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Sexual abuse can have negative consequences for children during the time of abuse as well as later in life, according to several recent research reviews. Initial effects reportedly have included fear, anxiety, depression, anger, aggression, and sexually inappropriate behavior in at least some portion of the victim population. Long-lasting consequences reportedly have included depression, self-destructive behavior, anxiety, feelings of isolation and stigma, poor self-esteem, difficulty in trusting others, a tendency toward revictimization, substance abuse, and sexual maladjustment. In addition, researchers have noted that there is widespread belief that there is a "cycle of sexual abuse," such that sexual victimization as a child may contribute to perpetration of sexual abuse as an adult. Such a pattern is consistent with social learning theories--which posit that children learn those behaviors that are modeled for them--and also with psychodynamic theories--which suggest that abusing others may help victimized individuals to overcome childhood trauma. Critics have argued that empirical support for the cycle of sexual abuse is weak, and that parents are unduly frightened into thinking that little can be done to mitigate the long-term effects of sexual abuse. There remain many unanswered questions about the risk posed by early sexual victimization, as well as about the conditions and experiences that might increase this risk (such as number of victimization experiences, age of the victim at the time of the abuse, and whether the abuse was perpetrated by a family member). There are also questions about factors that may prevent victimized children from becoming adult perpetrators (such as support from siblings and parents or positive relationships with other authority figures). Answers to such questions would be useful in developing both prevention strategies and therapeutic interventions. Studying the relationship between early sexual victimization and later perpetration of sexual abuse is methodologically difficult. If researchers take a retrospective approach, and ask adult sex offenders whether they experienced childhood sexual abuse, there are problems of selecting a representative sample of offenders, finding an appropriate comparison group of adults who have not committed sex offenses but are similar to the study group in other respects, minimizing errors that arise when recalling traumatic events from the distant past, and dealing with the possibility that offenders will purposely overreport childhood abuse to gain sympathy or underreport abuse to avoid imputations of guilt. A prospective approach--selecting a sample of children who have been sexually abused and following them into adulthood to see whether they become sexual abusers--overcomes some of the problems of the retrospective approach, but it is a costly and time-consuming solution. In addition, researchers choosing the prospective approach still face the challenge of disentangling the effects of sexual abuse from the effects of other possible problems and stress-related factors in the backgrounds of these children (e.g., poverty, unemployment, parental alcohol abuse, or other inadequate social and family functioning). This requires the selection of appropriate comparison groups of children who have not been sexually abused and children who have faced other forms of maltreatment, as well as the careful measurement of a variety of other explanatory factors. We collected, reviewed, and analyzed information from available published and unpublished research on the cycle of sexual abuse. Identifying the relevant literature involved a multistep process. Initially, we identified experts in the sex offense research field by contacting the Department of Justice's Office of Juvenile Justice and Delinquency Prevention and Office of Victim Assistance, the National Institute of Mental Health's Violence and Traumatic Stress Branch, the American Psychological Association, and academicians selected because of their expertise in the area. These contacts helped identify experts in the field, who in turn helped identify other experts. We also conducted computerized searches of several on-line databases, including ERIC (the Education Resources Information Center), NCJRS (the National Criminal Justice Reference Service), PsycINFO, Dissertation Abstracts, and the National Clearinghouse on Child Abuse. We identified 40 articles on the cycle of sexual abuse issued between 1965 and 1996. Four of these reviewed the literature in the area; of these, two were published in 1988, one was published in 1990, and one was published in 1991. Of the remaining articles, 23 presented findings from retrospective research studies, which began with a sample of known adult sex offenders of children and sought to determine (by asking the offenders) whether they were sexually abused during childhood. Another four presented findings from two prospective research studies, which began with samples of sexually victimized children and tracked them into adulthood to determine how many became sex offenders. Of the original 40 articles, we excluded 5 because they presented findings only, or primarily, on adolescent sex offenders against children, and an additional 4 because we were unable to obtain them. For the studies in our review, we recorded the quantitative results, summarized the methodologies used, and summarized the authors' conclusions about the cycle of sexual abuse. Each study was reviewed by two social scientists with specialized doctoral training in evaluation research methodology. Conclusions in this report are based on our assessment of the evidence presented in these studies. We sent the list of research articles to two experts, both of whom have done extensive research in the field, to confirm the comprehensiveness of our list of articles. In addition, as a final check, we conducted a second search of computerized on-line databases in March 1996 to ensure that no new research articles or reviews had been published since our original search in October 1995. We sent a draft copy of our report for comment to the two experts previously consulted, as well as to one additional expert, to ensure that we had presented the information about the research studies accurately.Their technical comments were incorporated where appropriate. We did not send a draft to any agency or organization because we did not obtain information from such organizations for use in this study. We did our work between October 1995 and August 1996 in accordance with generally accepted government auditing standards. There was no consensus among the studies we reviewed that being sexually abused as a child led directly to the victim's becoming an adult sexual abuser of children. However, some studies did conclude that it might increase the risk that victims would commit sexual abuse later. A majority of the retrospective studies noted that most sex offenders had not been sexually abused as children, and the two prospective studies showed that the majority of victims of sexual abuse during childhood did not become sex offenders as adults. The 4 review articles we obtained, which collectively covered roughly two-thirds of the 25 studies we reviewed, concluded that the evidence from these studies was insufficient to establish that being sexually abused as a child is either a necessary or a sufficient condition for the victim's becoming a sexual abuser as an adult. We reviewed 23 retrospective studies. Appendix I provides additional information on these studies. All but one of the retrospective studies focused on adult male sex offenders, and in most studies the offenders sampled were imprisoned or in some type of treatment program. However, these studies varied considerably in the types of child sexual abusers studied, whether control or comparison groups were used, and if so, the types of individuals in these groups. The retrospective studies also varied considerably in their findings and conclusions. The percent of adult sex offenders against children identified as being sexually abused as children themselves ranged from zero to 79 percent. This variation partially reflects differences across studies in how childhood