencing and/or deed or other restrictions. Sites using containment and/or groundwater pump and treat may also require use controls. The percentages used in this figure reflect information on the sites as of May 1995. We estimate that the federal government, states, and responsible parties will spend $32 billion for O&M costs over the next four decades; EPA estimated that they will spend $37 billion over this period. The states and responsible parties will bear most of these costs. (See app. II for information on how these estimates were developed.) On the basis of our analysis of EPA's O&M database, we estimate that $32 billion will be required for the O&M activities associated with the cleanup plans already approved or projected to be approved through fiscal year (FY) 2005. The sites that have already been placed on the NPL represent $25 billion, or 78 percent of that total, and the sites that will be added to the list during FY 1995 or later represent an additional $7 billion. (See app. II for a comparison of EPA's and our methodologies for estimating future O&M costs.) While the annual O&M costs were estimated at $148 million in FY 1994, these costs will increase over time. We estimate that the annual costs to the federal government, states, and responsible parties will peak at $1 billion in FY 2010. This figure reflects (1) the substantial increase in completed cleanups requiring O&M that EPA projects by the end of the century and (2) the fact that O&M is typically expected to last at least 30 years. We expect that federal costs will become relatively level over the next few decades because EPA has to pay for O&M only at the sites where groundwater is being treated, and only for 10 years. However, the states' costs will continue to increase as EPA turns these sites over to the states, which must continue to perform O&M activities for 20 years or more. Figure 2 shows the cumulative costs to all parties for the cleanup plans already approved or projected for approval through FY 2005. These projections are based on the site cleanup plans signed during fiscal years 1982 through 2005. If additional Superfund cleanups are planned after that period, the total O&M costs will also increase. Whether the states will be able to meet these future O&M obligations is not clear. In a recent report, we found that the states, because of their resource constraints, are already having difficulty in meeting federal environmental requirements in two water programs and in overseeing facilities handling hazardous waste. Only five of the Superfund program managers we interviewed from eight states said they had done any forecasting to determine their future O&M costs. The federal government, states, and responsible parties can expect to pay an average of $12 million over 30 years for the O&M associated with a single cleanup plan. These costs vary according to the type of activities required. For example, we found the following: When the cleanup remedy uses a technology designed to contain surface waste, the ongoing O&M activities after the containment system is built could typically cost $5 million over 30 years. When the cleanup remedy includes treating groundwater, operating and maintaining the treatment plant and water pumps after construction could typically cost $17 million over 30 years. When the cleanup remedy calls for treating surface waste or contaminated soil, additional O&M activities are not required. The actual O&M costs may eventually be greater than these estimates. When developing estimates of O&M costs, EPA generally assumes that O&M activities will be required for 30 years. However, EPA recently surveyed its regional project managers and found that about 20 percent of cleanups will require O&M for more than 30 years. For example, the sites where waste is contained require O&M activities--to inspect and repair the cover--indefinitely. Furthermore, because these containment remedies have been in place for less than 10 years, the long-term repair costs are not yet known. Groundwater treatment generally continues until the cleanup standards are met, but EPA recently concluded that many groundwater treatment systems are not as efficient as was originally hoped. As a result, more than 30 years may be required to reach cleanup goals, primarily because of contaminants in groundwater that are heavier than water and thus very difficult to extract. EPA estimates that these contaminants may be present at about 60 percent of the sites where the groundwater is contaminated. O&M for groundwater treatment constitutes the majority of the costs that the federal government, states, and responsible parties face. We estimate that the O&M costs for cleanups that only treat groundwater represent about 47 percent of the anticipated costs. Furthermore, we estimate that the O&M costs for cleanups that combine treating groundwater with containing waste represent about 36 percent of all O&M costs. For cleanup remedies in which surface waste is contained but groundwater is not treated, the O&M costs constitute about 12 percent of the costs that the federal government, states, and responsible parties will face. Figure 3 illustrates the share of the O&M costs each party will be expected to pay. Changes in EPA's policy or in the Superfund law, particularly in the guidelines for selecting cleanup remedies, could alter future O&M costs for the federal government, states, and responsible parties. For example, in recent discussions about reauthorizing the Superfund legislation, it has been suggested that the current preference for treating rather than containing surface waste might be changed to a preference for containing waste. Such a change would most likely lead to increased O&M costs because O&M activities would be required at a higher percentage of sites than is currently the case. (See app. II for information on how other potential policy changes could affect responsibilities for O&M.) EPA is responsible for monitoring O&M to ensure that these activities are performed as planned and that the cleanups continue to protect human health and the environment. However, until recently, the agency has focused on getting sites evaluated and cleaned up rather than on monitoring those sites where the cleanup remedy is in place. EPA is responsible for two types of monitoring: (1) reviewing actions that the states and responsible parties have taken to comply with the sites' O&M plan and (2) evaluating, at least every 5 years, the condition of certain sites where waste remains on-site. Although O&M has been ongoing at some sites for several years, EPA is just now developing guidance to monitor how the states and responsible parties perform O&M activities. In addition, EPA is significantly behind in performing its 5-year reviews. We reviewed O&M activities at 57 sites: 43 sites at which 5-year reviews had been performed (including 3 sites for which we conducted case studies) and an additional 14 sites for which we also conducted case studies. For 11 sites, we found that EPA had not been closely monitoring whether the states and responsible parties were following their required action plans for O&M. At these sites, the plan was not being followed; at some sites, conditions had deteriorated after the cleanup was completed. For example, the states or responsible parties were not maintaining the waterproof covers over contaminated soil, were allowing trees and brush to grow and potentially damage the covers, and were not performing the groundwater sampling called for in the plan. (See app. III for additional examples of EPA's monitoring of O&M activities.) We also found a site at which EPA's monitoring helped to prevent deterioration of the cleanup. At the Lehigh Electric site in Old Forge, Pennsylvania, EPA had removed all surface debris, equipment, and soil contaminated with PCBs. Consequently, in 1986 the site was deleted from the NPL. However, ongoing groundwater monitoring revealed that PCB contamination levels were increasing. Consequently, EPA has recommended a new study to determine the source of contamination and possible cleanup methods. EPA currently has no guidance for site project managers on monitoring O&M, but the agency plans to issue a new directive in December 1995. Without guidance on the day-to-day monitoring of O&M activities, EPA's project managers may not be able to adequately monitor the states and responsible parties. More importantly, without guidance these project managers cannot ensure that the cleanups continue to protect human health and the environment. EPA must also complete more formal reviews at some sites at least every 5 years. The 1986 Superfund reauthorization called for these 5-year reviews to occur at certain future sites where waste remaining after the cleanup prevented unlimited access to or use of the site. Subsequently, EPA decided to also conduct these reviews at certain sites where the remedies were selected before 1986 and at sites where more than 5 years will be required to reach the cleanup goals. As noted above, these reviews are important in that they often identify when O&M activities are being neglected or conditions at the site are deteriorating. Thus, these reviews are needed to ensure that the remedy continues to protect human health and the environment. For example, the 5-year review conducted at the Kellogg-Deering Wellfield Superfund site in Norwalk, Connecticut, identified problems with groundwater sampling. The site's responsible party was not sampling the groundwater, as required, at some wells used for monitoring. EPA's purpose in requiring the groundwater sampling was to provide an "early warning system" to detect the migration of contaminants. As part of ongoing work at other areas of the site, EPA has now approved a sampling plan that will monitor the cleanup's effectiveness. In another example, a 5-year review identified problems at the Mowbray Engineering site in Greenville, Alabama. No maintenance had ever been performed at the site, and trees were growing on the landfill cover that had been placed over the contaminated soil. Despite the benefits of the 5-year reviews, EPA's Inspector General found that EPA has a significant backlog of such reviews. EPA officials told us that 66 reviews had been completed as of August 31, 1995, and that an additional 84 are due by September 30, 1995. The officials expect that most of these unfinished reviews will not meet the deadline. As a result of this backlog, the agency may not be aware of problems that may be occurring at other Superfund sites. EPA is trying to reduce the size of the backlog by verifying which sites need a review and when it is due. The agency has also decided to narrow the scope of the review at those sites where the cleanup remedy is not fully in place. EPA's Inspector General concluded that adding 5-year reviews to the tasks for which regions have assigned annual targets could give the regions an incentive to improve performance. To address these concerns, the Assistant Administrator for Solid Waste and Emergency Response is taking measures to set more specific deadlines for 5-year reviews and to establish accountability for completing them. The majority of sites in the Superfund program will require long-term operations and maintenance, especially those sites requiring waste containment or groundwater treatment. These operations and maintenance costs will constitute a substantial portion of the funds the federal government, states, and responsible parties spend to clean up the environment even after they have paid millions of dollars to construct the required cleanup remedy. Because operations and maintenance costs largely depend on the remedies selected for Superfund sites, the level of these costs will be strongly influenced by policy decisions, such as whether the cleanup remedies emphasize treatment or containment. Although some state officials told us that they expected operations and maintenance to become a considerable burden in the coming decades, most state officials we interviewed had not attempted to forecast the actual amount of these costs. Oversight of operations and maintenance has been given a lower priority than other Superfund activities that EPA must implement and monitor. As a result, the states and responsible parties have not always performed the operations and maintenance activities required. The guidance that EPA intends to develop on how to oversee operations and maintenance activities should help to remedy this situation. Because EPA has responded to the Inspector General's findings on 5-year reviews by developing plans to track the reviews more closely and establish accountability for completing them in a timely manner, we are not making any recommendations in this report. We provided copies of a draft of this report to EPA for its review and comment. On August 30, 1995, we met with officials from EPA's Office of Emergency and Remedial Response--the office charged with implementing the Superfund program--to obtain the agency's comments. These officials included, among others, the Acting Deputy Director of the Hazardous Site Control Division--the division responsible for policy on operations and maintenance. These officials told us they agreed with the facts and findings in the report and were pleased with its objectivity and accuracy. They also suggested a number of technical corrections, which we have incorporated in the report. To determine the extent of O&M required at Superfund sites, we reviewed information about the 275 sites where the cleanup remedy has been built and determined whether the sites would require O&M. To project future O&M costs to the federal government, states, and responsible parties, we used and modified an EPA database of estimates of the O&M costs associated with individual cleanup plans. We obtained this database from EPA's Office of Emergency and Remedial Response. We combined data from this database with information in a database that we had previously developed on cleanup remedies in order to determine the O&M costs associated with different types of cleanups. In addition, we conducted case studies at 17 sites to determine the actual O&M activities and costs at these sites. We also interviewed state Superfund program managers and EPA site cleanup managers for information on O&M activities and expenditures at the sites and on the states' financial capacity to fund O&M. We reviewed EPA's draft guidance on O&M and the agency's guidance on 5-year reviews; we also used information from an evaluation of 5-year reviews by EPA's Inspector General. We interviewed EPA headquarters and regional managers about EPA's policy, guidance, and progress on 5-year reviews. We also reviewed and evaluated 43 reports on 5-year reviews that had been completed through March 1995. We conducted our work between August 1994 and September 1995 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Administrator of EPA. We will also make copies available to others on request. Please call me at (202) 512-6112 if you or your staff have any questions about this report. Major contributors are listed in appendix IV. We conducted case studies of hazardous waste sites in order to acquire information on actual experiences with and costs for operations and maintenance (O&M). We found 17 sites where the remedy had been built and that met the following criteria: The cleanup was funded by the federal government; the Environmental Protection Agency (EPA) had constructed either a groundwater pump and treat remedy or a waste containment remedy, thus requiring O&M; and EPA had completed construction of the cleanup at least 2 years before we began this work. Table I.1 summarizes information for each of the 17 sites, including the location, type of remedy, and estimated and actual costs incurred by EPA and the states for O&M at each site. O&M costs incurred by states$282,229 over 2 months $183,787 over 2 years and 3 months $15,540 over 2 years and 6 months $117,594 over 9 years $111,026 over 1 year and 3 months $8,658 over 1 year and 2 months $1,312,832 over 3 years $17,719 over 3 months $58,849 over 4 years and 6 months $88,294 over 1 year $5,422 over 13 months $528,226 over 2 years $251,432 over 2 years (continued) EPA used estimates of O&M costs, developed as part of each cleanup plan, to forecast the total O&M costs as well as the states' share of these costs for all current and anticipated Superfund sites. For sites expected to be listed on the National Priorities List (NPL) through fiscal year (FY) 2005, EPA estimated that the total O&M costs will be $37.3 billion and that the states will pay $11.9 billion of this total. In developing these estimates, however, EPA did not separately forecast the O&M costs that the federal government and responsible parties will be expected to pay. In addition, the estimate of average O&M costs that EPA used to forecast O&M costs did not distinguish among the types of cleanups. These costs can vary widely depending on the type of cleanup selected. We obtained EPA's database of the O&M estimates to make additional cost projections, including (1) the O&M costs that the federal government will be expected to pay, (2) the O&M costs that the responsible parties will be expected to pay, (3) the average O&M costs for those sites with and without groundwater contamination, and (4) the proportions of the total forecast O&M costs that are for current Superfund sites and sites EPA anticipates adding to the NPL in the future. We estimated that the total O&M costs for cleanup plans expected to be signed through FY 2005 will be $32 billion, with the federal government, states, and responsible parties paying about $5, $8, and $18 billion, respectively. Our estimate of total O&M costs is lower than EPA's estimate because we (1) used a consistent discount rate of 6 percent to better represent the actual discount rates used by EPA's project managers to estimate present-value figures, (2) removed costs in some cleanup plans that EPA inadvertently classified as O&M costs, and (3) calculated and used a different, lower average O&M cost--$337,000 per year--for each cleanup plan as opposed to the average cost of $434,000 per year calculated by EPA. This different average annual cost resulted both from decreased O&M costs for some cleanup plans because of the lower discount rate we used and from our inclusion of cleanup plans which involved no O&M costs when calculating the average. For its analysis, EPA began with the O&M estimates for the sites with cleanup plans signed during FY 1982 through 1992. To project future O&M costs for the cleanup plans it signed during FY 1993 and 1994, in addition to those it anticipates signing during FY 1995 through 2005, EPA used an average O&M estimate of $434,000 per year for each cleanup plan. On the basis of historical data, EPA anticipates preparing 175 cleanup plans per year. The 1,105 cleanup plans signed during FY 1982 through 1992 reported O&M estimates as either present-value figures or annual figures. To use the estimates reported in present-value figures in its analysis, EPA annualized the estimates using a 10-percent discount rate in order to calculate the total O&M costs over the duration of the cleanup. Unless the cleanup plan specified otherwise, EPA assumed the O&M activities would continue for 30 years. EPA also assumed a 5-year lag between the time the cleanup plan was signed and the start of the O&M activities, unless actual data were available. To allow for comparison, EPA converted all dollar figures to 1994 dollars, using a uniform 4-percent annual rate of inflation. To estimate the states' share of future O&M costs, EPA categorized the cleanup plans as either non-groundwater or groundwater cleanups. For EPA-funded cleanups not including groundwater contamination, EPA assumed that the states pay 100 percent of the O&M costs over the entire cleanup period. In the absence of specific data, for the EPA-funded cleanups including groundwater contamination, EPA assumed that contaminated soil or other surface waste was also being cleaned up. EPA then assumed that the O&M costs would be split evenly--50 percent to address groundwater contamination and 50 percent to address the other contamination. Consequently, during the first 10 years of the cleanup, EPA assumed that the states will pay 50 percent of the O&M costs for the surface waste and the federal government will pay the remaining 50 percent of the O&M costs for pumping and treating groundwater. For the remaining 20 years, the state will pay 100 percent of all the O&M costs for these sites. To begin our analysis, we performed quality assurance checks to ensure that the estimates of O&M costs in EPA's database were valid and reliable. We checked a random sample of cases to see whether the estimates of these costs in the cleanup plans were recorded accurately in the database and were properly adjusted to 1994 dollars. We also checked whether cleanup plans were properly categorized as involving groundwater contamination or not. We did not find any significant discrepancies. Because we were concerned about whether the estimates in the cleanup plans were a good indicator of actual O&M costs, we compared the estimates for the 17 sites for which we performed case studies with the actual O&M costs incurred. Some costs were higher or lower than the estimates, but we did not detect any bias in one direction or the other that would affect the use of these estimates to forecast future costs. (See app. I for additional information on our case studies.) When making these checks, we learned that EPA had used a 10-percent discount rate to adjust those estimates that were reported in present-value form. However, most EPA managers had originally estimated these values using a 5-percent discount rate, as prescribed by EPA guidance issued in October 1988, although some managers used other rates. EPA's use of a 10-percent discount rate to annualize these values thus resulted in an overstatement of the original estimates of O&M costs in the cleanup plans. EPA used this 10-percent rate following the guidelines recommended by the Office of Management and Budget. For our estimates of annual O&M costs, we used a 6-percent rate to better represent the rates actually used by all EPA project managers. For a small number of cleanup plans signed during FY 1988 through 1991, we decided to adjust the estimates of O&M costs. In particular, we determined that for these plans, EPA's projections of O&M costs included the costs of treating surface waste. According to EPA officials, such costs are not O&M costs but rather cleanup costs. Therefore, we revised the estimates for some of these cleanup plans to reflect this correction. In order to conduct our analysis, we developed a model for estimating O&M costs that considered (1) when cleanup plans were signed, (2) who will pay O&M costs--the federal government, states, or responsible parties, (3) what type of remedy was used (groundwater treatment or not), and (4) whether the costs are for current or future NPL sites. Our model projected future O&M costs for cleanup plans signed during FY 1993 through 2005 on the basis of plans signed after Superfund amendments passed in October 1986 because the changes affected responsibilities for O&M costs. We also assumed that 45 new sites will be added to the NPL each year beginning in FY 1995. We based our assumptions about who will pay O&M costs on Superfund regulations, extensive conversations with EPA officials, and our analysis of O&M costs at specific types of sites. In our model, we assumed that the federal government's O&M costs consist of (1) all O&M costs at federal facilities and (2) the federal portion of O&M costs for the cleanup plans at sites where EPA funds the cleanup and the remedy addresses groundwater contamination. To estimate these latter costs, we took the following steps, using 650 cleanup plans signed during FY 1988 through 1991 and their estimated O&M costs for the first 10 years: First, we estimated the groundwater treatment portion of O&M costs for cleanups addressing both groundwater contamination and surface waste. We estimated this portion to be 75 percent. We arrived at this figure by dividing the average O&M cost for the 220 cleanup plans that address only groundwater contamination by the sum of this average and the average O&M cost for the 168 cleanup plans that involved only containment of surface waste. Second, we estimated the ratio of the groundwater treatment portion of O&M costs to the total O&M costs for all 360 cleanup plans involving groundwater treatment, whether alone or in combination with surface waste containment. We determined this ratio to be 89 percent. As described above, for cleanup plans involving both groundwater treatment and surface waste containment, we assumed that 75 percent of the O&M costs are due to the groundwater treatment. For plans addressing only groundwater contamination, we assumed that 100 percent of the O&M costs are due to groundwater treatment. Finally, we estimated the federal portion of O&M costs for cleanup plans involving groundwater treatment. By statute, the federal government pays 90 percent of the total O&M costs during the first 10 years of such cleanups. Therefore, we multiplied this 90 percent by 89 percent, our estimate of the share of O&M costs represented by groundwater treatment, as described above. This calculation resulted in our assumption that the federal portion of O&M costs for EPA-funded cleanups is 80 percent for the first 10 years of cleanups involving groundwater treatment. This differs from EPA's assumption that the federal portion is 50 percent because EPA did not go through such steps to more specifically estimate groundwater-related O&M costs. Table II.1 shows where GAO's and EPA's assumptions differ on the portion of O&M costs that will be paid by the federal and state governments. 