sexual abuse was defined, as well as other differences in study methodology. This variation may also reflect the differences in the types of child sex offenders studied. For example, both Hanson and Slater (1988) and Garland and Dougher (1988) concluded from their reviews of retrospective studies that offenders who selected male children as victims were more likely to have been sexually abused themselves than were offenders against female children. A few of the studies found that sex offenders of children were more likely to have been sexually abused as children than were members of control groups composed of noninstitutionalized nonoffenders. However, many studies found that, when compared with other types of sex offenders (e.g., rapists or exhibitionists) and other types of nonsexual offenders (i.e., men incarcerated for nonsexual crimes), adult sex offenders of children were not necessarily more likely to have been sexually abused as children. According to several researchers, the relationship between childhood sexual victimization and adult perpetration of sexual offenses against children is complex and requires measurement and analysis of a host of factors. For example, it has been postulated that adult sexual offending is not simply a result of the experience of childhood sexual victimization, but also of other factors such as age at onset of the abuse, nature of the abuse, stability of the caregiver, and/or physical abuse. Studies that collect data on such additional factors may add to our understanding of what types of sexual abuse, perpetrated under what conditions against what types of child victims, are associated with what types of adult sexual offending against what types of victims under what types of conditions. However, while such retrospective studies can help explore factors possibly related to adult sexual offending, they cannot establish the importance of these factors in predicting adult sexual offending. The reason for this is discussed in the following section. The retrospective studies we reviewed had several shortcomings that precluded our drawing any firm conclusions about whether there is a cycle of sexual abuse. First, the studies focused on known sex offenders of children (i.e., offenders who have been detected, arrested, or convicted, or who had been referred or had presented themselves for treatment), and these offenders may not be typical or representative of all sex offenders against children. Second, self-reports of childhood sexual abuse obtained from known sex offenders are of questionable validity. Known offenders may be motivated to overreport histories of abuse to gain sympathy or to excuse their own offenses. Third, where comparison or control groups were used, attempts to match group members to sex offenders of children on factors possibly related to being sexually abused or abusive were typically limited; few of the studies attempted to control for such factors statistically. Finally, one of the major shortcomings of these retrospective studies is that they cannot reveal how likely it is that a person who has been sexually abused as a child will become a sexual abuser in adulthood. For example, even if 100 percent of sexual abusers of children were sexually abused as children, this would not necessarily mean that sexual abuse causes abused children to become abusers themselves. It may be that only a small percentage of sexually abused children become sex offenders against children. Determining how likely victims of childhood sexual abuse are to become adult sex offenders requires that a sample of sexually abused children be followed forward in time, rather than the histories of sex offenders be traced backward. Our review of the literature identified two research studies (described in four articles) that have used a prospective approach in examining the cycle of sexual abuse. One of these studies is part of a larger study of the cycle of violence. Widom is the primary researcher in the larger study, which is still ongoing. It involves a cohort of 908 substantiated cases of child abuse (physical and/or sexual) or neglect processed through the courts between 1967 and 1971. These abuse/neglect cases were restricted to children who were 11 years of age or younger at the time of the abuse or neglect incident. They included 153 sexually abused children, 160 physically abused children, and 697 neglected children. This prospective study also includes a control group of 667 individuals who had no record of abuse or neglect and who were either born in the same hospitals or attended the same elementary schools as the abused children. The control and study group members were matched on sex, age, race, and approximate family socioeconomic status. Local, state, and federal official arrest records containing information recorded up to June 1994 were used to determine how many of the study and control group members were arrested for sex offenses. Table 1 shows results pertaining to sex offenses from the most recent analyses based on this larger study. The study did not distinguish whether the sex offense was perpetrated against a child or an adult. Compared to the control group, a higher percentage of those who had been sexually abused, physically abused, or neglected as children were arrested as adults for any sex crime, for prostitution, and (among males) for rape or sodomy. To determine how different the study groups were from the control group, Widom statistically controlled for such differences between the groups as age, race, and sex; calculated odds ratios; and performed statistical tests. The results indicated that the differences between the sexually abused group and the control group in the odds of arrest for any sex crime or for rape or sodomy separately were not statistically significant. Sexually abused children were significantly more likely to have been arrested for prostitution, however. Twenty-three to 27 years later, sexually abused children were nearly four times more likely to have been arrested for prostitution. On the other hand, members of the childhood neglect study group were significantly more likely than members of the control group to have been arrested for any sex crime or for prostitution. Because it could allow researchers to discern the likelihood of victims becoming abusers, the prospective approach is methodologically superior to the retrospective approach. Widom's study, however, has several limitations. First, published work from the study has so far relied solely on official arrest data, which may fail to identify some offenders (those who avoid detection or arrest). Second, the study groups of victimized children were identified by using records of substantiated cases of abuse or neglect that were processed through the state courts. Such cases may represent only the most severe instances of abuse and may not be generalizable to all children who have been abused or neglected. Finally, the number of sexually abused males in the abused/neglected sample was small (a total of 24). Statistical comparisons based on small numbers of cases should be interpreted with caution, since small sample sizes may not yield reliable estimates. We located one other study that used a prospective design and followed sexually victimized children into early adulthood. This study sampled 147 boys under the age of 14 who were seen in the emergency room of an urban hospital because of sexual abuse between 1971 and 1975. The researchers also collected data on a comparison sample of boys of the same race and roughly the same age who were seen in the same emergency room at roughly the same time for reasons other than sexual abuse. In the period 1992 to 1994, official juvenile and adult arrest records for the entire victim and comparison sample were collected, and the researchers attempted to locate and interview as many of the men as possible. Fifty of the 147 boys in the victim sample, and 56 of the 147 boys in the comparison sample, were interviewed. They were asked to self-report instances of sex-offending, and were also asked a number of other questions about their family of origin, sexual history, history of sexual victimization, psychological functioning, drug and alcohol use, and criminal behavior. As shown in