80% (GAO) 20% (GAO) 50% (EPA) 50% (EPA) We assumed that the states will pay 100 percent of the O&M costs for cleanups addressing surface waste that were originally funded by EPA. For EPA-funded cleanups that include groundwater treatment, the states are assumed to pay the remainder of O&M costs that the federal government does not cover. As noted above, we estimated that the federal portion of these cleanups is 80 percent; thus, the states are responsible for the remaining 20 percent of costs for the first 10 years. After the 10th year of O&M activities, we assume that the state pays 100 percent of O&M costs. We identified all the O&M costs associated with responsible parties' cleanups to estimate their O&M costs. We excluded the O&M costs for cleanups performed jointly by EPA and the responsible parties from estimates of the costs to the federal government, states, and responsible parties since these costs were a small portion of the total O&M costs. Our analysis of the total O&M costs is presented in table II.2. Some totals do not add because of rounding. We reviewed past and current Superfund reauthorization proposals that could affect future O&M costs. The policy changes under consideration include the following: Changing the preference for treating highly contaminated waste to also consider the option of containing this waste. Because O&M costs are associated with containing waste, not with treating waste, O&M cost responsibilities will fluctuate depending on how often containment options are used. Changing the rules on the time frames for responsible parties' liability. The responsible parties are currently liable for cleaning up contamination that occurred before Superfund was passed in 1980. If this requirement is eliminated, the federal government's and the states' portions of O&M costs would increase. Changing the rules on responsible parties' liability. The responsible parties may currently be required to pay for all site cleanup, even if they did not contribute all the waste. Proposals for reauthorizing Superfund have called for the federal government to pay for those costs that cannot be allocated to responsible parties, thus increasing the federal share of O&M costs. Changing the current O&M cost-share provisions between the federal government and the states. Recently proposed legislation would have implemented different cost-sharing provisions. Doing so would shift O&M cost responsibilities between the federal government and the states. Limiting the number of new sites added to the NPL. Proposals for reauthorizing Superfund have called for placing a cap on the sites added to the NPL in the future. If this proposal is adopted, the O&M costs for future NPL sites will be lower than the $7 billion we estimated. As stated in the report, monitoring O&M activities is important because it provides assurance that the cleanup remedies continue to protect human health and the environment. Both we, through our review of 17 case studies and our analyses of 43 5-year reviews, and EPA's Inspector General have identified cases in which covers were not maintained and groundwater sampling was not performed as required in the O&M plans. The following cases highlight these instances. In our discussions with officials in EPA's Region IV, we identified a significant problem in monitoring O&M activities at the A.L. Taylor site (Valley of the Drums), located in Bullitt County, Kentucky. The state is now responsible for monitoring the waterproof cover used to contain chemical waste. However, local land-use controls to prevent activities that could potentially damage the cover have not been implemented. EPA and the state have had difficulty implementing land-use controls because the site is privately owned. Implementing land-use controls could have been critical at this site because the landowner was using the site as a junkyard for cars, potentially damaging the cover. After discussions with the state, however, the landowner agreed to remove the cars. Such a situation stresses the importance of continuous monitoring. Without it, EPA may not be aware of similar problems that may be occurring at other sites. EPA's Inspector General, during a site visit, identified a significant problem in monitoring O&M activities at the Heleva Landfill site in Lehigh County, Pennsylvania. A pond adjacent to the landfill receives much of the site's surface water runoff. The pond overflowed onto the waterproof cover, damaging it. In addition, the project manager responsible for monitoring the site was unaware of the requirement to sample surface water, such as the pond, even though the cleanup plan required doing so at least once every 3 months. In fact, no sampling had been performed since the waterproof cover was installed in 1990. Animals had also damaged the cover by burrowing holes in it. In our analysis of reports on EPA's 5-year reviews, we identified instances in which EPA had developed recommendations to address problems with maintaining covers. For example, at the Mowbray Engineering site in Greenville, Alabama, EPA recommended that the responsible party mow the cover regularly to prevent grass from growing too high. In addition, EPA recommended that the responsible party prevent trees from growing on top of the cover because the tree roots can potentially damage the cover. EPA also recommended that the fence surrounding the site be cleared of kudzu, a vine-like vegetation, so that the fence can be readily inspected. We also identified some sites in which EPA developed recommendations to address problems with sampling the groundwater. In EPA's 5-year review of the Middletown Road Dump site in Annapolis, Maryland, EPA recommended that further groundwater sampling be conducted. Although EPA collected groundwater samples during its review, it could not conclude whether the groundwater was still a health threat. Therefore, additional sampling was recommended. In another example, for the Triangle Chemical Company Superfund site in Bridge City, Texas, EPA recommended that the state conduct groundwater sampling more frequently because contamination levels are still above acceptable levels. Philip Farah, Economist Fran Featherston, Senior Social Science Analyst Mary D. Feeley, Evaluator Josephine Gaytan, Information Processing Assistant Angelia Kelly, Evaluator Eileen Larence, Assistant Director Rosa Maria Torres Lerma, Evaluator Mehrzad Nadji, Assistant Director for Economic Analysis Katherine Siggerud, Evaluator-in-charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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GAO reviewed operations and maintenance (O&M) activities at former or current National Priorities List (NPL) Superfund sites where remediation construction has been completed, focusing on the: (1) extent to which O&M activities are necessary at Superfund sites; (2) costs to the federal government, states, and responsible parties to perform these activities now and in the future; and (3) Environmental Protection Agency's (EPA) actions to help ensure that O&M activities continue to protect human health and the environment. GAO found that: (1) the federal government, states, and responsible parties must perform long-term O&M activities at almost two-thirds of the 275 NPL sites reviewed; (2) these O&M activities include controlling erosion of landfill covers, treating contaminated groundwater, and implementing and enforcing land and water use restrictions; (3) the nationwide cost of current and future O&M activities will be about $32 billion through fiscal year 2040, much of which will be borne by the states and responsible parties; (4) the cost of a given site remedy will depend mainly on what remedy type EPA selects and the duration of the O&M activities; (5) until recently, EPA has focused on the evaluation and cleanup of Superfund sites, but EPA monitoring of O&M activities is crucial because states and responsible parties do not always follow their O&M plans and site conditions can deteriorate; (6) EPA is just now developing guidance for site project managers on monitoring O&M activities to ensure that O&M plans are followed; and (7) EPA has a significant backlog of 5-year reviews and may not be aware of deteriorating conditions at some sites.

Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business. Of particular importance is the security of information and systems supporting critical infrastructures--physical or virtual systems and assets so vital to the nation that their incapacitation or destruction would have a debilitating impact on national and economic security and on public health and safety. Although the majority of our nation's critical infrastructures are owned by the private sector, the federal government owns and operates key facilities that use control systems, including oil, gas, water, electricity, and nuclear facilities. In the electric power industry, control systems can be used to manage and control the generation, transmission, and distribution of electric power. For example, control systems can open and close circuit breakers and set thresholds for preventive shutdowns. Critical infrastructure control systems face increasing risks due to cyber threats, system vulnerabilities, and the potential impact of attacks as demonstrated by reported incidents. Control systems are more vulnerable to cyber threats and unintended incidents now than in the past for several reasons, including their increasing standardization and connectivity to other systems and the Internet. For example, in August 2006, two circulation pumps at Unit 3 of the Browns Ferry, Alabama, nuclear power plant operated by TVA failed, forcing the unit to be shut down manually. The failure of the pumps was traced to an unintended incident involving excessive traffic on the control system's network. To address this increasing threat to control systems governing critical infrastructures, both federal and private organizations have begun efforts to develop requirements, guidance, and best practices for securing those systems. For example, FISMA outlines a comprehensive risk-based approach to securing federal information systems, which include control systems. Federal organizations, including the National Institute of Standards and Technology (NIST), the Federal Energy Regulatory Commission (FERC), and the Nuclear Regulatory Commission (NRC), have used a risk-based approach to develop guidance and standards to secure control systems. NIST guidance has been developed that currently applies to federal agencies; however, much of the guidance and standards developed by FERC and NRC has not yet been finalized. Once implemented, FERC and NRC standards will apply to both public and private organizations that operate covered critical infrastructures. The TVA is a federal corporation and the nation's largest public power company. TVA's power service area includes almost all of Tennessee and parts of Mississippi, Kentucky, Alabama, Georgia, North Carolina, and Virginia. It operates 11 coal-fired fossil plants, 8 combustion turbine plants, 3 nuclear plants, and a hydroelectric system that includes 29 hydroelectric dams and one pumped storage facility. TVA also owns and operates one of the largest transmission systems in North America. Control systems are essential to TVA's operation because it uses them to both generate and deliver power. To generate power, control systems are used within power plants to open and close valves, control equipment, monitor sensors, and ensure the safe and efficient operation of a generating unit. Many control systems networks connect with other agency networks to transmit system status information. To deliver power, TVA monitors the status of its own and surrounding transmission facilities from two operations centers. TVA had not fully implemented appropriate security practices to secure the networks on which its control systems rely. Specifically, the interconnected corporate and control systems networks at certain facilities that we reviewed did not have sufficient information security safeguards in place to adequately protect control systems. In addition, TVA did not always implement controls adequate to restrict physical access to control system areas and to protect these systems--and their operators-- from fire damage or other hazards. As a result TVA, control systems were at increased risk of unauthorized modification or disruption by both internal and external threats. Multiple weaknesses within the TVA corporate network left it vulnerable to potential compromise of the confidentiality, integrity, and availability of network devices and the information transmitted by the network. For example: Almost all of the workstations and servers that we examined on the corporate network lacked key security patches or had inadequate security settings. TVA hd not effectively configured host firewall controls on laptop computers we reviewed, and one remote access system that we reviewed had not been securely configured. Network services had been configured across lower and higher-security network segments, which could allow a malicious user to gain access to sensitive systems or modify or disrupt network traffic. TVA's ability to use its intrusion detection system to effectively monitor its network was limited. The access controls implemented by TVA did not adequately secure its control systems networks and devices, leaving the control systems vulnerable to disruption by unauthorized individuals. For example: TVA had implemented firewalls to segment control systems networks from the corporate network. However, the configuration of certain firewalls limited their effectiveness. The agency did not have effective passwords or other equivalent documented controls to restrict access to the control systems we reviewed. According to agency officials, passwords were not always technologically possible to implement, but in the cases we reviewed there were no documented compensating controls. TVA had not installed current versions of patches for key applications on computers on control systems networks. In addition, the agencywide policy for patch management did not apply to individual plant-level control systems. Although TVA had implemented antivirus software on its transmission control systems network, it had not consistently implemented antivirus software on other control systems we reviewed. TVA had not consistently implemented physical security controls at several facilities that we reviewed. For example: Live network jacks connected to TVA's internal network at certain facilities we reviewed had not been adequately secured from unauthorized access. At one facility, sufficient emergency lighting was not available, a server room had no smoke detectors, and a control room contained a kitchen (a potential fire and water hazard). The agency had not always ensured that access to sensitive computing and industrial control systems resources had been granted to only those who needed it to perform their jobs. At one facility, about 75 percent of facility badgeholders had access to a plant computer room, although the vast majority of these individuals did not need access. Officials stated that all of those with access had been through the required background investigation and training process. Nevertheless, an underlying principle for secure computer systems and data is that users should be granted only those access rights and permissions needed to perform their official duties. An underlying reason for TVA's information security control weaknesses was that it had not consistently implemented significant elements of its information security program, such as: documenting a complete inventory of systems; assessing risk of all systems identified; developing, documenting, and implementing information security policies and procedures; and documenting plans for security of control systems as well as for remedial actions to mitigate known vulnerabilities. As a result of not fully developing and implementing these elements of its information security program, TVA had limited assurance that its control systems were adequately protected from disruption or compromise from intentional attack or unintentional incident. TVA's inventory of systems did not include all of its control systems as required by agency policy. In its fiscal year 2007 FISMA submission, TVA included the transmission and the hydro automation control systems in its inventory. However, the plant control systems at its nuclear and fossil facilities had not been included in the inventory. At the conclusion of our review, agency officials stated they planned to develop a more complete and accurate system inventory by September 2008. TVA had not completed categorizing risk levels or assessing the risks to its control systems. FISMA mandates that agencies assess the risk and magnitude of harm that could result from the unauthorized access, use, disclosure disruption, modification, or destruction of their information and information systems. However, while the agency had categorized the transmission and hydro automation control systems as high-impact systems, its nuclear division and fossil business unit, which includes its coal and combustion turbine facilities, had not assigned risk levels to its control systems. TVA had also not completed risk assessments for the control systems at its hydroelectric, nuclear, coal, and combustion turbine facilities. According to TVA officials, the agency plans to complete the hydroelectric and nuclear control systems risk assessments by June 2008 and they plan to complete the security categorization of remaining control systems throughout TVA by September 2008, except for fossil systems, for which no date has been set. Several shortfalls in the development, documentation, and implementation of TVA's information security policies contributed to many of the inadequacies in TVA's security practices. For example: TVA had not consistently applied agencywide information security policies to its control systems, and TVA business unit security policies were not always consistent with agencywide information security policies. Cyber security responsibilities for interfaces between TVA's transmission control system and its hydroelectric and fossil generation units had not been documented. Physical security standards for control system sites had not been finalized or were in draft form. Weaknesses in TVA's patch management process hampered the efforts of TVA personnel to identify, prioritize, and install critical software security patches to TVA systems in a timely manner. For a 15-month period, TVA documented its analysis of 351 reported vulnerabilities, while NIST's National Vulnerability Database reported about 2,000 vulnerabilities rated as high or medium risk for the types of systems in operation at TVA for the same time period. In addition, upon release of a patch by the software vendor, the agency had difficulty in determining the patch's applicability to the software applications in use at the agency because it did not have a mechanism in place to provide timely access to software version and configuration information for the applications. Furthermore, TVA's written guidance on patch management provided only limited guidance on how to prioritize vulnerabilities. The guidance did not refer to the criticality of IT resources or specify situations in which it was acceptable to upgrade or downgrade a vulnerability's priority from that given by its vendors or third- party patch tracking services. For example, agency staff had reduced the priority of three vulnerabilities identified as critical or important by the vendor or a patch tracking service and did not provide sufficient documentation of the basis for this decision. As a result, patches that were identified as critical were not applied in a timely manner; in some cases, a patch was applied more than 6 months past TVA deadlines for installation. TVA had not developed system security or remedial action plans for all control systems as required under federal law and guidance. Security plans document the system environment and the security controls selected by the agency to adequately protect the system. Remedial action plans document and track activities to implement missing controls such as missing system