table 2, the study found little difference between the victim and comparison samples in the percentages that were arrested for, or that self-reported, sex offenses. According to the researchers, one explanation for this finding is that the victim and comparison samples are not as different as originally intended with respect to their having been victims of child sexual abuse. For instance, in the comparison group, 40 percent of the 56 men interviewed reported that they had themselves been sexually abused. Furthermore, 55 percent of the men in the victim sample did not recall, or at least did not report to interviewers, that they had been sexually abused. When the researchers reanalyzed the data and compared all victims (from both the victim sample and the comparison sample) with the remaining nonvictimized members of the comparison group, they did not find a significant difference between the two groups in the likelihood of becoming a sex offender. These findings must also be interpreted with caution, however, because no-difference findings are sometimes attributable to comparing small samples rather than to a real absence of difference between groups. The generalizability of these findings may be limited since the sample of sexually abused boys (and the matched comparison group) is neither a random sample nor a sample that is representative of the general population of children at risk of such abuse. Over 80 percent of the boys sampled were African-American, and a disproportionate number of the men who were interviewed were from poor families and had criminal records. About one-third of the interviewed men who were sexually abused as boys, and about one-fifth of all of the men interviewed, were incarcerated at the time of interview. The Williams et al. study is instructive in that it points to a number of difficulties involved in conducting prospective studies of the relationship between childhood victimization and adult offending. These difficulties include (1) the need to determine whether members of comparison groups were victims of sexual abuse, and (2) the need to employ more than a single outcome measure of offending. Of 15 men who self-reported any sex offense, only 5 had an arrest record for a sex offense; and of 14 men who had been arrested for a sex offense, only 5 self-reported a sex-offending behavior. A number of studies have been done on the cycle of sexual abuse, many of which were reviewed in this report. Most of the studies were retrospective in design; that is, they began with a sample of known sex offenders of children and sought to determine whether they were sexually abused during childhood. The chief limitation of the retrospective studies is that studying a known group of sexual offenders cannot provide any direct information about the extent to which children who are sexually abused become sexual offender as adults. The two studies we reviewed that were prospective in design attempted to overcome this limitation by identifying samples of sexually victimized children and tracking them into adulthood to determine how many became sex offenders. These studies also had limitations, which made it difficult to reach any definitive conclusions about the cycle of sexual abuse. However, in spite of their limitations, overall, the retrospective studies, prospective studies, and research reviews did indicate that the experience of childhood sexual victimization is quite likely neither a necessary nor a sufficient cause of adult sexual offending. Further research would be necessary to determine what kinds of experiences magnify the likelihood that sexually victimized children will become adult sexual offenders against children and, alternatively, what kinds of experiences help prevent victimized children from becoming adult sexual offenders against children. We are sending copies of this report to the Ranking Minority Member of the House Subcommittee on Crime and the Chairman and Ranking Minority Member of the Senate Committee on the Judiciary. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix II. Please call me at (202) 512-8777 if you have any questions about this report.

Pursuant to a congressional request, GAO reviewed research studies regarding the cycle of sexual abuse, focusing on the likelihood that individuals who are victims of sexual abuse as children will become sexual abusers of children in adulthood. GAO found that: (1) there was no consensus among the 23 retrospective and 2 prospective studies reviewed that childhood sexual abuse led directly to the victim becoming an adult sexual abuser; (2) the retrospective studies, which sought to determine whether a sample of known sex offenders had been sexually abused as children, differed considerably in the types of offenders studied, use of control or comparison groups, and definition and reporting of childhood sexual abuse; (3) although some of the retrospective studies concluded that childhood sexual abuse may increase the risk that victims will commit sexual abuse later, most of the studies noted that the majority of sex offenders had not been sexually abused as children; (4) the prospective studies, which tracked sexually abused children into adulthood to determine how many became sex offenders, studied sample populations that may not be representative of the entire population of childhood sexual abuse victims; and (5) the prospective studies found that victims of childhood sexual abuse were not more likely than nonvictims to be arrested for sex offenses.

I-NET, Inc. is a high technology corporation that provides federal agencies with computer systems and support services. For fiscal year 1992, it was the third largest recipient of 8(a) contract awards, which totaled over $65 million. During its nearly 10-year (Sept. 20, 1984, to June 16, 1994) program participation, I-NET obtained 145 8(a) contracts totaling at least $508 million. At least 126 of the 145 contracts were awarded noncompetitively. TAMSCO is a high technology corporation that provides computer systems and support services to federal agencies and large Department of Defense contractors. For fiscal year 1992, it was the ninth largest recipient of 8(a) contract awards, totaling over $30 million. During its program participation from May 14, 1984, until September 18, 1993, TAMSCO obtained 108 8(a) contracts totaling at least $356 million. At least 82 of the 108 contracts were awarded noncompetitively. In March and April 1995, as a part of our continuing work on the 8(a) program, we testified that the program has continued to experience problems in achieving its objectives. As the value and number of 8(a) contracts continue to grow, the distribution of those contracts remains concentrated among a very small percentage of participating 8(a) firms, while a large percentage get no awards at all. This is a long-standing problem. For example, in fiscal year 1990, 50 firms representing fewer than 2 percent of all program participants obtained about 40 percent, or $1.5 billion, of the total $4 billion awarded. Of additional concern is that, of the approximately 8,300 8(a) contracts awarded in fiscal 1990 and 1991 combined, 67 contracts were awarded competitively. In fiscal year 1994, the top 50 firms represented 1 percent of the program participants and obtained 25 percent, or $1.1 billion, of the $4.37 billion awarded, while 56 percent of the firms got no awards. In fiscal year 1994, $383 million in contracts were awarded competitively. The eligibility and participation files for the top 25 8(a) contract award recipients for fiscal year 1992, from which we selected I-NET and TAMSCO, showed that approximately $816 million, or about 22 percent of the total 8(a) contract dollars awarded that year, went to the top 25 firms. These firms had obtained, as of May 1995, a total of $4.9 billion in 8(a) contracts. Of these firms, three were Black-owned; eight were Hispanic-owned; six were Asian-owned; and five were Native American-owned. SBA had initially recommended that 15 of these 25 firms not be accepted into the program because the applicants did not meet eligibility standards for one or more of the following reasons: The ownership or control of the firms resided in individuals other than those who were applying (8 firms). The owners