security plans and other corrective actions necessary to mitigate vulnerabilities in the system. Although TVA had developed system security and remedial action plans for its transmission control system, it had not done so for control systems at the hydroelectric, nuclear, or fossil facilities. According to agency officials, TVA plans to develop a system security plan for its hydroelectric automation and nuclear control systems by June 2008, but no time frame has been set to complete development of a security plan for control systems at fossil facilities. Until the agency documents security plans and implements a remediation process for all control systems, it will not have assurance that the proper controls will be applied to secure control systems or that known vulnerabilities will be properly mitigated. Numerous opportunities exist for TVA to improve the security of its control systems. Specifically, strengthening logical access controls over agency networks can better protect the confidentiality, integrity, and availability of control systems from compromise by unauthorized individuals. In addition, fortifying physical access controls at its facilities can limit entry to TVA restricted areas to only authorized personnel, and enhancing environmental safeguards can mitigate losses due to fire or other hazards. Further, establishing an effective information security program can provide TVA with a solid foundation for ensuring the adequate protection of its control systems. Because of the interconnectivity between TVA's corporate network and certain control systems networks, we recommend that TVA implement effective patch management practices, securely configure its remote access system, and appropriately segregate specific network services. We also recommend that the agency take steps to improve the security of its control systems networks, such as implementing strong passwords or equivalent authentication mechanisms, implementing antivirus software, restricting firewall configuration settings, and implementing equivalent compensating controls when such steps cannot be taken. To prevent unauthorized physical access to restricted areas surrounding TVA's control systems, we recommend that the agency take steps to toughen barriers at points of entry to these facilities. In addition, to protect TVA's control systems operators and equipment from fire damage or other hazards, we also recommend that the agency improve environmental controls by enhancing fire suppression capabilities and physically separating cooking areas from system equipment areas. Finally, to improve the ability of TVA's information security program to effectively secure its control systems, we are recommending that the agency improve its configuration management process and enhance its patch management policy. We also recommend that TVA complete a comprehensive system inventory that identifies all control systems, perform risk assessments and security risk categorization of these systems, and document system security and remedial action plans for these systems. Further, we recommend improvements to agency information security policies. In commenting on drafts of our reports, TVA concurred with all of our recommendations regarding its information security program and the majority of our recommendations regarding specific information security weaknesses. The agency agreed on the importance of protecting critical infrastructures and stated that it has taken several actions to strengthen information security for control systems, such as centralizing responsibility for cyber security within the agency. It also provided information on steps the agency was taking to implement certain GAO recommendations. In summary, TVA's power generation and transmission critical infrastructures are important to the economy of the southeastern United States and the safety, security, and welfare of millions of people. Control systems are essential to the operation of these infrastructures; however, multiple information security weaknesses exist in both the agency's corporate network and individual control systems networks and devices. An underlying cause for these weaknesses is that the agency had not consistently implemented its information security program throughout the agency. If TVA does not take sufficient steps to secure its control systems and implement an information security program, it risks not being able to respond properly to a major disruption that is the result of an intended or unintended cyber incident. Mr. Chairman, this concludes our statement. We would be happy to answer questions at this time. If you have any questions regarding this testimony, please contact Gregory C. Wilshusen, Director, Information Security Issues, at (202) 512-6244 or [email protected], or Nabajyoti Barkakati, Acting Chief Technologist, at (202) 512-4499 or [email protected]. Other key contributors to this testimony include Nancy DeFrancesco and Lon Chin (Assistant Directors); Angela Bell; Bruce Cain; Mark Canter; Heather Collins; West Coile; Kirk Daubenspeck; Neil Doherty; Vijay D'Souza; Nancy Glover; Sairah Ijaz; Myong Kim; Stephanie Lee; Lee McCracken; Duc Ngo; Sylvia Shanks; John Spence; and Chris Warweg. 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 control systems that regulate the nation's critical infrastructures face risks of cyber threats, system vulnerabilities, and potential attacks. Securing these systems is therefore vital to ensuring national security, economic well-being, and public health and safety. While most critical infrastructures are privately owned, the Tennessee Valley Authority (TVA), a federal corporation and the nation's largest public power company, provides power and other services to a large swath of the American Southeast. GAO was asked to testify on its public report being released today on the security controls in place over TVA's critical infrastructure control systems. In doing this work, GAO examined the security practices in place at TVA facilities; analyzed the agency's information security policies, plans, and procedures in light of federal law and guidance; and interviewed agency officials responsible for overseeing TVA's control systems and their security. TVA had not fully implemented appropriate security practices to secure the control systems used to operate its critical infrastructures at facilities GAO reviewed. Multiple weaknesses within the TVA corporate network left it vulnerable to potential compromise of the confidentiality, integrity, and availability of network devices and the information transmitted by the network. For example, almost all of the workstations and servers that GAO examined on the corporate network lacked key security patches or had inadequate security settings. Furthermore, TVA did not adequately secure its control system networks and devices on these networks, leaving the control systems vulnerable to disruption by unauthorized individuals. Network interconnections provided opportunities for weaknesses on one network to potentially affect systems on other networks. For example, weaknesses in the separation of network segments could allow an individual who gained access to a computing device connected to a less secure portion of the network to compromise systems in a more secure portion of the network, such as the control systems. In addition, physical security at multiple locations that GAO reviewed did not sufficiently protect the control systems. For example, live network jacks connected to TVA's internal network at certain facilities GAO reviewed had not been adequately secured from unauthorized access. As a result, TVA's control systems were at increased risk of unauthorized modification or disruption by both internal and external threats. An underlying reason for these weaknesses was that TVA had not consistently implemented significant elements of its information security program. For example, the agency lacked a complete and accurate inventory of its control systems and had not categorized all of its control systems according to risk, limiting assurance that these systems are adequately protected. In addition, TVA's patch management process lacked a mechanism to effectively prioritize vulnerabilities. As a result, patches that were identified as critical, meaning they should be applied immediately to vulnerable systems, were not applied in a timely manner. Numerous opportunities exist for TVA to improve the security of its control systems. For example, TVA can strengthen logical access controls, improve physical security, and fully implement its information security program. If TVA does not take sufficient steps to secure its control systems and fully implement an information security program, it risks not being able to respond properly to a major disruption that is the result of an intended or unintended cyber incident.

Operation Desert Storm demonstrated that the U.S. military and other allied forces have limited capability against theater ballistic missiles. In fact, U.S. defensive capability is limited to weapons that defend against missiles nearing the end of their flight, such as the Patriot. No capability currently exists to destroy missiles in the boost phase. Consequently, DOD is expending considerable resources to develop the ABL's capability to intercept missiles in their boost phase. In simple terms, the ABL program will involve placing various components, including a powerful multimegawatt laser, a beam control system, and related equipment, in a Boeing 747-400 aircraft and ensuring that all the components work together to detect and destroy enemy missiles in their boost phase. In November 1996, the Air Force awarded a 77-month program definition and risk reduction contract to the team of Boeing, TRW, and Lockheed Martin. Under the contract, Boeing is to produce and modify the 747-400 aircraft and integrate the laser and the beam control system with the aircraft, TRW will develop the multimegawatt Chemical Oxygen Iodine Laser (COIL) and ground support systems, and Lockheed Martin will develop the beam control system. The various program components are in the early phases of design and testing. One prototype ABL will be produced and used in 2002 to shoot down a missile in its boost phase. If this demonstration is successful, the program will move into the engineering and manufacturing development phase in 2003. Production is scheduled to begin about 2005. Initial operational capability of three ABLs is scheduled for 2006; full operational capability of seven ABLs is scheduled for 2008. The ABL is a complex laser weapon system that is expected to detect an enemy missile shortly after its launch, track the missile's path, and destroy the missile by holding a concentrated laser beam on it until the beam's heat causes the pressurized missile casing to crack, in turn causing the missile to explode and the warhead to fall to earth well short of its intended target. The ABL's opportunity to shoot down a missile lasts only from the time the missile has cleared the cloud tops until its booster burns out. That interval can range from 30 to 140 seconds, depending on missile type. During that interval, the ABL is expected to detect, track, and destroy the missile, as shown in figure 1. The first step--detection--is to begin when the ABL's infrared search sensor detects a burst of heat that could be fire from a missile's booster.Because clouds block the view of the infrared search sensor, the sensor cannot detect this burst of heat until the missile has broken through the cloud tops--assumed to be at about 38,500 feet. The sensor detects the heat burst about 2 seconds after the missile has cleared the cloud tops. (In the absence of clouds, detection can occur earlier.) The ABL would then use information from the sensor to verify that the heat burst is the plume of a missile in its boost phase and would then move the telescope located in the nose of the aircraft toward the coordinates identified by the infrared sensor. The second step--tracking--is to be performed sequentially and with increasing precision by several ABL devices. The first of these tracking devices, the acquisition sensor, is to take control of the telescope, center the plume in the telescope's field of view, and hand off that information to the next device, the plume tracker. The plume tracker, having taken control of the telescope, is to track and determine the shape of the missile plume and use this information to estimate the location of the missile's body and project a beam from the track illuminator laser to light up the nose cone of the missile. The plume tracker is then to hand its information, and control of the telescope, to the final tracking device, the fine tracker. The fine tracker is to measure the effects of turbulence and determine the aimpoint for the beacon laser and, ultimately, for the COIL laser. The reflected light from the illuminator laser provides information that is to be used to operate a sophisticated mirror system (known as a fast-steering mirror) that helps to compensate for optical turbulence by stabilizing the COIL beam on the target. The reflected light from the beacon laser provides information that is to be used to operate deformable mirrors that will further compensate for turbulence by shaping the COIL beam. With the illuminator and beacon lasers still operating, the fine tracker is to determine the aimpoint for the COIL laser. The COIL laser is to be brought to full power and focused on the aimpoint. At this point, the final step in the sequence--missile destruction--is to begin. During this final step, a lethal laser beam is held on the missile. The length of time that the beam must dwell on the missile will depend on turbulence levels and the missile type, hardness, range, and altitude. Throughout the lethal dwell, the illuminator and beacon lasers are to continue to operate, providing the information to operate the fast-steering and deformable mirrors. Under the intense heat of the laser beam, which is focused on an area about the size of a basketball, the missile's pressurized casing fractures, and then explodes, destroying the missile. The ABL is expected to operate from a central base in the United States and be available to be deployed worldwide. The program calls for a seven-aircraft fleet, with five aircraft to be available for operational duty at any given time. The other two aircraft are to be undergoing modifications or down for maintenance or repair. When the ABLs are deployed, two aircraft are to fly, in figure-eight patterns, above the clouds at about 40,000 feet. Through in-flight refueling, which is to occur between 25,000 and 35,000 feet, and rotation of aircraft, two ABLs will always be on patrol, thus ensuring 24-hour coverage of potential missile launch sites within the theater of operations. The ABLs are intended to operate about 90 kilometers behind the front line of friendly troops but could move forward once air superiority has been established in the theater of operations. When on patrol, the ABLs are to be provided the same sort of fighter and/or surface-to-air missile protection provided to other high-value air assets, such as the Airborne Warning and Control System and the Joint Surveillance Target Attack Radar System. A key factor in determining whether the ABL will be able to successfully destroy a missile in its boost phase is the Air Force's ability to predict the levels of turbulence that the ABL is expected to encounter. Those levels are needed to define the ABL's technical requirements for turbulence. To date, the Air Force has not shown that it can accurately predict the levels of turbulence the ABL is expected to encounter or that its technical requirements regarding turbulence is appropriate. The type of turbulence that the ABL will encounter is referred to as optical turbulence. It is caused by temperature variations in the atmosphere. These variations distort and reduce the intensity of the laser beam. Optical turbulence can be measured either optically on non-optically. Optical measurements are taken by transmitting laser beams from one aircraft to instruments on board another aircraft at various altitudes and distances. Non-optical measurements of turbulence are taken by radar or by temperature probes mounted on balloons or on an aircraft's exterior. The Air Force's ABL program office has not determined whether non-optical measurements of turbulence can be mathematically correlated with optical measurements. Without demonstrating that such a correlation exists, the program office cannot ensure that the non-optical measurements of turbulence that it is collecting are useful in predicting the turbulence likely to be encountered by the ABL's laser beam. Concern about turbulence measurements was expressed by a DOD oversight office nearly 1 year ago. In November 1996, during its milestone 1 review of the ABL program, the Defense Acquisition Board directed the program office to develop a plan for gathering additional data on optical turbulence and present that plan to a senior-level ABL oversight team for approval. The Board also asked the program office to "demonstrate a quantifiable understanding of the range and range variability due to optical turbulence and assess operational implications." This requirement was one of several that the Air Force has been asked to meet before being granted the authority to proceed with development of the ABL. That authority-to-proceed decision is scheduled for June 1998. In February 1997, the program office presented to the oversight team a plan for gathering only non-optical data. The oversight team accepted the plan but noted concern that the plan was based on a "fundamental assumption" of a correlation between non-optical and optical measurements. If that assumption does not prove to be accurate, according to the oversight team, the program office will have to develop a new plan to gather more relevant (i.e., optical rather than non-optical) measurements. Accordingly, the oversight team required that the program office include in its data-gathering plan a statement agreeing to demonstrate the correlation between the non-optical and optical measurements. Program officials said they plan to demonstrate that correlation in the summer of 1997. To establish that a correlation exists, the program office plans to use optical and non-optical turbulence measurements taken during a 1995 Air Force project known as Airborne Laser Extended Atmospheric Characterization Experiment (ABLE ACE). Optical measurements were made by transmitting two laser beams from one aircraft to instruments aboard another aircraft at distances from 13 to 198 kilometers and at altitudes from 39,000 to 46,000 feet. These measurements provided the data used to calculate the average turbulence strengths encountered by the beams over these distances. The ABLE ACE project also took non-optical measurements of turbulence using temperature probes mounted on the exterior of one of the aircraft. Rather than taking measurements over the path of a laser beam between two aircraft, as with the optical measurements, the probes measured temperature variations of the air as the aircraft flew its route. Opinions vary within DOD about whether a correlation between optical and non-optical turbulence measurements can be established. Some atmospheric experts, who are members of the program office's Working Group on Atmospheric Characterization, criticized the program office's plan for collecting additional atmospheric data because it did not include additional optical measurements. Minutes from a Working Group meeting indicated that some of these experts believed that "current scientific understanding is far too immature" to predict optical effects from non-optical point measurements. In contrast, the chief scientist for the ABL program said it would be surprising if the two measurements were not directly related; he added that evaluations at specific points in the ABLE ACE tests have already indicated a relationship. According to the chief scientist, it would be prudent for the program office to continue to collect non-optical data while it completes its in-depth analysis of the ABLE ACE data. According to a DOD headquarters official, because the ABL is an optical weapon, gathering non-optical data without first establishing their correlation to optical data is risky. The official concluded that, if the program office cannot establish this correlation, turbulence data will have to be gathered through optical means. The ABL program office also has not shown that the turbulence levels in which the ABL is being designed to operate are realistic. Available optical data on optical turbulence indicate that the turbulence the ABL may encounter could be four times greater than the design specifications. These higher levels of optical turbulence would decrease the effective range of the ABL system. The ABL program office set the ABL's design specifications for optical turbulence at a level twice that, according to a model, the ABL would likely encounter at its operational altitude. This model was based on research carried out in 1984 for the ground based laser/free electron laser program, in which non-optical measurements were taken by 12 balloon flights at the White Sands Missile Range in New Mexico. Each of the 12 flights took temperature measurements at various altitudes. These measurements were then used to develop a turbulence model that the program office refers to as "clear 1 night." The clear 1 night model shows the average turbulence levels found at various altitudes. The ABL is being designed to operate at about 40,000 feet, so the turbulence expected at that level became the starting point for setting the design specifications. To ensure that the ABL would operate effectively at the intended ranges, for design purposes, the program office doubled the turbulence levels indicated by its clear 1 night model. The program office estimated that the ABL could be expected to encounter turbulence at or below that level 85 percent of the time. This estimate was based on the turbulence measured by 63 balloon flights made at various locations in the United States during the 1980s. When the ABL design specifications were established, the program office had very little data on turbulence. However, more recent data, accumulated during the ABLE ACE program, indicated that turbulence levels in many areas were much greater than those the ABL is being designed to handle. According to DOD officials, if such higher levels of turbulence are encountered, the effective range of the ABL system would decrease, and the risk that the ABL system would be underdesigned for its intended mission would increase. DOD officials also indicated that a more realistic design may not be achievable using current state-of-the-art technology. ABLE ACE took optical measurements in various parts of the world, including airspace over the United States, Japan, and Korea. According to the program office and Office of the Secretary of Defense (OSD) analyses of optical measurements taken