were not economically disadvantaged (2 firms). The firm was acting as a broker/dealer in violation of the Walsh-Healy Act (1 firm). The firms lacked the financial capability to perform on the contracts they wished to bid on (5 firms). SBA could not provide adequate contract support for the firms to succeed (3 firms). These recommendations were overruled, in some cases by high-level SBA officials, despite the fact that some of the firms had not been recommended for acceptance up to three times previously for the same reasons. As of May 1995, 18 of these 25 firms had exited from the program; yet at least 17 are still performing on contracts awarded while they were in the program. According to SBA, the total dollar value of contracts awarded to the firms initially not recommended for participation in the program is at least $2.9 billion. An SBA Office of Inspector General (OIG) audit report (Sept. 1994) also questioned the continued eligibility of large 8(a) firms in the program and identified some of the same causes. In its report, it cited findings wherein individuals in the program had overcome their economic disadvantage but remained in the program by understating their net worth; SBA officials had miscalculated the net worth; high personal income was also not considered in the evaluation of net worth; and individuals remained in the program because either the firm's equity, the owner's personal residence, and/or the spouse's net worth were not considered factors in determining the owners' net worth. Consequently, individuals could remove equity from the firms and use it to purchase expensive personal residences exempt from net worth evaluations. According to SBA 8(a) regulations, negative control is the lack of power by a program participant to control a firm's operations. For the 8(a) program, SBA regulations state that a program applicant must unconditionally own at least 51 percent of the firm and control its operations. Control is further defined as a condition that would not allow a noneligible person to benefit from the program or subjugate the control of the firm's operations. SBA had concerns about negative control issues at both I-NET and TAMSCO, but it ultimately admitted both firms to the 8(a) program. SBA officials recommended denying I-NET acceptance into the program in four separate instances, but other SBA officials overruled these recommendations. SBA officials had determined that I-NET's owner and president, Mrs. Kavelle Bajaj, lacked the technical and managerial experience to run a high technology computer firm. They also determined that, rather than Mrs. Bajaj, Mr. Bajaj, a recognized expert in the field, would actually control and run the firm's operations. A former I-NET Vice President for Marketing and Operations told us that Mrs. Bajaj lacked the technical and managerial skills needed to run a computer company and that he was hired by Mr. Bajaj in January 1985 to help start and run the firm and to "teach" Mrs. Bajaj how to run a business. For this, Mrs. Bajaj gave the former vice president 24.5 percent of the company. Shortly after leaving the company in 1988, this individual was replaced by Mr. Bajaj, who was appointed Executive Vice President. Mr. Bajaj formally became I-NET's president after I-NET exited from the 8(a) program in 1994. On the resume he submitted to SBA-OIG during its 1992 audit, Mr. Bajaj stated that he was "responsible for day-to-day operations" of I-NET. Mrs. Bajaj was adamant with us that she unconditionally owned and controlled the firm. However, Mrs. Bajaj provided no explanation when we asked her how she maintained control over I-NET while, at the same time, her husband represented that he had the day-to-day responsibilities for I-NET operations. Further, a senior SBA official told us that the memorandum prepared by an SBA regional staff member recommending acceptance into the program used "circular reasoning" in overruling the District Office's objections to this firm. Other SBA officials who relied on the first official's analysis agreed that it was "double talk" that inadequately addressed the reason to overrule the recommended refusal. One stated that I-NET's admission to the 8(a) program was "questionable." Nevertheless, these officials stood by their decision to recommend accepting I-NET. From the outset, SBA questioned the control that TAMSCO's nondisadvantaged (Caucasian) owner exercised over the disadvantaged (Hispanic) owner due to the structure of the board of directors, the owners' prior relationship, and their compensation. However, SBA allowed TAMSCO to participate fully in the 8(a) program. SBA identified the ownership and negative control issue at TAMSCO during the application process and twice recommended that the firm's application be denied. SBA determined that the firm was owned by two persons, with the Hispanic owner having 51 percent and the Caucasian owner, 49 percent. SBA compared their resumes and other documentation in the 8(a) application and found that the Caucasian owner had previously held supervisory positions over the Hispanic owner and that the two-man board of directors, on which both served, allowed the Caucasian owner to have negative control over the Hispanic owner. SBA officials concluded that the firm should be rejected because the Caucasian owner would improperly benefit from the program. We also found that the personal financial statements and other documentation showed that the Caucasian owner had a higher salary than the Hispanic owner and that the firm was located at the Caucasian owner's residence. A former official of the firm told us that the two owners were "co-dependent" and functioned as equals. TAMSCO's president (the Hispanic owner) told us that (1) despite his previous relationship with the Caucasian owner, ownership was structured so that TAMSCO would be eligible for Small and Disadvantaged Business contracts and (2) it was agreed that he would maintain total control over the firm's operations. The SBA official who overturned the two recommendations for denial had no answers or explanations as to why he had accepted TAMSCO into the 8(a) program over the prior objections of SBA officials concerning negative control. He also denied meeting or discussing the matter with TAMSCO's owners. However, the TAMSCO owners told us that they had had substantive discussions and meetings with him on the issue of negative control. I-NET provided false and misleading information to SBA regarding its equity ownership in the firm, the owner's educational credentials, and the owner's citizenship status. Despite these misrepresentations, SBA did not terminate I-NET from the program or suspend its contracts. I-NET submitted false statements to SBA about its equity ownership. Documents, interviews, and a federal court case revealed that I-NET had entered into partnership agreements with two individuals in January 1985 for a total of 49-percent ownership interest (each with a 24.5-percent share) without disclosing these transactions to SBA, as required by SBA regulations. One of the 24.5-percent equity owners also owned another computer services company. At the time, SBA regulations prohibited a business concern in a related field from owning any equity in an 8(a) firm. Although I-NET repurchased this ownership interest within a year of its issuance, Mrs. Bajaj never informed SBA about this transaction. Mrs. Bajaj submitted a false statement about I-NET's ownership status to SBA in January 1986, when I-NET notified SBA that 49 percent of the company's stock was unissued. However, 24.5 percent was still outstanding with the one remaining partner. Believing that SBA would approve only a 15-percent transfer of ownership, Mrs. Bajaj attempted to reduce the remaining partner's interest to 15 percent and privately negotiate away the remaining difference. In 1988, Mrs. Bajaj submitted a second document to SBA, stating that 49 percent of the stock was "unissued," despite the outstanding 24.5-percent equity ownership by the remaining partner. She told us that she considered the stock unissued until a dispute with this partner over his ownership was resolved. In August 1994, 2 weeks after agreeing to withdraw from the program, I-NET notified SBA that it intended to sell 20 to 25 percent