during seven ABLE ACE missions, overall turbulence levels exceeded the design specifications 50 percent of the time. For the two ABLE ACE missions flown over Korea, the measurements indicated turbulence of up to four times the design specifications. Additionally, according to officials in OSD, ABLE ACE data were biased toward benign, low-turbulent, nighttime conditions. According to these officials, turbulence levels may be greater in the daytime. Developing and integrating a weapon-level laser, a beam control system, and the many associated components and software systems into an aircraft are unprecedented challenges for DOD. Although DOD has integrated a weapon-level laser and beam control system on the ground at White Sands Missile Range, it has not done so in an aircraft environment. Therefore, it has not had to contend with size and weight restrictions, motion and vibrations, and other factors unique to an aircraft environment. The COIL is in the early development stage. The Air Force must build the laser to be able to contend with size and weight restrictions, motion and vibrations, and other factors unique to an aircraft environment, yet be powerful enough to sustain a killing force over a range of at least 500 kilometers. It is to be constructed in a configuration that links modules together to produce a single high-energy beam. The laser being developed for the program definition and risk reduction phase will have six modules. The laser to be developed for the engineering and manufacturing development phase of the program will have 14 modules. To date, one developmental module has been constructed and tested. Although this developmental module exceeded its energy output requirements, it is too heavy and too large to meet integration requirements. The module currently weighs about 5,535 pounds and must be reduced to about 2,777 pounds. The module's width must also be reduced by about one-third. To accomplish these reductions, many components of the module may have to be built of advanced materials, such as composites. The ABL aircraft, a Boeing 747-400 Freighter, will require many modifications to allow integration of the laser, beam control system, and other components. A significant modification is the installation of the beam control turret in the nose of the aircraft. The beam control turret is to be used for acquisition, tracking, and pointing actions used in destroying a missile. Consequently, the location of the turret is critical to the success of the ABL. Issues associated with the turret include the decreased aircraft performance resulting from the additional drag on the aircraft; the interaction of the laser beam with the atmosphere next to the turret, which can cause the laser beam to lose intensity; and vibrations from the operation of the aircraft that affect the accuracy of pointing the beam control turret. The contractor has conducted wind tunnel tests of these expected effects for three different turret locations and found that installing the turret in the nose of the aircraft would cause the fewest negative effects. However, the operational effectiveness of the beam control turret will not be known until it undergoes additional testing in 2002 in an operationally realistic environment. The laser exhaust system is another critical modification. The system must prevent the hot corrosive laser exhaust from damaging the bottom of the aircraft and other structural components made of conventional aluminum. The exhaust created by the laser will reach about 500 degrees Fahrenheit when it is ejected through the laser exhaust system on the bottom of the aircraft. This exhaust system must also undergo additional testing on the aircraft in 2002 to determine its operational effectiveness. Integrating the beam control system with the aircraft also poses a challenge for the Air Force. The Air Force must create a beam control system, consisting of complex software programs, moving telescopes, and sophisticated mirrors, that will compensate for the optical turbulence in which the system is operating and control the direction and size of the laser beam. In addition, the beam control system must be able to tolerate the various kinds of motions and vibrations that will be encountered in an aircraft environment. In deciding the on-board location of the beam control system's components, the Air Force used data gathered by an extensive study of aircraft vibrations on the 747-400 Freighter. The beam control components are expected to be located in those areas of the aircraft that experience less intense vibrations and, to the extent possible, be shielded from vibrations and other aircraft motion. To date, the Air Force has not demonstrated how well a beam control system of such complexity can operate on an aircraft. The contractor has modeled the ABL's beam control system on a brassboard but has not tested it on board an aircraft. The ABL program is a revolutionary weapon system concept. Although DOD has a long history with laser technologies, the ABL is its first attempt to design, develop, and install a multimegawatt laser on an aircraft. As such, the concept faces a number of technological challenges. A fundamental challenge is for the Air Force to accurately and reliably predict the level of optical turbulence that the ABL will encounter and then design the system to operate effectively in that turbulence. The Air Force will not have resolved that challenge until it has demonstrated whether there is a reliable correlation between its non-optical and optical turbulence measurements, or, should such a correlation not exist, gather additional optical data, which may delay the ABL program. Whether relevant and reliable data are confirmed through correlation or by additional optical measurements, the data are critical in assessing the appropriateness of the design specifications for turbulence. If the specifications need to be set higher, that should be done as soon as possible. Therefore, we recommend that the Secretary of Defense direct the Secretary of the Air Force to take the following actions: Demonstrate as quickly as possible, but no later than the time when DOD decides whether to grant the ABL program the authority to proceed (currently scheduled for June 1998), the existence of a correlation between the optical and non-optical turbulence data. If a correlation between optical and non-optical data cannot be established, the Air Force should be required to gather additional optical data to accurately predict the turbulence levels the ABL may encounter, before being given the authority to proceed with the program as planned. Validate the appropriateness of the design specification for turbulence based on reliable data that are either derived from a correlation between optical and non-optical data or obtained through the collection of additional optical data. DOD concurred with both of our recommendations. DOD's comments are reprinted in appendix I. DOD also provided technical comments that we incorporated in this report where appropriate. We reviewed and analyzed DOD, Air Force, ABL program office, and contractor documents and studies regarding various aspects of the ABL program. We discussed the ABL program with officials of the Office of the Under Secretary of Defense (Comptroller); the Office of the Under Secretary of Defense (Acquisition and Technology); the Air Combat Command; the ABL program office; the Air Force's Phillips Laboratory; and the ABL Contractor team of Boeing, TRW, and Lockheed Martin. We also discussed selected aspects of the ABL program with a consultant to the ABL program office. We conducted our review from September 1996 to August 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the congressional committees that have jurisdiction over the matters discussed and to the Secretary of Defense; the Secretary of the Air Force; and the Director, Office of Management and Budget. We will make copies available to others on request. Please contact me at (202) 512-4841 if you or your staff have questions concerning this report. Major contributors to this report were Steven Kuhta, Ted Baird, Suzanne MacFarlane, and Rich Horiuchi. 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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Pursuant to a congressional request, GAO reviewed the status of the Airborne Laser (ABL) program, focusing on: (1) the way in which the ABL is expected to change theater missile defense; (2) assurances that the ABL will be able to operate effectively in the levels of optical turbulence that may be encountered in the geographical areas in which the system might be used; and (3) the technical challenges in developing an ABL system that will be compatible with the unique environment of an aircraft. GAO noted that: (1) the ABL program is the Department of Defense's (DOD) first attempt to design, develop, and install a multimegawatt laser on an aircraft and is expected to be DOD's first system to intercept missiles during the boost phase; (2) a key factor in determining whether the ABL will be able to successfully destroy a missile in its boost phase is the Air Force's ability to predict the levels of turbulence that the ABL is expected to encounter; (3) the Air Force has not shown that it can accurately predict the levels of turbulence the ABL is expected to encounter or that its technical requirements regarding turbulence are appropriate; (4) because ABL is an optical weapons system, only optical measurements can measure the turbulence that will actually be encountered by the ABL laser beam; (5) the Air Force has no plans to take additional optical measurements and instead plans to take additional non-optical measurements to predict the severity of optical turbulence the ABL will encounter; (6) to ensure that the non-optical measurements can be validly applied to the ABL program, the Air Force must determine whether the non-optical measurements can be correlated to optical measurements; (7) until the Air Force can verify that its predicted levels of optical turbulence are valid, it will not be able to validate the ABL's design specifications for overcoming turbulence; (8) the Air Force has established a design specification for the ABL that is based on modelling techniques; (9) data collected by the program office indicate that the levels of turbulence that ABL may encounter could be four times greater than the levels in which the system is being designed to operate; (10) DOD officials indicated that a more realistic design may not be achievable using a current state-of-the-art technology; (11) in addition to the challenges posed by turbulence, developing and integrating a laser weapon system into an aircraft pose many technical challenges for the Air Force; (12) the Air Force must build a new laser that is able to contend with size and weight restriction, motion and vibrations, and other factors unique to an aircraft environment and yet be powerful enough to sustain a killing force over a range of at least 500 kilometers; (13) the Air Force must create a beam control system that must compensate for the optical turbulence in which the system is operating and control the direction and size of the laser beam; and (14) because these challenges will not be resolved for several years, it is too early to accurately predict whether the ABL program will evolve into a viable missile defense system.

DOD identifies 32 accounts for fiscal year 2017 under the appropriation category of O&M, including both base and OCO funding. Among the military services, each of their components receives its own O&M appropriations and has corresponding accounts--active (Army, Navy, Marine Corps, and Air Force), reserve (Army Reserve, Navy Reserve, Marine Corps Reserve, and Air Force Reserve), and National Guard (Army National Guard and Air National Guard). Additionally, there are O&M accounts for defense-wide and other DOD programs, such as the defense health program. In support of DOD's budget request included in the annual President's budget, DOD financial management officials prepare separate congressional budget justification materials by account for O&M base and O&M OCO. Each set of O&M budget justification materials is divided first into budget activities, such as operating forces and mobilization for the military services' O&M accounts. For some O&M accounts, the budget activities are then divided into activity groups. For example, the defense- wide budget justification materials for O&M are divided by activity group, which represent a defense agency. For other O&M accounts, the budget activities are further divided into subactivity groups. For example, the military service justification materials for O&M are divided first into various activity groups, such as installation support and weapons support, and then into subactivity groups, such as depot maintenance and operating support for installations. DOD submits to Congress annual budget justification materials that provide details at the budget activity, activity group, or subactivity group level. Congress separately appropriates amounts for O&M base and O&M OCO activities into existing O&M base accounts. Congress directs how O&M funds are to be spent by designating specific amounts at the activity level in conference reports or explanatory statements accompanying annual appropriations acts. DOD financial management officials execute both O&M base and O&M OCO funds from the base O&M account. For example, Army financial management officials execute both O&M base funding and O&M OCO funding from the Army base O&M account. DOD conducts an annual process for determining its budget request and allocating resources. This includes developing a 5-year funding plan by appropriation that identifies the immediate budget priorities and future projections for the next 4 fiscal years, and is called the Future Years Defense Program. The Future Years Defense Program reflects decisions made in DOD's annual budget process and represents estimated funding that the President requests from Congress for the current budget year and at least the 4 fiscal years following it. In 1987, Congress directed the Secretary of Defense to submit the 5-year funding plan, in part, to establish a mechanism to help inform DOD and Congress on current and planned funding needs as decisions are made. The 5- year funding plans are specific to DOD's total base funding and do not include OCO funding. Provisions of annual defense appropriations and authorization acts provide DOD with authority to transfer funds. DOD can realign funds (1) between appropriations accounts through transfers and (2) within an account's budget activity from the same appropriations account through reprogrammings. While transfers require statutory authority, DOD officials may also realign, or reprogram, O&M base funds within an appropriations account's budget activity as part of their duty to manage their funds and do not require statutory authority to do so. For both transfers and reprogrammings, Congress requires notification of DOD's fiscal year baseline for application of reprogramming and transfer authorities prior to funds becoming available for reprogramming or transfer. Further, if a transfer or reprogramming exceeds threshold amounts established by Congress, prior approval of a congressional committee is required. For example, effective for fiscal year 2015, the basic reprogramming threshold for O&M that requires DOD to notify Congress in writing was a cumulative increase or decrease of $15 million. However, the military services can transfer or reprogram funds that are below threshold amounts between budget activities within O&M base accounts without requiring written congressional approval. DOD's enacted funding for O&M base has generally increased each year since fiscal year 2009, with the exception of fiscal year 2013. Enacted funding, set by Congress, establishes how much the department can obligate in a given fiscal year, unless the amounts are subsequently adjusted through additional congressional action or DOD's use of its authorities to transfer funds between appropriations accounts. Based on DOD's data, enacted funding for O&M base in nominal dollars increased by 7 percent from about $185.0 billion in fiscal year 2009 to about $198.5 billion in fiscal year 2016 (see figure 1). Our analysis of the budget year of DOD's 5-year funding plans for O&M base from fiscal years 2009 through 2016 found that since fiscal year 2011, DOD consistently planned for more O&M base funding than Congress enacted. The 5-year funding plans--also known as the Future Years Defense Plan--consist of a budget year (first fiscal year) and out- years (4 subsequent fiscal years beyond the budget year), and are intended to help inform Congress on current and future planned funding needs. Congress enacted more funding than DOD planned in the fiscal year 2009 budget year and the amount enacted was the same as planned in the fiscal year 2010 plan. Since 2011 the enacted amount was less than the planned amount by between 1.8 and 7.2 percent. Figure 2 provides details on DOD's funding plans and enacted amounts for O&M base. Further, between the funding plans for fiscal year 2009 and fiscal year 2015, planned O&M base funding in the out-years was adjusted downward relative to the previous year until fiscal year 2016, when it slightly increased. For example, in the fiscal year 2011 plan, DOD estimated that its planned funding in the out-years would increase by 12.9 percent ($27.4 billion) between the first and the last out-year of the plan (fiscal years 2012-2015), but in the fiscal year 2012 plan, DOD decreased its estimate of planned funding in the out-years (fiscal years 2013-2016) as compared to the fiscal year 2011 plan by 8.4 percent ($18.1 billion). The decrease relative to the previous year continued until the fiscal year 2016 plan when DOD adjusted its plans upward for fiscal years 2018 and 2019 from the amounts in the fiscal year 2015 plan, as shown above in figure 2. We found that various factors influenced the changes in the out-year amounts since the fiscal year 2009 plan. For example, according to DOD documents, the 5-year plan for fiscal year 2011 reflected the defense objectives outlined in the 2010 Quadrennial Defense Review and the corresponding increase in requirements to carry out those objectives. The department then began to reduce its planned growth in fiscal year 2012, as compared to fiscal year 2011, according to DOD budget documents and DOD officials, based on a variety of initiatives intended to improve the efficiency of DOD's business operations by reducing excess overhead costs. In fiscal years 2013 through 2015, DOD further reduced its base O&M funding plans as it realigned its entire discretionary budget closer to expected appropriations. According to DOD documents and officials, this was achieved through a combination of continued efficiency initiatives and economic adjustments, among other reductions. However, in fiscal year 2016, DOD's funding plans did not include further reductions. According to DOD's fiscal year 2016 budget request and DOD officials, the department concluded that it could not execute its updated defense strategy at the expected appropriation level. Congress made additional funding available to DOD's O&M base programs and activities in fiscal years 2009 through 2016. Specifically, Congress made additional funding available to DOD's O&M base in two areas: OCO funding for programs and activities requested in the base budget and OCO funding for readiness-related efforts. OCO Funding for Programs and Activities Requested in the Base Budget: In fiscal years 2009 through 2016, according to DOD's data, Congress made additional funding available by designating O&M supplemental or OCO funding to be used for certain O&M base programs and activities for which DOD had requested O&M base funding. For example, Congress directed additional funding from fiscal years 2009 through 2016, ranging from $405 million in fiscal year 2013 to $9.2 billion in fiscal year 2014. According to DOD officials and budget documents, Congress gave the department the approval to transfer this OCO funding for base programs and activities. OCO Funding for Readiness-Related Efforts: In fiscal year 2015, Congress provided $1 billion in OCO funding to be used for supporting DOD's readiness efforts. According to DOD officials, this OCO funding could be used to support O&M base programs and activities that relate to readiness-related efforts, such as increased training, depot maintenance, and operations support for installations. Conversely, the sequestration in fiscal year 2013 reduced DOD's O&M base funding when across-the-board spending reductions were applied to all nonexempt appropriations accounts across the government. The reductions resulted in a decrease of $11.9 billion to DOD's O&M base, to $182.8 billion, the lowest level since fiscal year 2009. Figure 3 shows DOD's enacted funding for O&M base with changes directed by Congress and as a result of sequestration. Our analysis of DOD data for the military services' and defense-wide agencies' O&M accounts--from fiscal years 2009 through 2015--found that DOD realigned $146.9 billion by transfers between O&M base, O&M OCO, and other appropriations accounts and reprogrammings within O&M accounts. These realigned funds represented 11 percent of the $1,336.5 billion enacted for these accounts. According to DOD and military service officials, they used existing statutory authorities to transfer (realign funds between appropriations accounts) or reprogram (realign funds from the same appropriation within an account's budget activity) O&M funding to adjust to differences in their budget year funding plans and respond to emerging requirements, such as disaster response and new contingency operations. The officials stated that this flexibility helps the department to manage risk associated with priority missions by ensuring that resources are aligned appropriately. DOD relied on legal authority with congressional approval where necessary to realign about $71.3 billion (48.5 percent) of these funds from transfers between or reprogrammings within appropriations. DOD also reprogrammed about $75.6 billion (51.5 percent) of these funds between budget activities within accounts in amounts that did not require prior congressional approval (see figure 4). We estimated that after the department used its authorities to transfer funds, DOD's base obligations subsequent to fiscal year 2009 were greater than amounts enacted by Congress for O&M base funding by an annual average of 5.6 percent. During the period of our review, DOD did not report O&M base obligation amounts separately from O&M OCO amounts in its budget justification materials or execution reports; therefore, we estimated base obligations for O&M. We found in 5 of the 7 fiscal years we estimated that O&M base obligations--consisting of enacted and realigned amounts--were 5.6 percent to 8.7 percent greater than congressionally enacted amounts ($10.9 billion and $16.7 billion, respectively). The exceptions were fiscal years 2009 and 2013, when DOD obligated 1 percent and 2.6 percent more, respectively, than the enacted amount, even with reductions in fiscal year 2013 resulting from sequestration (see figure 5). While overall obligations exceeded enacted amounts in each year due to transfers and reprogrammings, we also found that consistent patterns of difference existed within certain categories of spending. Among the military services' accounts (including the active, reserves, and National Guard), we found that after the military services had reprogrammed funds from the amounts designated by Congress, their obligations for O&M base subsequent to 2009 were consistently different from designated amounts for at least 3 consecutive years in 3 out of 11 specific categories of similar O&M subactivity groups. Specifically, we found, as shown in figure 6: Base Operating Support: In each fiscal year since 2009 the military services obligated more than Congress designated for the 7-year period collectively by a total of $17.9 billion. Administrative and Management Functions: In each fiscal year since 2009, the military services obligated more than Congress designated for the 7-year period collectively by a total of about $5.4 billion. Mobilization: Since fiscal year 2012, the military services obligated more than Congress designated for the 4-year period collectively by a total of about $1.2 billion. In interviews with OUSD Comptroller officials, we discussed these consistent patterns of differences in obligations as compared with what was designated by Congress. Officials stated that it is often difficult to predict some requirements 2 years before they occur. However, in the area of base operating support, where costs are often more fixed and predictable, officials told us that they reviewed the military services' obligations and became aware in 2015 of the Army's consistent pattern of obligating amounts greater than Congress designated. Officials told us that they have since taken steps to better align the request with the requirement by issuing guidance to the Army to incorporate information on prior spending levels in this area within the budget request for fiscal year 2017. In addition, they discussed that in fiscal years 2011 and 2012 the difference from the designated amount for the Air Force resulted from the use of O&M base funding to support OCO requirements. In addition, our analysis found that there was no consistent pattern of differences between spending and what was designated by Congress among the two categories of subactivity groups that are most directly related to readiness--maintenance and weapon systems support and operational tempo and training. For these two categories, spending varied most years between under- and over-obligations. In addition, since fiscal year 2014, the largest magnitude of over-obligation has not been in these categories, but in base operating support as previously discussed (see figure 7). DOD has reported its O&M OCO obligations to Congress, but it has not reported its O&M base obligations. Instead, DOD has reported a combination of O&M base and OCO obligations in its O&M base budget justification materials and execution reports. Congressional budget justification materials and O&M execution reports are key documents that help Congress make appropriations decisions, conduct oversight, and provide control over funds. DOD information on O&M base obligations is important in enabling Congress to have a more complete understanding of what costs paid for by DOD's OCO appropriations are intended for base activities. The FASAB Handbook of Federal Accounting Standards and Other Pronouncements, as Amended suggests that agencies should provide reliable and timely information on the full costs of their federal programs aimed at assisting congressional and executive decision makers in allocating federal resources and making decisions to improve operating economy and efficiency. In addition, Standards for Internal Control in the Federal Government emphasizes using quality and complete information to make decisions and communicate such information externally. The Senate Appropriations Committee's report accompanying a bill for DOD's fiscal year 2015 appropriations stated that the committee does not have a clear understanding of enduring activities funded by the OCO budget. The committee noted the potential for risk in continuing to fund non-contingency-related activities through the OCO budget. The committee directed the Secretary of Defense to submit a report showing the transfers of OCO funding to the base budget for fiscal year 2016 at the time of the President's budget submission for fiscal year 2017. This request to show transfers of OCO funding to the base demonstrates that having information on base obligations at a detailed level is useful to Congress as it aims to better understand the magnitude of spending for base activities to date and in the future. OUSD Comptroller officials told us that the department has not provided the report because the evolution of threats in U.S. Central Command's area of responsibility creates uncertainty over its enduring missions. We made a similar recommendation in 2014 that DOD develop guidance for transitioning enduring programs and activities funded through OCO appropriations to the base budget request. DOD partially concurred with that recommendation, and in the fiscal year 2016 base budget request the department proposed to outline a plan to complete this transition, beginning in 2017, by 2020. However, according to DOD officials, the department has suspended the timeline to complete this transition due to the mission uncertainty discussed above. DOD has reported O&M OCO obligations to Congress at the levels of information--that is, budget activity, activity group, or subactivity group level--presented in its O&M OCO budget justification materials by each O&M OCO account. It reported all four military services by active, reserves, and National Guard accounts; defense-wide accounts; and defense health account. However, in its O&M base budget justification materials and O&M execution reports, DOD reported combined obligations for the base and OCO appropriations in each appropriations account that receives both types of O&M appropriations. For example, in fiscal year 2009, we calculated from each account's OCO budget justification materials that DOD's O&M OCO obligations were $83.9 billion, and DOD reported that in the same period its total O&M obligations were $270.6 billion. Subtracting O&M OCO obligations from O&M total obligations reveals that O&M base obligations would be approximately $186.7 billion for fiscal year 2009, as we showed previously in figure 5. While the total level of O&M base obligations can be readily estimated, the effects of the realignment of funds on categories of similar subactivity groups is not so readily apparent. As discussed in the previous section, in some cases there are consistent patterns of over- obligation across certain categories of subactivity groups. According to OUSD Comptroller officials, DOD components track obligations by base and OCO appropriation, but DOD's Financial Management Regulation--issued by the OUSD Comptroller--does not require the department to report to Congress on O&M base obligations at the levels of information presented by account in its base budget justification materials and execution reports. Additionally, the officials stated that Congress has not asked the department to report O&M base obligations separately from OCO obligations. Military service officials confirmed that they track both base and OCO O&M obligations in their financial accounting systems and provide the OCO obligation information to OUSD Comptroller for reporting purposes. However, when we asked the OUSD Comptroller officials if they could include O&M base obligations in their budget justification materials and execution reports, the officials stated that it would be resource-intensive to report O&M base obligations separately from O&M OCO at the level of information presented for each account because the information is not integrated into one common financial accounting system. Instead, the military services currently use different accounting codes in their individual financial accounting systems to track base and OCO obligations. When we discussed manually estimating O&M base obligations with OUSD Comptroller officials as we had done, they acknowledged that they have used an approach similar to ours for internal estimates of O&M base obligations for total O&M, total account, and lower-level account information. Since 1995, our work on risk to federal government operations has included DOD's financial management as an area of high risk because it lacks accurate, timely, and useful information, among other things, that have limited DOD's ability to ensure basic financial accountability, to prepare auditable financial statements, and to make sound decisions affecting the department's operations. Evaluating how DOD currently collects cost information on base activities in connection with ongoing efforts to improve financial systems to address these limitations could help the department identify ways to more consistently and efficiently capture and report this information in the future. Until DOD revises its guidance to require reporting of O&M base obligations at the level of information presented for each account in its budget justification materials and execution reports, Congress will not have complete information to better understand DOD's full funding needs for its O&M base programs and activities and to oversee the O&M budget. Although operation and maintenance accounts are the largest category of DOD's appropriations, DOD does not report O&M base obligations to Congress separately from O&M OCO obligations in its budget justification materials and O&M execution reports. It currently has the means to collect this information for internal purposes. Further, as the department works to improve its financial systems to achieve financial auditability, DOD has the opportunity to begin collecting consistent information more efficiently in this area of its budget across the department's various organizations. In light of federal accounting and internal control standards, agencies should inform Congress on the full costs of their programs to assist with allocating federal resources and conducting oversight. DOD could do this by requiring the inclusion of O&M base obligations at the level of information presented in each account's reports to Congress. To ensure that Congress will have more complete information on DOD's full funding needs for its O&M base budget and to conduct oversight of DOD's use of OCO funds to support base programs and activities, we recommend that the Secretary of Defense direct the OUSD Comptroller to revise its guidance on preparing budget justification materials and execution reports for Congress to require the addition of O&M obligations used for base programs and activities at the level of information presented for each account. We provided a draft of this report to DOD for review and comment. In its written comments, which are summarized below and reprinted in appendix II, DOD did not concur with the recommendation. In its written comments, DOD noted that many of its financial accounting systems currently in use cannot distinguish between O&M base and OCO obligations easily, and that due to limited resources as a result of headquarters reductions, the requirement to manually identify these obligations in O&M budget justification materials and quarterly O&M execution reports will be extremely labor intensive. DOD further noted that once all DOD components convert from these financial accounting systems, the department should be able to report O&M base and OCO obligations consistently and effectively. For over two decades, we have recognized and brought attention to DOD's reliance on financial accounting systems with significant weaknesses. In addition, we have consistently acknowledged that the reliability of DOD's financial information will be increasingly important to the federal government's ability to make sound resource allocation decisions. While DOD is in the process of implementing various enterprise resource planning systems to improve its financial accounting departmentwide and implement an audit ready systems environment, as required by Congress, we also recognize that DOD's continued efforts will take time. However, in the interim, the revision we recommended to DOD's guidance would help to establish the consistent reporting of O&M base and OCO obligations once those enterprise resource planning systems are in place. Specifically, revised guidance for preparing congressional budget justification materials and execution reports to require the addition of O&M base obligations for each O&M account would position DOD components to report O&M base obligations uniformly using their new systems. Given this, we continue to believe that implementing the recommendation would make more complete information available to Congress on the amount of funds DOD is obligating for its day-to-day programs and activities, and reflect the department's full funding needs for its O&M base budget. DOD provided additional information in its comments as to the specific reasons its current financial accounting systems cannot easily distinguish between O&M base and OCO obligations, and how it reports O&M total and OCO obligations to Congress rather than O&M base obligations at the level of information presented for each account. As discussed in this report, implementing this recommendation would provide Congress with more detailed information about DOD's O&M budget. DOD also provided technical comments, which we incorporated into the report, as appropriate. We are sending copies of this report to the appropriate congressional committees, and to the Secretary of Defense, Secretary of the Army, Secretary of the Air Force, and Secretary of the Navy. 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 (213) 830-1011 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. Senate Report 114-49 accompanying a proposed version of the National Defense Authorization Act for Fiscal Year 2016, includes a provision for GAO to evaluate the effects of budgetary constraints on DOD's available base funding within the O&M appropriations accounts. This report: (1) identifies the trends in enacted and planned funding for DOD's O&M base appropriations since fiscal year 2009; (2) describes the amount of O&M funding DOD has transferred or reprogrammed, and the effect of this realignment on O&M base obligations; and (3) evaluates the extent to which DOD reported to Congress its O&M obligations for its base and OCO budgets. To identify the trends in enacted base funding for DOD's O&M accounts since fiscal year 2009, we analyzed data on enacted funding from DOD's budget justification materials from fiscal years 2009 through 2016. We began with fiscal year 2009 because it was the first year after the surge in both Iraq and Afghanistan and would provide us with a 7-year period of data. All enacted funding amounts are in nominal dollars as presented in the budget materials. In addition, we interviewed officials from the Office of the Under Secretary of Defense (OUSD) Comptroller and the military services' financial management offices about O&M base funding. In some years the budget justification materials were produced while DOD was operating under a continuing resolution and contain an estimate of funding under the continuing resolution. We verified the enacted data with OUSD Comptroller officials to ensure that the data reflected enacted amounts that were also reported to Congress after a defense appropriation act in the annual Base for Reprogramming Actions report. OUSD Comptroller provided revised amounts on enacted funding as appropriate. We determined that the enacted funding amounts were sufficiently reliable for the purposes of this audit with attribution to DOD. To identify how DOD's base funding plans for O&M compared with its enacted funding levels since fiscal year 2009, we analyzed data specific to O&M from DOD's Future Years Defense Program summary tables. We compared information from each 5-year plan--the budget year and total for the 5 years--with the enacted funding information previously discussed. We also compared each 5-year plan with the previous plan to describe the changes between plans since fiscal year 2009. We reviewed documentary information and interviewed officials from Cost Assessment and Program Evaluation and OUSD Comptroller on the Future Years Defense Program about the changes in plans since fiscal year 2009. We verified the data on planned funding amounts with OUSD Comptroller officials. All enacted funding amounts are in nominal dollars. We determined that the data were sufficiently reliable for the purposes of this audit with attribution to DOD and the source document. To identify trends in other base funding available, we corroborated data provided by the OUSD Comptroller officials with information in the defense appropriations acts and defense appropriations joint explanatory statements. All funding amounts are in nominal dollars. We determined that the data on other funding available were sufficiently reliable for the purposes of this audit with attribution to DOD. To describe how DOD has realigned O&M funds between O&M and other appropriations through transfers, and within accounts through reprogrammings, since fiscal year 2009, we analyzed data from DOD's 4th Quarter O&M execution reports from fiscal years 2009 through 2015 to determine the extent to which DOD transferred and reprogrammed O&M base and OCO funding. Our analysis goes through fiscal year 2015, as this was the last full year of data during our review. We calculated the value of funds realigned between and within the military services' and defense-wide O&M accounts by two categories reported in the execution reports--prior approval transfers and reprogrammings, and below threshold reprogrammings. Funds realigned out of accounts are presented as negative numbers in DOD's execution reports. We used the absolute value of the negative numbers to account for the total amount of the realignment. We provided the amounts obtained from the execution reports with OUSD Comptroller officials to verify the accuracy of the information. Next, we calculated the total enacted O&M funding reported in the execution reports for the military services' and defense-wide accounts and determined the percentage of the enacted O&M funding that DOD reported moving. We also interviewed OUSD Comptroller and the military services' financial management officials to understand DOD's process for transferring and reprogramming funds, including any notifications to Congress about them. All fund realignment amounts are in nominal dollars, and we determined that the data were sufficiently reliable for the purposes of this audit with attribution to DOD and the source document. To understand the differences between DOD's base obligations and the amounts that Congress designated for base O&M programs and activities, we estimated O&M base obligations because DOD is not required to report this information in its budget justification materials or execution reports separately from O&M OCO obligations, and had not reported the amounts. To estimate O&M base obligations for the O&M title, we compiled and summed O&M OCO obligations reported in the budget justification materials for each O&M base account. We then subtracted the O&M OCO obligations from the total O&M obligations reported in the O&M O-1 budget exhibit, which provides aggregate details on O&M obligations. We verified the OCO and total O&M obligation data with OUSD Comptroller officials. We compared estimated O&M base obligations with the enacted funding information previously discussed. Further, to understand the differences between O&M base obligations and congressional designations for aggregate categories of similar subactivity groups within the military services' O&M base accounts, we compiled congressional designations, O&M total, and O&M OCO obligations by each of the subactivity groups from the military services' O&M budget justification materials. To normalize obligations for the items that were not enacted in the military services' O&M base accounts but were appropriated to other accounts and authorized to be transferred to the military services' O&M base accounts for execution, we obtained data from the military services by subactivity group. Specifically, we obtained data on transfers from the Environmental Restoration and Drug Interdiction and Counterdrug Activities appropriation that were transferred into the military services' accounts. Next, to estimate O&M base obligations, we subtracted O&M OCO obligations and obligations associated with Environmental Restoration and Drug Interdiction and Counterdrug Activities transfer amounts from total O&M obligations. We grouped the unclassified subactivity groups from the military services' O&M budget justification materials into 11 broad categories of similar activities used in our prior sequestration work based on the activities and functions of each subactivity group (see table 1). To ensure that the budget categories and the placement of subactivity groups therein were valid, we shared our updated approach with officials from OUSD Comptroller, who did not make any suggested revisions. We then compared the congressional designations with estimated O&M base obligations for the 11 aggregate categories of similar subactivity groups within the military services' accounts to determine the amount and percentage of difference in the same direction. We identified consistent patterns of difference, defined as at least three consecutive years with a difference. All amounts are in nominal dollars, and we determined that the data were sufficiently reliable for the purposes of this audit with attribution to DOD and the source. Lastly, to evaluate the extent to which DOD reported O&M base and OCO obligations to Congress, we reviewed the data presented in DOD's budget justification materials and execution reports to identify the type of information available. We also reviewed DOD's Financial Management Regulations and congressional committee report language and interviewed OUSD Comptroller officials to obtain information on the organization of the budget justification materials. We reviewed this information in light of federal internal control and accounting standards that outline how information should be recorded and communicated to management and others. We conducted this performance audit from August 2015 to August 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. In addition to the contact named above, Tina Won Sherman (Assistant Director), Tim Carr, Susan C. Langley, Amie Lesser, Felicia M. Lopez, Kristiana D. Moore, Steve Pruitt, Richard Powelson, and Michael D. Silver made key contributions to this report.