of the firm's stock through a private placement offered through a large investment company. When SBA officials learned of the impending sale, SBA attorneys recommended against approving it because its terms would have relinquished control of the firm to the outside private investors. The terms of the transactions, according to the SBA attorneys who reviewed the documents, enabled the investors to have negative control over the firm's operations. SBA has not issued a decision, but I-NET completed the sale without a waiver from SBA, thus potentially jeopardizing its current 8(a) program contracts. The SBA Associate Administrator for Minority and Enterprise Development told us that the matter was being handled immediately; but, as of August 14, 1995, no final decision had been rendered. Mrs. Bajaj provided false information about her educational credentials, which SBA relied upon, in part, for admittance to the 8(a) program. She certified on the resume accompanying her 8(a) application to SBA in January 1983 that she had obtained an AA degree in Computer Science and Technology from Montgomery College in Rockville, Maryland. Transcripts from Montgomery College show that she never earned the stated degree. SBA denied I-NET's application for the 8(a) program in October 1983 because of lack of technical and managerial experience. Mrs. Bajaj again submitted a resume with the same false information in a reconsideration appeal application later that month. According to a former I-NET senior executive, Mrs. Bajaj attached a resume that contained the same false information to contract proposals submitted to agencies. In 1992, when the SBA-OIG audited I-NET, I-NET provided the OIG another resume claiming she held the same nonexistent AA degree. Mrs. Bajaj admitted to us not having the degree and stated that she "naively" thought that the credits she had earned to obtain her Bachelor of Science degree in Home Economics from the University of Delhi, India, counted toward an AA degree in computer science and technology. SBA documents show that SBA relied in part on Mrs. Bajaj's false information about the AA degree at the time when it was certifying I-NET for program participation. In an October 1993 document, the SBA Regional Counsel stated that the "original recommendation for I-NET's approval was based, at least in part, on false information submitted by the applicant regarding Mrs. Bajaj's degree." Although SBA officials acknowledged this fact in October 1993, I-NET remained in the program for another 9 months and obtained additional contract awards totaling at least $13.5 million. When asked about this document, the Regional Counsel stated that the falsification was not itself sufficient to terminate the firm, despite SBA regulations that providing false information to SBA is grounds for termination from the program. Mrs. Bajaj also misrepresented her citizenship on her first application on January 11, 1983. She said that she was a U.S. citizen, but she did not obtain her citizenship until May 13, 1983. (U.S. citizenship is a requirement for acceptance into the 8(a) program.) She told us that she thought she would be a citizen by the time the application was processed. She also said that although SBA had told her that she need not be a citizen at the time of application, she was concerned that her pending citizenship status would have held up her 8(a) application. I-NET was accepted into the program on September 20, 1984. SBA did not recognize that I-NET had provided misleading financial statements concerning its total revenues. Furthermore, I-NET misstated its financial condition as being at risk in efforts to continue 8(a) program contracts. I-NET submitted financial statements to SBA that misrepresented its size by excluding certain revenues from the total sales, which allowed it to meet size standards for contracts in 1991 and 1992. I-NET explained the exclusion of this revenue in footnotes to its audited 1988 through 1990 financial statements, claiming that it was entitled to exclude these revenues because I-NET had earned no income on the revenues. SBA did not recognize or react to the information in the 1988 through 1990 financial statement footnotes until 1992. These exclusions permitted I-NET to obtain at least 11 contracts for which it was not eligible. However, I-NET included these revenues in its yearly total sales figures in submissions to an outside investment firm when it was seeking private outside investment. Our review of I-NET's 1989 and 1990 corporate tax returns, submitted to SBA, shows that I-NET's gross receipts as reported to the Internal Revenue Service were also substantially greater than those reported to SBA. In 1992, SBA found that the excluded revenue should have been counted for 8(a) size purposes. Therefore, in early 1993, SBA considered terminating certain contracts on the grounds that I-NET was not eligible because it had exceeded its size standards. In response, I-NET submitted an Impact Analysis Statement to SBA in April 1993. The statement said, in part, ". . . (t)he banking industry continues to label I-NET and Kavelle in a negative way . . . and maintaining adequate capital and credit are a constant challenge which leaves the company at risk." However, in reviewing the matter and determining if I-NET met early graduation criteria, SBA found that I-NET had a $25-million line of credit with its bank, had obtained loans and financings exceeding $2 million, and had sales approaching $100 million per year. Based on its review, SBA did not find that I-NET was at risk. When asked about this apparent contradiction, Mrs. Bajaj told us that it was her view that $25 million was not sufficient credit. During this same time period, however, I-NET did not portray itself as a company at risk when it sought outside investors. A written private placement memorandum about I-NET states that as of June 1993, I-NET had a backlog of over $580 million in contracts and projected revenues through 1997 of about $1.3 billion. Subsequent to our interview of Mrs. Bajaj, I-NET provided us a written response to the risk issue. It stated that, at the time the memorandum was written, I-NET ". . . had severe cash flow problems and was having difficulty securing credit." Furthermore, in December 1993, SBA determined that I-NET again had claimed erroneously that it lacked access to credit when it was appealing SBA's October 1993 proposed early graduation action. In its review, SBA also determined that I-NET appeared to be misleading SBA by using inappropriate time periods to calculate earnings. Although SBA officials responsible for monitoring I-NET's progress had become aware that I-NET had grown too large for continued program participation, SBA allowed the company to remain enrolled for almost 2 additional years. During this time, I-NET continued to obtain large contract awards. In fact, 6 days prior to I-NET's initially being recommended for early graduation in September 1992, it was awarded a $134-million contract. The SBA official who approved the contract award was also responsible for initially recommending I-NET's early graduation. When we interviewed him, he explained that, under SBA regulations, until a firm is officially out of the program, it can still obtain contract awards for which it is eligible. Although he wanted I-NET out of the program, he felt he could not deny contract awards until I-NET had either graduated or been terminated. However, SBA regulations and a 1982 federal court decision, in conjunction with a Comptroller General decision on the same issue, concluded differently. Both the court and the Comptroller General determined that an 8(a) firm that has exceeded size limitations must have its 8(a) contracts suspended. The regulations also state that contracts can be suspended pending a termination action by SBA. When asked about this contradiction, responsible SBA officials responded by stating that SBA lacked the proof required to terminate I-NET, despite regulations regarding actionable offenses for termination, which include providing false information to SBA--something that SBA concedes occurred. In January 1993, the SBA-OIG provided a draft audit report to the SBA office responsible for I-NET, recommending that no further contracts