O&M is DOD's largest category of appropriations and constitutes about 43 percent of the President's total request for DOD of $582.7 billion in fiscal year 2017. The President requested $251 billion for DOD's total O&M funding, which included approximately $206 billion for O&M base and $45 billion for O&M OCO. Senate Report 114-49 included a provision for GAO to review the effects of budgetary constraints on DOD's base funding within its O&M appropriations accounts. This report (1) identifies the trends in enacted funding for DOD's O&M base appropriations accounts since fiscal year 2009; (2) describes how much O&M funding DOD has transferred or reprogrammed, and the effect of this realignment on base obligations; and (3) evaluates the extent to which DOD reported to Congress its O&M obligations for its base and OCO budgets. GAO analyzed DOD's O&M budget justification materials and execution reports since 2009 and interviewed DOD officials. Congress enacted funding for the Department of Defense's (DOD) Operation and Maintenance (O&M) into multiple base appropriations accounts, which are used to pay for day-to-day programs and activities. This enacted funding generally has increased each year since fiscal year 2009, with the exception of fiscal year 2013, when sequestration reduced funding for O&M base. GAO found that DOD used its authorities to realign about $146.9 billion of its funding from fiscal years 2009 through 2015 (that is, moving funds through transfers from one account to another, and reprogrammings within an account). During GAO's review, the effects of such realignments on base obligations were not readily apparent because DOD did not report its O&M base obligations to Congress separately from its O&M overseas contingency operations (OCO) obligations used to support war-related programs and activities. GAO estimated O&M base obligations since fiscal year 2009 and found that DOD's realignment of funds led to its O&M base obligations exceeding O&M base enacted amounts in each fiscal year and by an annual average of 5.6 percent (see figure). DOD reported to Congress a combination of O&M base and O&M OCO obligations in its budget justification materials and execution reports, but it did not separately report its O&M base obligations by account for each of its multiple O&M base appropriations. These materials and reports are key documents that help Congress appropriate, conduct oversight of, and provide control over funds. The Senate Appropriations Committee has expressed concern in its report accompanying a bill for DOD's fiscal year 2015 appropriations that it does not have a clear understanding of OCO funding used to support DOD's day-to-day programs and activities. The services track O&M obligations by base and OCO appropriations for OCO reporting purposes, but DOD's financial management regulations do not require it to congressionally report O&M base obligations separately for each account in its budget justification materials and execution reports. By revising its guidance to require congressional reporting on O&M base obligations for each account in these materials and reports, DOD could provide complete information to assist Congress in better understanding and overseeing DOD's full funding needs for O&M base. To assist Congress in its oversight of the O&M budget, GAO recommends that DOD revise its guidance on preparing budget materials and execution reports to require the addition of O&M base obligations for each account. DOD did not concur, citing the inability of its current financial systems to easily distinguish base obligations. GAO believes the recommendation is valid as discussed in the report.

The number of people age 65 and older will nearly double in the U.S. by the year 2030 to 71 million. Over time, some elderly adults become physically or mentally incapable of making or communicating important decisions, such as those required to handle finances or secure their possessions. While some incapacitated adults may have family members who can informally assume responsibility for their decision-making, many elderly incapacitated people do not. In situations such as these, additional measures may be necessary to ensure that incapacitated people are protected from abuse and neglect. Several arrangements can be made to protect the elderly or others who may become incapacitated. A person may prepare a living will, write advance health care directives, appoint someone to assume durable power of attorney, or establish a trust. However, such arrangements may not provide sufficient protection. For example, some federal agencies do not recognize durable powers of attorney for managing federal benefits. SSA will assign a representative payee for an incapacitated person if it concludes that the interest of the incapacitated beneficiary would be served, whether or not the person has granted someone else power of attorney. In addition, many states have surrogacy healthcare decision- making laws, but these alternatives do not cover all cases. Additional measures may be needed to designate legal authority for someone to make decisions on the incapacitated person's behalf. To provide further protection for both elderly and non-elderly incapacitated adults, state and local courts appoint guardians to oversee their personal welfare, their financial well-being, or both. The appointment of a guardian typically means that the person loses basic rights, such as the right to vote, sign contracts, buy or sell real estate, marry or divorce, or make decisions about medical procedures. If an incapacitated person becomes capable again, by recovering from a stroke, for example, he or she cannot dismiss the guardian but, rather, must go back to court and petition to have the guardianship terminated. The federal government does not regulate or provide any direct support for guardianships, but courts may decide that the appointment of a guardian is not necessary if a federal agency has already assigned a representative payee--a person or organization designated to handle federal benefits payments on behalf of an incapacitated person. Representative payees are entirely independent of court supervision unless they also serve their beneficiary as a court-appointed guardian. Guardians are supervised by state and local courts and may be removed for failing to fulfill their responsibilities. Representative payees are supervised by federal agencies, although each federal agency with representative payees has different forms and procedures for monitoring them. Each state provides its own process for initiating and evaluating petitions for guardianship appointment. Generally, state laws require filing a petition with the court and providing notice to the alleged incapacitated person and other people with a connection to that person. In many cases, both courts and federal agencies have responsibilities for protecting incapacitated elderly people. For federal agencies, a state court determination that someone is incapacitated or reports from physicians often provide evidence of a beneficiary's incapacity, but agency procedures also allow statements from lay people to serve as a sufficient basis for determining that a beneficiary needs someone to handle benefit payments on their behalf--a representative payee. SSA, OPM, and VA ask whether the alleged incapacitated person has been appointed a guardian and often appoint that person or organization as the representative payee. In some cases, however, the agencies choose to select someone other than the court-appointed guardian. In many cases, guardians are appointed with a full range of responsibilities for making decisions about the incapacitated person's health and well- being as well as their finances, but several states' laws require the court to limit the powers granted to the guardian, if possible. The court may appoint a "guardian of the estate" to make decisions regarding the incapacitated person's finances or a "guardian of the person" to make nonfinancial decisions. An incapacitated person with little income other than benefits from SSA for example, might not need a "guardian of the estate" if he or she already has a representative payee designated by SSA to act on their behalf in managing benefit payments. Sometimes the guardian is paid for their services from the assets or income of the incapacitated person, or from public sources if the incapacitated person is unable to pay. In some cases, the representative payee is paid from the incapacitated person's benefit payments. Guardians and representative payees do not always act in the best interest of the people they are appointed to protect. Some have conflicts of interest that pose risks to incapacitated people. While many people appointed as guardians or representative payees serve compassionately, often without any compensation, some will act in their own interest rather than in the interest of the incapacitated person. Oversight of both guardians and representative payees is intended to prevent abuse by the people designated to protect the incapacitated people. While the incidence of elder abuse involving persons assigned a guardian or representative payee is unknown, certain cases have received widespread attention. Our 2004 report noted that some state laws and some courts provide more protection for incapacitated elderly people than others. State laws have varied requirements for monitoring guardianships and court practices in the states we visited also varied widely. Coordination among federal agencies and courts was quite limited and on a case-by-case basis. Since our report was issued, some states have strengthened their guardianship programs and some efforts have been made to lay the groundwork for better collaboration. However, there continues to be little coordination between state courts and federal agencies in the area of guardianships. In our 2004 review we determined that all 50 states and the District of Columbia have laws requiring courts to oversee guardianships. At a minimum, most states' laws require guardians to submit a periodic report to the court, usually at least once annually, regarding the well-being of the incapacitated person. Many states' statutes also authorize measures that courts can use to enforce guardianship responsibilities. However, court procedures for implementing guardianship laws appear to vary considerably. For example, most courts in each of the three states responding to our survey require guardians to submit time and expense records to support petitions for compensation, but each state also has courts that do not require these reports. We also found that some states are reluctant to recognize guardianships originating in other states. Few have adopted procedures for accepting transfer of guardianship from another state or recognizing some or all of the powers of a guardian appointed in another state. This complicates life for an incapacitated elderly person who needs to move from one state to another or when a guardian needs to transact business on his or her behalf in another state. In addition, guardianship data are scarce. Most courts we surveyed did not track the number of active guardianships, let alone maintain data on abuse by guardians. Although this basic information is needed for effective oversight, no more than one-third of the responding courts tracked the number of active guardianships, and only a few could provide the number that were for elderly people specifically. Since issuance of our report, several states have passed new legislation amending their guardianship laws. During 2004, for example, 14 states amended their laws related to guardianships, and in 2005 at least 15 states did so, according to the American Bar Association's annual compilations. Alaska, for example, established requirements for the licensing of private professional guardians and, in January of this year, New Jersey began requiring the registration of professional guardians. Acting on legislation in 2004, the California court system established an education requirement for guardians and a 15-hour-per-year continuing education requirement for private professional guardians. In 2004 Hawaii adopted legislation requiring that guardians provide the court annual accountings. Wisconsin also adopted a major revision of its guardianship code this year; it establishes a new requirement that the guardian regularly visit the incapacitated person to assess their condition and the treatment they are receiving. The new law also leaves in effect powers of attorney previously granted by the incapacitated person unless it finds good cause to revoke them, and establishes procedures for recognition of guardianships originating in other states. Several states' guardianship law amendments established or strengthened public guardian programs, including those in Texas, Georgia, Idaho, Iowa, Virginia, Nevada, and New Jersey. In Georgia and New Jersey, for example, public guardians must now be registered. Public guardians are public officials or publicly funded organizations that serve as guardians for incapacitated people who do not have family members or friends to be their guardian and cannot afford to pay for the services of a private guardian. In our 2004 report several courts were identified as having "exemplary" programs. As we conducted our review, we sought particular courts that those in the guardianship community considered to have exemplary practices. Each of the four courts so identified distinguished themselves by going well beyond minimum state requirements for guardianship training and oversight. For example, the court we visited in Florida provides comprehensive reference materials for guardians to supplement training. With regard to active oversight, the court in New Hampshire recruits volunteers, primarily retired senior citizens, to visit incapacitated people, their guardians, and care providers at least annually, and submit a report of their findings to court officials. Exemplary courts in Florida and California also have permanent staff to investigate allegations of fraud, abuse, or exploitation. The policies and practices associated with these courts may serve as models for those seeking to assure that guardianship programs serve the elderly well. We recently contacted officials in each of these courts and received responses from two of them. We learned that officials in these two courts have worked to help strengthen statewide guardianship programs. For example, court officials in Fort Worth, Texas, have helped encourage adoption of Texas' recent reform legislation. However, we could not determine whether other courts had adopted these courts' practices. There is also a role for the federal government in the protection of incapacitated people. Federal agencies administering benefit programs appoint representative payees for individuals who become incapable of handling their own benefits. The federal government does not regulate or provide any direct support for guardianships, but state courts may decide that the appointment of a guardian is not necessary if a representative payee has already been assigned. In our study, we found that although courts and federal agencies are responsible for protecting many of the same incapacitated elderly people, they generally work together only on a case-by-case basis. With few exceptions, courts and federal agencies don't systematically notify other courts or agencies when they identify someone who is incapacitated, nor do they notify them if they discover that a guardian or a representative payee is abusing the person. This lack of coordination may leave incapacitated people without the protection of responsible guardians and representative payees or, worse, with an identified abuser in charge of their benefit payments. Since issuance of our report, we have not found any indication that coordination among the federal agencies or between federal agencies and the state courts has changed. SSA did, however, contract with the National Academies for a study of its representative payee program. The study committee issued a letter report including preliminary observations in 2005, and a final report is scheduled for release in May 2007. The committee plans to use a nationally representative survey of representative payees and the beneficiaries they serve in order to (1) assess the extent to which the representative payees are performing their duties in accordance with standards, (2) learn whether representative payment policies are practical and appropriate; (3) identify types of representative payees that have the highest risk of misuse of benefits; and (4) suggest ways to reduce the risk of misuse of benefits and ways to better protect beneficiaries. Only limited progress has been made on our recommendations. In one recommendation we suggested that SSA convene an interagency study group to increase the ability of representative payee programs to protect federal benefit payments from misuse. Although VA, HHS, and OPM indicated their willingness to participate in such a study group, SSA disagreed with this recommendation. SSA stated that its responsibility focuses on protecting SSA benefits, cited concern about the difficulty of interagency data sharing and Privacy Act restrictions, and indicated that leadership of the study group would not be within its purview. We checked with SSA recently and learned that its position has not changed. Coordination among federal agencies and between federal agencies and state courts remains essentially unchanged, according to agency and court officials we spoke with. SSA continues to provide limited information to the VA in cases where issues arise such as evidence of incapability or misuse of benefits. However, to ensure that no overpayment of VA benefits occurs, SSA will provide appropriate VA officials requested information as to the amount of Social Security benefit savings reported by the representative payee. In 2004, we also recommended that HHS work with national organizations involved in guardianship programs to provide support and leadership to the states for cost-effective pilot and demonstration projects to facilitate state efforts to improve oversight of guardianships and to aid guardians in the fulfillment of their responsibilities. Specifically, we recommended that HHS support the development of cost-effective approaches for compiling consistent national data concerning guardianships. HHS made a step in this direction by supporting a study by the American Bar Association Commission on Law and Aging of the guardianship data practices in each state, which could prove helpful in efforts to move toward more consistent and comprehensive data on guardianships. The study found that although several states collect at least some basic data on guardianships, most still do not. Only about a third of states receive trial court reports on the number of guardianship filings. A total of 33 states responded to a question about whether they were interested in compiling data. Of these, 21 expressed interest and 12 indicated that they are not interested, as the barriers are too high. Thus, it is still not possible to determine how many people in the U.S. of any age are assigned guardians each year, let alone the number of elderly people who are currently under such protection. Third, we recommended that HHS support the study of options for compiling data from federal and state agencies concerning the incidence of elder abuse in cases in which the victim had granted someone the durable power of attorney or had been assigned a fiduciary, such as a guardian or representative payee, as well as cases in which the victim did not have a fiduciary. HHS has taken a step in this direction by supporting the inclusion of questions about guardians in the National Center on Elder Abuse's annual survey of state adult protective services agencies. Specifically, the survey asked each state about cases in which a guardian was the source of a report of abuse or was the alleged perpetrator in state fiscal year 2003. Only 11 states provided information about the source of reports of abuse. Similarly, 11 states indicated the relationship between the victims and the alleged perpetrators. Guardians were not often cited in either case. Indeed, a recent study found that existing data cannot provide a clear picture of the incidence and prevalence of elder abuse. Finally, we also recommended that HHS facilitate a review of state policies and procedures concerning interstate transfer and recognition of guardianship appointments to facilitate efficient and cost-effective solutions for interstate jurisdictional issues. The National Conference of Commissioners on Uniform State Laws (NCCUSL) met in July 2006 and issued a discussion draft for a Uniform Adult Guardianship and Protective Proceedings Jurisdiction Act. This draft contains provisions that would allow guardianships to be formally recognized by another state or transferred to another state. The draft is being refined, and a NCCUSL committee plans to discuss it at another meeting this November. Passage of this draft by the NCCUSL does not, however, guarantee that states will follow its provisions because they must decide on their own whether to amend their own laws. While little progress has been made on several of our specific recommendations, other steps taken since the release of our report are more promising. In November of 2004, a joint conference of the National Academy of Elder Law Attorneys, the National Guardianship Association and the National College of Probate Judges convened a special session to develop an action plan on guardianships. This implementation session developed a series of 45 action steps that could be taken at the national, state, and local levels in order to accomplish a select subset of the recommendations made at the 2001 Second National Guardianship Conference--the "Wingspan Conference." These action steps fall into five main categories: the development of interdisciplinary guardianship committees at the national, state, and local levels; the development of uniform jurisdiction procedures, uniform data collection systems, and innovative funding mechanisms for guardianships; the enhancement of training and certification for guardians and the encouragement of judicial specialization in guardianship matters; the encouragement of the most appropriate and least restrictive types of guardianships; and the establishment of effective monitoring of guardianships. The identification of these action steps and the work that has begun on them reflects a high level of commitment by the professionals working in the field. In some cases work has begun on these action steps. Both the House and the Senate versions of bills calling for an Elder Justice Act would establish an Advisory Board on Elder Abuse, Neglect, and Exploitation charged with making several recommendations including some concerning the development of state interdisciplinary guardianship committees. As noted earlier, the Commission on Uniform State Law has issued a discussion draft of a Uniform Adult Guardianship and Protective Proceedings Jurisdiction Act. Wisconsin's adoption of a reformed guardianship law this year emphasizes the use of the least restrictive type of guardianship that is appropriate. Regarding the monitoring of guardianships, recently Texas and New Jersey joined several states that now have programs in place to license, certify, or register professional guardians. In 2005, Colorado began requiring prospective guardians (with some exceptions such as parents who are seeking to be guardians for their children) to undergo criminal background checks. In conclusion, as the number of elderly Americans grows dramatically, the need for guardianship arrangements seems likely to rise in response, and ensuring that such arrangements are safe and effective will become increasingly important. Progress on fulfilling some of our recommendations has been slow where it has occurred, and for some, no steps have been taken at all. The lack of leadership from a federal agency, and states' differing approaches to guardianship matters, make it difficult to realize quick improvements. Nonetheless, many people actively involved in guardianship issues continue to look for ways to make improvements. Emulating exemplary programs such as the four we examined would surely help, but we believe more can also be done to better coordinate across states, federal agencies, and courts. In our 2004 report we concluded that the prospect of increasing numbers of incapacitated elderly people in the years ahead signals the need to reassess the way in which state and local courts and federal agencies work together in efforts to protect incapacitated elderly people. Your Committee has played an important role in bringing these problems to light and continuing to seek improvements. In the absence of more federal leadership, however, progress is likely to continue to be slow, particularly in the coordination among federal agencies and between federal agencies and state courts. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I'd be happy to answer any questions you may have. Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues at (202) 512-7215. Alicia Puente Cackley, Assistant Director; Benjamin P. Pfeiffer; Scott R. Heacock; Mary E. Robison; and Daniel A. Schwimer also contributed to this report. 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 Senate Special Committee on Aging asked GAO to follow up on its 2004 report, Guardianships: Collaboration Needed to Protect Incapacitated Elderly People, GAO-04-655 . This report covered what state courts do to ensure that guardians fulfill their responsibilities, what exemplary guardianship programs look like, and how state courts and federal agencies work together to protect incapacitated elderly people. For this testimony, GAO agreed to (1) provide an overview and update of the findings of this prior work; (2) discuss the status of a series of recommendations GAO made in that report; and (3) discuss the prospects for progress in efforts to strengthen protections for incapacitated elderly people through guardianships. To complete this work, GAO interviewed lawyers and agency officials who have been actively involved in guardianship and representative payee programs, and spoke with officials at some of the courts identified as exemplary in the report. GAO's 2004 report had three principal findings. First, all states have laws requiring courts to oversee guardianships, but court implementation of these laws varies. Second, those courts recognized as exemplary in the area of guardianships focused on training and monitoring. Third, there is little coordination between state courts and federal agencies or among federal agencies regarding guardianships. At present, these findings remain largely the same, but there are some new developments to report. Since GAO's report was issued, some states have strengthened their guardianship programs. For example, Alaska established requirements for licensing of private guardianships and New Jersey and Texas established requirements for the registration of professional guardians. However, there continues to be little coordination between state courts and federal agencies or among federal agencies in the protection of incapacitated people. GAO's report made recommendations to federal agencies, but to date little progress has been made. GAO recommended that SSA convene an interagency study group to increase the ability of representative payee programs to protect federal benefit payments from misuse. Although VA, HHS, and OPM indicated their willingness to participate in such a study group, SSA disagreed with this recommendation, and its position has not changed. Second, GAO recommended that HHS work with national organizations involved in guardianship programs to provide support and leadership to the states for cost-effective pilot and demonstration projects to facilitate state efforts to improve oversight of guardianships and to aid guardians in the fulfillment of their responsibilities. HHS did support a study that surveyed the status of states' guardianship data collection practices. HHS also supported a National Center on Elder Abuse survey of adult protective services agencies to collect information including the extent to which guardians are the alleged perpetrators or the sources of reports about elder abuse. Third, GAO recommended a review of state policies and procedures concerning interstate transfer and recognition of guardianship appointments. A National Conference of Commissioners on Uniform State Laws, held in July of this year, issued a discussion draft for a uniform state law addressing these issues. Following issuance of GAO's 2004 report, a joint conference of professional guardianship organizations agreed on a set of action steps to implement previously-released recommendations from a group of experts on adult guardianship, known as the Wingspan recommendations. Among other things, these action steps call for licensing, certifying, or registering professional guardians.