be awarded to I-NET because it had exceeded its size standards and had provided incorrect information to SBA for its annual size-standard determinations. However, until I-NET left the program in June 1994, SBA awarded I-NET additional contracts totaling at least $62 million. In 1993, the U.S. Coast Guard directed a noncompetitive IDIQ contract with a maximum value of $14 million to TAMSCO. During the preaward phase of the contract, Coast Guard contracting officials, who told us that it was always their intention to award the contract to TAMSCO, met with TAMSCO representatives and discussed the contract, competition thresholds, and Standard Industrial Classification (SIC) codes. The Coast Guard changed the original SIC code so that TAMSCO would be eligible for the award; used the IDIQ contracting option; and lowered the labor hours to avoid competition. Further, one Coast Guard official's notes referred to this IDIQ contract to TAMSCO as a "graduation present" from the 8(a) program. Coast Guard officials changed the SIC code assignment and minimum contract value. Following these changes, TAMSCO was awarded a large noncompetitive IDIQ contract 1 day before its term was to expire in the 8(a) program in September 1993. Had the Coast Guard contracting officer's originally assigned SIC code been used, TAMSCO would not have been eligible for the contract because the company had exceeded the size standard for the originally assigned SIC code. Based on notes that the Contracting Officer's Technical Representative (COTR) wrote during meetings between Coast Guard officials and TAMSCO, it appears that the Coast Guard officials and TAMSCO had concerns about the competition thresholds. In essence, we believe that they wished to avoid the $3-million threshold required for competitive 8(a) service contracts. The Coast Guard lowered the labor hours, thus being able to award an IDIQ noncompetitive contract. Our analysis of labor costs determined that Coast Guard officials lowered the total number of labor hours in the contract by 46 percent from what was specified in the contract solicitation. Thus, the minimum contract value dropped below the $3-million competition threshold, from $4.6 million to $2.1 million. We interviewed a Coast Guard officer involved in the contract award who also developed the original minimum contract value. When we asked him about a Coast Guard finding that if fully loaded labor rates had been used in the contract, the minimum value of the contract would have exceeded competitive thresholds, he had no answer. However, he stated that the Coast Guard officials had done everything possible to get TAMSCO the contract, including changing the SIC codes and using the IDIQ contracting option. The COTR also told us that the SIC code was intentionally changed to meet TAMSCO's eligibility and that the Coast Guard viewed competition of contract awards as a hindrance to furthering the mission. A draft of an internal Coast Guard memorandum, written to justify the contract award to TAMSCO, sheds light on Coast Guard attitudes about the use of competition and 8(a) sole source contracts. The COTR sent the memorandum--in electronic mail (e-mail) format--to another Coast Guard official for comment. The commenting Coast Guard official responded to the COTR's memorandum--also by e-mail--by interspersing his remarks in all capital letters. (See fig. 1.) According to two former TAMSCO officials involved in the award, the COTR had provided them with a later draft of the internal memorandum to review before he submitted it to higher-level Coast Guard officials. One of the TAMSCO officials told us that providing TAMSCO the memorandum to review was inappropriate; the other felt uncomfortable with receiving the document because the Coast Guard was always careful not to release internal documents. According to these two former TAMSCO officials and TAMSCO's president, while they did not think it improper for TAMSCO to provide information on the 8(a) program and other contracting procedures to the Coast Guard, they agreed that the Coast Guard should have been using its own contracting officials to obtain the information. Notes that the COTR took during Coast Guard/TAMSCO discussions also referred to suggestions that the contract be awarded to TAMSCO as a "graduation present" before the end of TAMSCO's 8(a) program participation. For example, one note stated, in part, "IDIQ: Grad Pt. -eligible until grad from program Sept 18, '93." In other words, TAMSCO could get a sole source IDIQ contract as a graduation present until its graduation date of September 18, 1993. (See fig. 2.) In addition to the Coast Guard contract, TAMSCO obtained at least 22 other 8(a) awards within 2 weeks of its "graduation" from the program totaling at least $63 million. Thirteen of the awards were IDIQ contracts from a number of government agencies, including the Coast Guard award. We began our investigation by reviewing the application, eligibility, and participation files for the top 25 8(a) contract award recipients for fiscal year 1992, as compiled in our 1993 report. These records were located in 10 SBA District Offices nationwide. The files for two firms were unavailable for review. A third file did not contain eligibility documents. We looked for indicators of potential regulatory violations and criminal misconduct. We initially selected four of the firms for further investigation. However, the records we compiled for one firm were destroyed in the Oklahoma City bombing tragedy on April 19, 1995, and our investigation of another firm was not complete at the time of this publication. We then narrowed our investigation to two firms--I-NET, Inc. of Bethesda, Maryland, and Technical and Management Services Corporation (TAMSCO) of Calverton, Maryland. We interviewed officials and reviewed documents from the SBA, Office of Inspector General; various SBA district and regional offices; SBA's Central Office; U.S. Department of Transportation, Office of Inspector General; U.S. Coast Guard; Resolution Trust Corporation, Office of Inspector General; Defense Contract Audit Agency; Department of Justice; and the Federal Bureau of Investigation. We also interviewed current and former employees of the firms, subcontractors, representatives of financial institutions, and others. As requested, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to the Administrator of SBA and to others upon request. If you have any questions concerning this report, please call me at (202) 512-6722 or Robert H. Hast, Assistant Director for Investigations, New York Regional Office, at (212) 264-0982. Major contributors to this report are listed in appendix III. Section 8(a) of the Small Business Act, as amended, established the Minority Small Business and Capital Ownership Development Program, or 8(a) program, to promote the development of small businesses owned by socially and economically disadvantaged individuals so that they could develop into viable competitors in the commercial marketplace. To be eligible for the program, a small business must be 51 percent unconditionally owned and controlled by one or more socially and economically disadvantaged individuals. The company must also meet the small business size standards established by SBA for the firm's industry as defined in the classification categories prescribed by the Standard Industrial Classification (SIC) Manual. SBA approves applicable SIC codes for participating firms. Participating 8(a) firms may have one or more SICs assigned to them by SBA. To be considered a small business and remain eligible for the program, participating firms must not have outgrown all their SBA-approved SIC codes. Size standards for each SIC code are generally defined by the firm's number of employees or its average annual gross sales. Under the program, SBA acts as a prime contractor, entering into contracts with other federal agencies and then subcontracting work to firms in the 8(a) program. Firms in the program are also eligible for financial, technical, and management assistance from SBA to aid their development. Participating firms can stay in the program for up to 9 years. The Small Business Act, as amended, and federal regulations define "socially disadvantaged" as those persons who have been subjected to racial, ethnic, or cultural bias because of their identities as members of groups, without regard to their individual qualities. Certain racial and ethnic groups such as Black Americans, Hispanic Americans, Subcontinental Asian Americans, and Native Americans are presumed to be socially disadvantaged. However, individuals in groups not cited in the act, who can demonstrate that they are socially disadvantaged, may also be eligible. SBA regulations define "economically disadvantaged" as socially disadvantaged individuals who are unable to compete in the free enterprise system because their opportunities to obtain credit and capital have been more limited than those of others in similar businesses. Further, program applicants must demonstrate a personal net worth that does not exceed certain limits so as to meet and maintain the criteria for an economic disadvantage. Each 8(a) firm under SBA's regulations is subject to a program term of 9 years. However, SBA may also, under its regulations, "graduate" an 8(a) firm prior to the expiration of its 9-year program term if that 8(a) firm substantially achieves the target objectives and goals set forth in its business plan. To date, according to SBA, no 8(a) firm has graduated. Colsa Inc. Barry L. Shillito, Senior Attorney Leslie Krasner, Attorney Adviser 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. 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Pursuant to a congressional request, GAO reviewed the Small Business Administration's (SBA) 8(a) program, focusing on whether: (1) ineligible 8(a) firms have received contracts through their improper participation in the program; (2) 8(a) firms have misrepresented themselves to enter and stay in the program; (3) firms exceeding the size standard have inappropriately received 8(a) awards; (4) SBA has allowed ineligible firms to remain in the program after they exceeded the size limitations; and (5) federal contracting authorities have improperly used indefinite delivery, indefinite quantity (IDIQ) contracts to avoid competition. GAO found that: (1) the two firms studied were initially recommended for nonacceptance into the 8(a) program because of eligibility questions about who actually controlled the firms; (2) SBA justification for accepting the firms was questionable, since the questions about the firms' ownership were never fully answered; (3) one firm's owner misrepresented her personal qualifications, her equity in the firm, and ownership changes, but SBA took no action when it found out about the misrepresentations; (4) the firm received millions of dollars worth of 8(a) contracts after it had grown too large to participate in the program; (5) although the firm hid its size by excluding items from its financial statements, understating its total revenue, and representing itself as a company at financial risk, it had considerable access to credit; (6) SBA allowed the firm to remain in the program and receive new 8(a) contracts even after it had determined that the firm had grown too large for continued program participation; (7) the Coast Guard awarded a sole-source IDIQ contract to the second firm by changing the contract's classification code to one for which the firm was eligible and altering the contract's original minimum value below the minimum threshold for mandatory 8(a) competitive procurements; and (8) the Coast Guard believed that competitive 8(a) procurements hindered its mission and viewed the contract as a graduation present to the firm.

First authorized in 1971, the program currently known as HCOP was last reauthorized in 1998. The Secretary of Health and Human Services is authorized to make HCOP grants "for the purpose of assisting individuals from disadvantaged backgrounds . . . to undertake education to enter a health profession." A wide range of entities are eligible to receive HCOP grants, including, for example, schools of medicine, dentistry, and pharmacy; schools with graduate programs in behavioral and mental health; programs to train physician assistants; and other public or private nonprofit health or educational entities. HCOP grant funds may be used for a variety of activities, such as recruiting individuals from disadvantaged backgrounds interested in health careers; facilitating their entry into health professions schools; providing counseling, mentoring, and other support activities designed to assist them to complete this education; providing information on financial aid; and providing experience in primary health care settings. The 1998 reauthorization of HCOP emphasized the importance of outreach activities by adding a funding preference for HCOP applications for projects that "involve a comprehensive approach by several public or private nonprofit health or educational entities to establish, enhance and expand educational programs that will result in the development of a competitive applicant pool of individuals from disadvantaged backgrounds who desire to pursue health professions careers." Applications qualifying for this funding preference have an advantage because they must be considered for funding ahead of applications that do not. Projects supported by HCOP grants focus on individuals from disadvantaged backgrounds, and Congress has recognized that such individuals may be members of minority groups. The Public Health Service Act directs the Secretary of Health and Human Services "to the extent practicable, ensure that services and activities are adequately allocated among the various racial and ethnic populations who are from disadvantaged backgrounds." Section 739 of the Public Health Service Act does not specify any particular populations or methods that HRSA must use to ensure this allocation, leaving these decisions to the agency's discretion. According to HRSA officials, in the 1990s, the agency allocated additional points to the scores of applications from historically black colleges and universities, Hispanic-serving institutions, and tribal colleges and universities to improve their chances of receiving an HCOP grant. HRSA reported that for 1997 this practice resulted in its awarding eight more HCOP grants to historically black colleges and universities than it had awarded for the previous year. For fiscal years 2002 through 2005, HRSA followed a standard process to award HCOP grant funds, distributing the program's available funds on a noncompetitive basis to continue funding existing grant projects, then awarding the remaining funds on a competitive basis. For competitive HCOP grants, HRSA published criteria and relied on the assessment of independent reviewers. Grants were awarded in accordance with the applications' rank order as determined by the independent reviewers. The amount of HCOP funds HRSA distributed each year on a noncompetitive basis to continue funding existing grant projects determined the amount that remained available for competitive grants and, consequently, the number of competitive grants HRSA awarded. For fiscal years 2002 through 2005, the amounts HRSA made available for HCOP grants from its annual appropriations remained relatively stable, with an average of about $34 million a year over the 4 fiscal years. Before making competitive awards, HRSA distributed funds each year on a noncompetitive basis to support existing HCOP grant projects in their second or subsequent years. These noncompetitive continuation awards were subject to HRSA officials' approval after the agency reviewed each grantee's annual progress report. Once the noncompetitive continuation awards were made, HRSA awarded the remaining HCOP funds on a competitive basis, including new grants to entities that did not have an HCOP grant for a particular project and competitive continuation grants to entities that applied for continued funding after the end of their authorized HCOP grant period. As shown in figure 1, the amounts distributed on a noncompetitive basis to continue funding existing grant projects varied, from a low of $18 million for fiscal year 2005 to a high of $30 million for fiscal year 2003, and the remaining funds awarded as competitive grants ranged from a low of $4 million for fiscal year 2003 to a high of $15 million for fiscal year 2005. For each of fiscal years 2002 through 