A majority of the nation's wastewater is treated by publicly owned treatment works that serve a variety of customers, including private homes, businesses, hospitals, and industry. These publicly owned treatment works are regulated by the Clean Water Act. Wastewater treatment includes a collection system (the underground network of sewers) and a treatment facility. Wastewater enters the treatment facility through the collection system, where it undergoes an initial stage called primary treatment, during which screens remove coarse solids, and grit chambers and sedimentation tanks allow solids to gradually sink. Next, wastewater enters secondary treatment, where bacteria consume most of the organic matter in the wastewater. After these processes, wastewater is disinfected to eliminate remaining pathogens and other harmful microorganisms. Wastewater facilities typically use both chemical and physical disinfection methods, including the following: Chlorine gas. Injecting chlorine gas into a waste stream has been the traditional method of disinfecting wastewater. Chlorine gas is a powerful oxidizing agent, is relatively inexpensive, and can be stored for an extended period of time as a liquefied gas under high pressure. Also, the residual chlorine that remains in the wastewater effluent can prolong disinfection after initial treatment. However, chlorine gas is extremely volatile and hazardous, and it requires specific precautions for its safe transport, storage, and use. Because it is stored and transported as a liquefied gas under pressure, if accidentally released, chlorine gas can quickly turn into a potentially lethal gas. EPA requires, among other things, that any facility storing at least 2,500 pounds of chlorine gas prepare a risk management plan that lays out accident prevention and emergency response activities. At certain concentrations, the residual chlorine that remains in wastewater effluent is toxic to aquatic life, so wastewater facilities that use chlorine compounds may also need to dechlorinate the treatment stream before discharging it to receiving waters. Chlorine can also oxidize certain types of organic matter in wastewater, creating hazardous chemical byproducts, such as trihalomethanes. Our March 2006 report found that many large wastewater facilities have discontinued, or are planning to discontinue using chlorine gas as a disinfectant in favor of alternative disinfection methods such as sodium hypochlorite delivered in bulk to the facility. Of the 206 large wastewater facilities responding to our survey, only 85 facilities indicated they currently use chlorine gas, and 20 of these facilities plan to switch from the gas to another disinfectant. Sodium hypochlorite. Injecting sodium hypochlorite--essentially a concentrated form of household bleach--into a waste stream is another chlorination method of disinfecting wastewater. Sodium hypochlorite is safer than chlorine gas because, if spilled, it remains liquid and can be contained and recovered. For this reason, it is not subject to EPA's risk management planning requirements. However, sodium hypochlorite is more expensive than chlorine gas, and it degrades quickly if it is exposed to sunlight or is not kept at proper temperatures. For this reason, properly storing delivered sodium hypochlorite in the concentration necessary to disinfect wastewater may require an on-site building with environmental controls. Sodium hypochlorite can also be generated on-site at a wastewater facility using an "electrochlorination system" that produces sodium hypochlorite through an electrical reaction with high-purity salt and softened water. Facilities choosing this method of disinfection reduce chemical costs, but face increased electrical costs from the generation equipment. Because it is a chlorine compound, wastewater facilities using sodium hypochlorite must also be concerned with residual chlorine and hazardous chemical byproducts, such as trihalomethanes. Ultraviolet light. This disinfection method uses ultraviolet lamps to break down disease-causing microorganisms in wastewater. Wastewater passes through an open channel with lamps submerged below the water level. The lamps transfer electromagnetic energy to an organism's genetic material destroying the ability of its cells to reproduce. Because ultraviolet light is a physical process rather than a chemical disinfectant, it eliminates the need to generate, handle, transport, or store hazardous and corrosive chemicals. In addition, there are no harmful residual effects to humans or aquatic life. However, ultraviolet light disinfection may not be effective given the turbidity of some wastewater streams. Wastewater facilities using ultraviolet instead of chlorine gas or delivered sodium hypochlorite for disinfection will face additional costs to maintain lamps and increased electrical costs. Ozone. This disinfection method feeds ozone generated on-site from oxygen exposed to a high-voltage current into a contact chamber containing wastewater. According to EPA, ozone is very effective at destroying viruses and bacteria, but it is the least used disinfection method in the United States largely because of its high capital and maintenance costs compared to available alternatives. According to EPA, vulnerability assessments help water systems evaluate susceptibility to potential threats such as vandalism or terrorism and identify corrective actions that can reduce or mitigate the risk of serious consequences. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the Bioterrorism Act) required drinking water utilities serving populations greater than 3,300 to complete vulnerability assessments by June 2004. Wastewater facilities are not required by law to complete vulnerability assessments. Congress has considered bills that would have encouraged or required wastewater treatment plants to assess vulnerabilities, but no such requirement has become law. In our March 2006 report on wastewater facility security efforts, we found that many large wastewater facilities have either completed a vulnerability assessment or had one underway. Of the 206 large wastewater facilities that responded to our survey, 106 facilities--or 51 percent--reported that they had completed a vulnerability assessment or were currently conducting one. Several other facilities indicated they had conducted or planned to conduct other types of security assessments. Facilities cited several reasons for completing a vulnerability assessment or some other type of security assessment, but most--roughly 77 percent--reported doing so on their own initiative. Many facilities indicated they were combined systems--facilities that manage both drinking water and wastewater treatment. As such, 37 percent of facilities reported that they did some type of security assessment in conjunction with the required assessment for their drinking water facility. The Clean Air Act requires wastewater facilities that use or store more than 2,500 pounds of chlorine gas to submit to EPA a risk management plan that lays out accident prevention and emergency response activities. Under this act, EPA requires that about 15,000 facilities--including chemical, water, energy, and other sector facilities--that produce, use, or store more than threshold amounts of chemicals posing the greatest risk to human health and the environment take a number of steps to prevent and prepare for an accidental chemical release. EPA regulations implementing the Clean Air Act require that the owners and operators of chemical facilities include a facility hazard assessment, an accident prevention program, and an emergency response program as part of their risk management plans. The regulations required that a summary of each facility's risk management plan be submitted to EPA by June 21, 1999. The plans are to be revised and resubmitted to EPA at least every 5 years, and EPA is to review them and require revisions, if necessary. Although accurate information on the costs of vulnerability assessments and risk management plans is limited, available estimates suggest that their costs vary considerably. A factor contributing to the cost differential was whether they were contracted to third parties (such as engineering consulting firms) or prepared in-house with existing staff. Despite higher costs, some facilities preferred using contractors because their expertise and independence lent credibility to their assessments, which may be useful in obtaining support for security-related upgrades. Costs generally did not relate to facility size, as measured by million of gallons of wastewater treated per day. The reported cost of preparing vulnerability assessments at the 20 large wastewater facilities where we interviewed officials ranged from $1,000 to $175,000. Whether the assessment was done in-house with existing staff or contracted to a third party was a factor contributing to the cost differences. Officials from several facilities told us they used contractors to complete vulnerability assessments in 2002. For example, staff at the Denver Metro Wastewater Reclamation District reported that a contractor completed a vulnerability assessment in November 2002 for its Central Treatment Plant, which treats 130 million gallons of wastewater per day, at an estimated cost of $175,000. Of this cost, $100,000 was for the contractor, and $75,000 was estimated for in-house staff time. Other large wastewater facilities that reported completing vulnerability assessments in 2002 were part of combined systems that provide both drinking water and wastewater services. These systemwide vulnerability assessments were done before the 2002 Bioterrorism Act required drinking water utilities serving populations greater than 3,300 to complete vulnerability assessments by June 2004. The combined systems that conducted systemwide vulnerability assessments include the following: San Antonio Water System (San Antonio, Texas). According to system staff, a contractor completed a systemwide vulnerability assessment for all its drinking water, wastewater, and related infrastructure in August 2002 for $112,000. Staff did not provide an estimate of in-house costs related to the assessment, but prorated the wastewater treatment plants costs related to this contract at $37,000: $25,000 for its Dos Rios plant, which treats 70 million gallons per day; $5,000 each for its Leon Creek and Salado Creek plants, which treat 33 million gallons per day; and $2,000 for its Medio Creek plant, which treats 5 million gallons per day. The Phoenix Water Services Department (Phoenix, Arizona). According to department staff, a contractor completed a systemwide vulnerability assessment for its five drinking water plants, three wastewater plants, and related infrastructure in November 2002 for $479,725. Staff did not provide an estimate of in-house cost related to the assessment, but estimated the contract costs related to its largest wastewater treatment plant, the 91st Avenue Sewage Treatment Plant, which treats 140 million gallons per day, to be $100,000. Fort Worth Water Department (Fort Worth, Texas). According to department staff, a contractor completed a systemwide vulnerability assessment for its four drinking water plants and one wastewater treatment plant in December 2002 at a cost of $292,300. Staff did not provide an estimate of in-house cost related to the assessment, but estimated the contract costs related to its Village Creek Wastewater Treatment Plant, which treats 96 million gallons per day, at $73,075. Wastewater facility managers cited several reasons for using contractors to complete vulnerability assessments. Staff with the Phoenix Water Services Department told us they used contractors for their vulnerability assessment because a citywide policy required that contract services be used whenever possible. Staff at other wastewater facilities told us that, despite the higher costs, they preferred to use contractors because of their expertise. According to a wastewater security official, contractor expertise and independence can give contractor findings and recommendations greater credibility with utility governing boards that determine spending priorities. One manager told us that he used a contractor for a 2002 vulnerability assessment because risk management software and tools were not yet available. After the events of September 11, 2001, EPA provided funding to the Association of Metropolitan Sewerage Agencies to develop software, called the Vulnerability Self Assessment Tool (VSAT), for water utilities to use to develop vulnerability assessments. According to a Water Environment Federation (WEF) official, VSAT became available in June 2002. This official also said that EPA provided funding to WEF to provide training workshops to wastewater utilities on how to use VSAT to conduct vulnerability assessments beginning October 2002. According to interviews with wastewater facility managers, large wastewater facilities that prepared vulnerability assessments in-house with existing staff reported lower costs for preparing the document. These include the following: City of Ventura Public Works Department (Ventura, California). According to facility staff, in-house staff completed a vulnerability assessment in March 2003 for the Ventura Water Reclamation Facility, which treats 9 million gallons per day, at a cost of roughly $1,000 in staff time. Facility staff participated in VSAT training sponsored by EPA and completed the assessment using this tool. City of Fort Wayne Utilities Division (Fort Wayne, Indiana). According to facility staff, in-house staff completed a vulnerability assessment in November 2005 for the Fort Wayne Water Pollution Control Plant, which treats 43 million gallons per day, at undetermined staff time. Facility staff participated in VSAT training and updated a previous risk assessment prepared for the facility by a contractor in 2000 at a contracted cost of $10,000. City of Eugene Wastewater Division (Eugene, Oregon). According to facility staff, in-house staff completed a vulnerability assessment in October 2005 for the Eugene/Springfield Regional Water Pollution Control Facility, which treats 38 million gallons per day, for about $2,000 in staff time. City of Cedar Rapids Department of Water Pollution Control (Cedar Rapids, Iowa). According to facility staff, in-house staff completed a vulnerability assessment in January 2007 for the Cedar Rapids Wastewater Treatment Plant, which treats 35 million gallons per day, for about $5,000 in staff time. Detroit Water and Sewerage Department (Detroit, Michigan). According to department staff, in-house staff completed a vulnerability assessment in January 2005 for the Detroit Wastewater Treatment Plant, which treats 700 million gallons per day, for about $20,000 in staff time. Costs to prepare risk management plans ranged from less than $1,000 for facilities that completed the plan in-house to over $31,000 for facilities that used contractors. Costs to update risk management plans were generally less, ranging from less than $1,000 to $20,000 depending upon whether facilities used in-house staff or contractors. Costs were generally higher at facilities that used contractors. These include the following: The Phoenix Water Services Department (Phoenix, Arizona). According to department staff, a contractor completed risk management plans for all the system's drinking and wastewater facilities in 1999 for $230,086. Costs for the 91st Avenue Sewage Treatment Plant were prorated at $28,761. Department staff said a contractor updated the 91st Avenue plant's risk management plan in 2004 for $20,000. Fort Worth Water Department (Fort Worth, Texas). According to department staff, a contractor completed risk management plans for all of the department's drinking water and wastewater facilities in 1999 for $124,718. Costs related to the Village Creek Wastewater Treatment Plant's risk management plan were prorated at $31,100. Department staff reported that the contractor later updated these risk management plans for $18,040 in 2004, $4,510 of which was for the Village Creek plant. City of Fort Wayne Utilities Division (Fort Wayne, Indiana). According to facility staff, a contractor completed a risk management plan in 2001 for the Fort Wayne Water Pollution Control Plant for $16,000. Facility staff reported a contractor updated the plan in 2005 for $6,000. South Central Regional Wastewater Treatment and Disposal Board (Delray Beach, Florida). According to facility staff, a contractor completed a risk management plan in 1999 for the South Central Regional Wastewater Treatment and Disposal Plant, which treats 18 million gallons per day, for $10,000. Facility staff reported a contractor updated it in 2006 for $2,000. City of Portland Bureau of Environmental Services (Portland, Oregon). According to bureau staff, a contractor completed a risk management plan in 1999 for its Columbia Boulevard Wastewater Treatment Plant, which treats 143 million gallons per day, for $30,000. Bureau staff reported they updated the plan using in-house staff in 2004 for $10,000 in staff time. Other large wastewater facilities that prepared risk management plans in- house with existing staff reported lower costs for preparing the documents. These include the following: San Antonio Water System (San Antonio, Texas). According to system staff, in-house staff completed a risk management plan in 1999 for the Dos Rios Wastewater Treatment Plant for between $5,000 and $10,000 in staff time. In-house staff updated the plan in 2004 for less than $1,000 in staff time. City of Cedar Rapids Department of Water Pollution Control (Cedar Rapids, Iowa). According to facility staff, in-house staff completed a risk management plan in January 2000 for the Cedar Rapids Wastewater Treatment Plant for $5,000 in staff time. In-house staff updated the plan in 2004 for about $250 in staff time. According to district staff, in-house staff completed a risk management plan in 1999 for $10,000 in staff time. In-house staff updated the plan in 2006 for about $1,000 in staff time. City of Savannah Water and Sewer Bureau (Savannah, Georgia). According to facility staff, in-house staff completed a risk management plan in 1999 for the President Street Water Pollution Control Plant, which treats 17 million gallons per day, at a cost of only $150 in staff time. In-house staff updated the plan in 2006 for about $130 in staff time. Large wastewater facilities that convert from chlorine gas disinfection to alternative disinfection processes incur widely varying capital costs, which generally depend on the alternative treatment chosen and facility size. Other factors that affect capital costs include the characteristics of individual facilities, such as whether existing structures can be used, and local factors, such as building costs. Alternative disinfection processes may also pose higher annual operating costs than chlorine gas. However, these costs may be offset, at least somewhat, by savings in training and labor costs, and regulatory burdens associated with the handling of chlorine gas. Some facilities even reported or projected net annual cost savings related to wastewater disinfection. The 23 large wastewater facilities that we interviewed reported capital costs for chlorine conversion ranging from $646,922 to just over $13 million. Table 1 identifies the 23 large wastewater facilities that recently converted or plan to convert from chlorine gas to another disinfection method and their reported and planned capital conversion cost. As shown in the table, 17 of the 23 facilities converted or plan to convert to sodium hypochlorite delivered in bulk to the facility. Officials with several of these facilities told us they considered ultraviolet disinfection, but chose delivered sodium hypochlorite because of its lower capital conversion costs. The remainder converted or plan to convert to sodium hypochlorite generated on-site or ultraviolet light. None of the facilities we contacted adopted ozone. Interview responses indicate that several factors affect the cost of conversion; among these are disinfection method chosen, facility size, key facility characteristics such as available buildings, and whether the conversion was permanent or temporary, as follows. Generally, conversion to delivered sodium hypochlorite has the lowest capital costs, followed by sodium hypochlorite generated on-site, and followed again by ultraviolet light. This observation is supported by cost estimates in the Chlorine Gas Decision Tool, a software program released by DHS in March 2006. The decision tool was designed to provide water and wastewater utilities with the means to conduct assessments of alternatives to chlorine gas disinfection. DHS cautions that the final costs of the disinfection systems will depend on project design details, actual labor and material costs, competitive market conditions, actual site conditions, final project scope, implementation schedule, continuity of personnel and engineering, and other variable factors. With these caveats, the decision tool estimates that for a wastewater facility with an average disinfection flow of 10 million gallons per day and a peak disinfection flow of 20 million gallons per day, capital costs for conversion to delivered sodium hypochlorite would amount to $533,000, on-site generation of sodium hypochlorite would total $1,238,000, and ultraviolet disinfection would reach $1,526,000. Our interviews with wastewater facilities provide specific examples of conversion costs. For example, managers of the Chesapeake-Elizabeth Treatment Plant, which treats 21 million gallons per day and serves customers in Virginia Beach, Virginia, reported spending an estimated $1,225,000 in 2004 converting to bulk sodium hypochlorite disinfection. Managers of the comparably sized Western Branch Wastewater Treatment Plant, which treats 20 million gallons per day and serves customers in Laurel, Maryland, estimated that they will spend $4 million converting to ultraviolet light disinfection by January 1, 2008. Managers of the Western Branch plant indicated that one reason they chose the more expensive ultraviolet treatment option over bulk deliveries of sodium hypochlorite was to avoid the risk to local traffic that could result from additional deliveries to the plant. Plant managers indicated that because sodium hypochlorite degrades more quickly than chlorine gas, truck deliveries would increase under a disinfection system using sodium hypochlorite. They also noted that ultraviolet light disinfection would eliminate the need for the facility to handle and store significant amounts of hazardous and corrosive chemicals. In addition to disinfection method chosen, facility size can also influence capital conversion costs. In general, larger facilities spend more converting to alternative disinfection methods. For example, because larger facilities process a greater flow of wastewater, converting to delivered sodium hypochlorite would require a larger sodium hypochlorite storage building or buildings relative to a smaller facility. It may also require additional pumps, instrumentation, and piping to deliver treatment chemicals to a greater number of contact tanks. Importantly, the largest facilities also tend to serve high-cost urban areas, and their conversion costs reflect the higher costs for construction materials and contract labor in these markets. For example, the Blue Plains Wastewater Treatment Plant, which treats 307 million gallons per day and serves over 2 million customers in the Washington, D.C., metropolitan area, converted from chlorine gas to delivered sodium hypochlorite in 2003 at a cost of almost $13 million. According to facility managers, the facility temporarily converted from chlorine gas to delivered sodium hypochlorite in April 2002 at a cost of $500,000, primarily for storage tanks, pumps, piping, and related instrumentation. It completed the permanent conversion in October 2003 at an added cost of about $12.5 million, which included the purchase of additional storage tanks, related pumps, piping and instrumentation, and the construction of storage facilities for sodium hypochlorite and sodium bisulfate (used for dechlorination). In addition to facility size, other physical characteristics related to individual facilities also play a large role in conversion costs. For instance, the availability of usable buildings on facility grounds will determine whether a facility needs to construct, expand, or update a building to properly house sodium hypochlorite and its associated metering equipment. In addition, the distance between the storage building and treatment tanks will determine the amount of piping needed to deliver stored sodium hypochlorite to the treatment tanks. An example comes from the Hampton Roads Sanitation District which provides wastewater treatment to approximately 1.6 million people in 17 cities and counties in southeast Virginia, including the cities of Newport News, Norfolk, Suffolk, Virginia Beach, and Williamsburg. In 2004, the sanitation district converted from chlorine gas to bulk sodium hypochlorite disinfection at two of its plants--the Nansemond Treatment Plant, which treats 17 million gallons per day for the city of Suffolk, and the previously mentioned Chesapeake- Elizabeth plant, which treats 21 million gallons per day. The Nansemond plant conversion cost an estimated $1.65 million, while the slightly larger Chesapeake-Elizabeth plant conversion cost about $1.2 million. Costs were higher at the Nansemond plant because a building needed to be constructed for sodium hypochlorite storage, while the Chesapeake- Elizabeth plant had an existing building that only needed to be upgraded to properly store the chemical. Federal discharge permit requirements related to individual treatment facilities can also influence conversion costs. Certain wastewater facilities may be allowed higher chlorine residuals in treated effluent because they discharge into less sensitive waters. Often, these facilities do not have to dechlorinate wastewater, saving the facility the cost of dechlorination chemicals, equipment, and storage. For example, the Philadelphia-area Southeast and Northeast Wastewater Treatment Plants, which treat 90 and 190 million gallons per day, respectively, need only to chlorinate water prior to discharging into the Delaware River. Both plants were converted to delivered sodium hypochlorite--the Southeast plant in 2006 at an estimated cost of $1.9 million and the Northeast plant in 2003 at an estimated cost of $2.6 million. In contrast, the Baltimore-area Back River Wastewater Treatment Plant, which treats 150 million gallons per day and discharges into the ecologically sensitive Chesapeake Bay, must chlorinate and dechlorinate its wastewater before discharge. This facility converted to delivered sodium hypochlorite in 2004 at a reported cost of $3.3 million. Finally, some facilities have reduced conversion costs in the short term through temporary conversions. For example, the Metropolitan Sewer District of Greater Cincinnati decided to convert its Mill Creek Wastewater Treatment Plant, which treats 120 million gallons per day, from chlorine gas to sodium hypochlorite disinfection soon after September 11, 2001. According to the plant manager, by mid-October 2001, the facility had begun disinfecting with sodium hypochlorite by hooking up a rented sodium hypochlorite trailer to its disinfection system at a cost of $25,000. By May 2002, the facility had completed an interim conversion to sodium hypochlorite by purchasing and installing two 8,000 gallon outdoor storage tanks for sodium hypochlorite at a cost of $60,000. According to the plant manager, this interim disinfection system is still in use today, though the plant intends to permanently convert to delivered sodium hypochlorite in 2008 or 2009 at an estimated cost of $3 million. The plant manager said the permanent conversion would include an unloading station for sodium hypochlorite deliveries and a new storage building for the chemical and related instrumentation. The plant manager said the new storage building was needed to reduce the decay of stored sodium hypochlorite. The plant manager added that the storage building and additional piping would improve plant safety because it would allow for central storage and delivery of sodium hypochlorite. Currently, sodium hypochlorite deliveries are made at several plant locations for odor control which, according to the plant manager, increase the odds the chemical may be mishandled and accidentally mixed with other reactant chemicals used at the plant, such as ammonia. Similarly, the Eastern Water Reclamation Facility, which treats 16 million gallons per day and provides service to Orange County, Florida, converted from chlorine gas to sodium hypochlorite disinfection at a cost of $60,000 in November 2001 through the addition of outdoor storage tanks and related pumps. According to the plant manager, the facility may consider additional changes in the future, such as permanent sodium hypochlorite storage or on-site generation. Changes in annual costs related to disinfection treatment conversions were hard to measure due to lack of data. Many facilities we interviewed were unable to provide complete information on annual costs related to disinfection before and after converting from chlorine gas. Available data show that annual chemical costs related to disinfection increased for facilities that converted to delivered sodium hypochlorite, because sodium hypochlorite costs more than chlorine gas. Available data also show that electrical costs related to disinfection increased for facilities that converted to on-site generation of sodium hypochlorite or ultraviolet light treatment, however these facilities also saw large reductions in chemical costs. Available data also show that increases in annual costs related to disinfection were offset somewhat by savings in training and regulatory requirements, as several facilities that converted reported a reduced need for staff time devoted to complying with the EPA risk management planning that was required when the plant used chlorine gas. A few facilities were even able to report or project annual savings due to the disinfection conversion. For example, the wastewater treatment manager of the Columbia Boulevard Treatment Plant, which treats 143 million gallons per day and provides wastewater service to Portland, Oregon, estimated that annual costs related to disinfection fell by over $100,000 after the plant completed a 2005 conversion from chlorine gas to delivered sodium hypochlorite disinfection. According to the wastewater treatment manager, increases in disinfection chemical costs for the plant were more than offset by reductions in electrical, labor, and training costs. Electrical power costs fell because the plant no longer had to power chlorine gas evaporators, which heat and help convert the pressurized liquid into gas before it is injected into the waste stream. In contrast, sodium hypochlorite is fed into the waste stream via less energy-intensive pumps. Labor and training costs also fell because the plant no longer had to meet the Occupational Safety and Health Administration's (OSHA) Process Safety Management of Highly Hazardous Chemicals standard, and risk management and emergency response planning costs associated with the use of chlorine gas were eliminated. In another example, the South Central Regional Wastewater Treatment and Disposal Plant, which treats 18 million gallons per day for customers in the cities of Delray Beach and Boynton Beach, Florida, predicts that it too will achieve annual savings once it converts from chlorine gas to sodium hypochlorite generated on-site, which it anticipates completing in September 2007. According to the Executive Director of the South Central Regional Wastewater Treatment and Disposal Board, potential disruptions of sodium hypochlorite delivery during hurricane seasons motivated them to begin generating their disinfection chemicals on-site. The plant's most recent fiscal year operating and maintenance budget for disinfection is estimated to be roughly $307,000 for chlorine gas and associated costs including equipment and maintenance, labor, and risk management planning. Postconversion annual operating and maintenance costs for disinfection are estimated to fall to $205,000 in the 2008 calendar year, primarily due to the suspension of chlorine gas purchases. We provided a draft of this report to EPA for review and comment. In its letter, reproduced in appendix II, EPA concurred with the results of the report. EPA's Water Security Division in the Office of Ground Water and Drinking Water provided technical comments and clarifications that were incorporated, as appropriate. As agreed with your office, unless you publicly release 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; interested Members of Congress; the Administrator, EPA; and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff need further information, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To identify the costs of preparing vulnerability assessments and risk management plans, we conducted structured telephone interviews with a select sample of large wastewater facilities identified as having completed these documents in our March 2006 report. Our March report identified 106 large facilities that reported they had prepared vulnerability assessments or had one underway, and 85 facilities that were required to prepare risk management plans because they currently used chlorine gas as a disinfectant. From these two groups, we identified 47 facilities that reported that they had prepared vulnerability assessments and currently use chlorine. Of this universe, we chose a nonprobability sample of 25 facilities to assure geographic dispersion and adequate variation in size, since these factors were likely to influence their costs. We completed structured interviews with 20 of the remaining 25 facilities. We sent an interview schedule in advance of each of the interviews. We completed the structured interviews between November 2006 and February 2007. Reported costs included both actual and estimated costs. For estimated costs, we asked facility managers to explain how they arrived at these estimates. Reported costs were not adjusted for inflation. To identify the costs incurred by wastewater facilities in converting from gaseous chlorine to an alternative disinfection process, we conducted structured telephone interviews with a nonprobability sample of 26 of the 38 large facilities identified in the March report as having recently converted or planning to convert from chlorine gas to an alternative disinfection process. We sent an interview schedule in advance of each of the interviews. We completed the structured interviews between October 2006 and February 2007. Reported costs included both actual and estimated costs. For estimated costs, we asked facility managers to explain how they arrived at these estimates. Reported costs were not adjusted for inflation. We also conducted site visits with some of the facilities. Where available, we gathered documentation, such as capital plans, from these facilities in order to document conversion costs. We supplemented the cost information we gathered at individual wastewater facilities with information obtained at the Environmental Protection Agency, the Department of Homeland Security, nongovernmental organizations, and industry representatives. We determined that reported cost data were sufficiently reliable to provide useful information about the costs for preparing vulnerability assessments, risk management plans, and conversions from gaseous chlorine and the factors that affect these costs. We conducted our work between August 2006 and March 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, Jenny Chanley, Steve Elstein, Nicole Harris, Greg Marchand, Tim Minelli, Alison O'Neill, Daniel Semick, and Monica Wolford made key contributions to this report.

In 2006, GAO reported that many large wastewater facilities have responded to this risk by voluntarily conducting vulnerability assessments and converting from chlorine gas to other disinfection methods. The Clean Air Act requires all wastewater facilities that use threshold quantities of chlorine gas to prepare and implement risk management plans to prevent accidental releases and reduce the severity of any releases. In this study, GAO was asked to provide information on (1) the range of costs large wastewater treatment facilities incurred in preparing vulnerability assessments and risk management plans, and (2) the costs large wastewater treatment facilities incurred in converting from chlorine gas to alternative disinfection processes. To answer these questions, GAO conducted structured telephone interviews with a number of facilities surveyed for the 2006 report. The Environmental Protection Agency (EPA) agreed with the report and provided several technical changes and clarifications. Among the large wastewater facilities GAO examined, the costs reported to prepare vulnerability assessments ranged from $1,000 to $175,000, while costs to prepare risk management plans ranged from less than $1,000 to over $31,000. Whether the documents were prepared in-house or contracted to third parties such as engineering firms was a factor in cost differences. Despite higher costs, some facilities preferred to use contractors due to their expertise and independence. According to one wastewater security official, these attributes can give contractor findings and recommendations greater credibility with utility governing boards that determine spending priorities. One facility that used a contractor to complete a vulnerability assessment in 2002 did so because, at the time, vulnerability assessment software and training were not widely available. Since that time, EPA has increased funding for the development and dissemination of risk assessment software and related training. Overall, cost estimates for vulnerability assessments and risk management plans did not relate to facility size, as measured by millions of gallons of wastewater treated per day. For the large wastewater facilities GAO examined, reports of actual and projected capital costs to convert from chlorine gas to alternative disinfection methods range from about $650,000 to just over $13 million. Most facilities converted, or planned to convert, to delivered sodium hypochlorite (essentially a concentrated form of household bleach shipped in bulk to the facility). Managers of these facilities told GAO they considered other options, but chose delivered sodium hypochlorite because its capital conversion costs were lower than those associated with other alternatives, such as generating sodium hypochlorite on-site or using ultraviolet light. Overall, the primary factors associated with facilities' conversion costs included the type of alternative disinfection method chosen and the size of the facility. Other cost factors facility managers cited included (1) whether existing buildings and related infrastructure could be used in the conversion, (2) labor and building supply costs, which varied considerably among locations, (3) the cost of sodium hypochlorite relative to chlorine gas, and (4) the extent to which training, labor, and regulatory compliance costs were reduced for utilities that no longer had to rely on chlorine gas.