2005, HRSA published a notification of upcoming grant opportunities, including those for HCOP grants. This notification provided an overview of the HCOP program, including the entities eligible to receive HCOP grants and a description of the funding preference for projects with a comprehensive approach. For detailed review criteria, the annual notification referred prospective HCOP applicants to the HCOP program guidance available on request or, for fiscal year 2005, through HRSA's Web site. The review criteria HRSA published in its HCOP program guidance addressed different aspects of a successful HCOP project. Each criterion carried a specified number of potential points, for a maximum total score of 100. For some criteria, the point values differed according to whether the application was for a new grant or a competitive continuation grant. This difference reflected the fact that applications for competitive continuation grants were required to include a summary of the grantee's management of its previous HCOP grant project and of progress toward meeting its objectives. For all applications for competitive grants--both new and competitive continuations--HRSA assigned the greatest number of potential points to the criterion that addressed plans to implement the HCOP activities authorized in the Public Health Service Act. Table 1 summarizes the criteria used by reviewers to assess HCOP applications for fiscal year 2005. The HCOP program guidance also included information on how to apply for, and receive, the funding preference for projects involving a comprehensive approach. To receive the funding preference, applicants were required to meet all four of the following statutory requirements: Demonstrate a commitment to a comprehensive approach through formal signed agreements that specify common objectives and establish partnerships with institutions of higher education, school districts, and other community-based entities. Enter into formal signed agreements reflecting the coordination of educational activities and support services and the consolidation of resources within a specific area. Design activities that establish a competitive health professions applicant pool of individuals from disadvantaged backgrounds by focusing on both academic and social preparation for health careers. Describe educational activities that focus on developing a culturally competent health care workforce to serve needy populations in the geographic area. HRSA's HCOP program guidance for fiscal years 2002 through 2005 specified that, to receive the funding preference, copies of formal agreements between applicants and community-based partners must be included with the application. For fiscal years 2002 through 2005, HRSA's standard process for awarding competitive HCOP grants relied on independent reviewers to assess applications against the agency's published review criteria. HRSA officials generally limited their own review of applications for competitive HCOP grants to screening for applicant eligibility and compliance with technical requirements such as format and length. After determining which applications met basic eligibility requirements, HRSA officials forwarded all eligible HCOP applications to the agency's Division of Independent Review to arrange for assessment and scoring. To assess HCOP applications, the division selected reviewers with health- related educational, counseling, academic, or project management experience who were not employed by HRSA and who were free from conflicts of interest, including employment or consulting arrangements with any entity that was applying for an HCOP grant for that fiscal year. The division sent each reviewer about eight applications to read in advance, then convened multiple panels in which reviewers met to discuss the merits of those applications. The reviewers were instructed to apply the published HCOP review criteria and reach consensus within each panel on their funding recommendations. The reviewers did not recommend for approval those applications they determined were not responsive to the review criteria. For each application recommended for approval, the reviewers assigned a score and determined whether the application qualified for the funding preference. The reviewers also had the opportunity to comment on applications' proposed budgets and to recommend adjustments for reasonableness. After the independent reviewers completed their assessments, HRSA officials used a statistical method to standardize the results from all HCOP review panels for a given year into a single ranked list, placing all applications receiving the funding preference ahead as a group, from highest to lowest score, followed by applications without the funding preference, from highest to lowest score. HRSA officials used this rank- order list as their basis for recommending which applications should receive grants for a given fiscal year and the amount of each award. The HRSA officials' recommendations were included in memorandums to the HRSA Administrator, who made the final award decisions for fiscal years 2002 through 2005. Figure 2 provides an overview of the process for awarding competitive HCOP grants. When awarding HCOP grants, HRSA had the discretion to consider additional factors, such as geographic diversity, targeted health professions, and the allocation of HCOP-funded services and activities among minority populations who are disadvantaged. According to a HRSA official responsible for administering the HCOP program, the agency could have used this discretion to depart from the rank-order list resulting from the independent review process but did not do so for fiscal years 2002 through 2005. This official said that 80 percent of HCOP program participants in fiscal year 2004 came from disadvantaged minority groups, regardless of the entity that received the HCOP grants, and that HRSA had concluded that no divergence from the rank-order list was required since the allocation of HCOP-funded activities among minority populations was consistent with the Public Health Service Act. For fiscal year 2004, however, HRSA reduced all competitive HCOP grant budgets by 10 percent--an action that enabled the agency to fund five additional grants, including three at historically black colleges and universities that would not otherwise have been funded. For fiscal years 2002 through 2005, HRSA reviewed a total of 439 applications for competitive HCOP grants and awarded 99 HCOP grants. The number of competitive HCOP grants awarded depended on the availability of funds each year, and HRSA was unable to fund many high- scoring applications that received the funding preference. Over the 4 fiscal years, minority-serving institutions submitted 25 percent of the applications for competitive HCOP grants and received 30 percent of the awards. Both the number of applications and the number of competitive grants awarded varied from year to year (see table 2). Overall, for fiscal years 2002 through 2005, applications for new HCOP grants outnumbered applications for competitive continuations by nearly three to one, but applications for new grants received about the same number of awards as applications for competitive continuation grants. The number of competitive grants awarded in a given year depended more on the availability of funds for competitive HCOP grants than on the applications' scores. Each year, the score of the lowest-scoring application receiving a grant differed little from the score of the next application on the list, which did not receive a grant. While all applications that received grants for fiscal years 2002 through 2005 qualified for the funding preference for comprehensive projects, the preference did not guarantee that an application would be funded. In some years, applications that received the funding preference and scored in the 80s (out of 100 possible points) were not funded. As shown in figure 3, the majority of applications that were approved for funding by the independent reviewers received the funding preference, but not all were funded. For fiscal years 2002 through 2005, minority-serving institutions submitted a total of 25 percent of all applications for competitive HCOP grants and received about 30 percent of awards. Although minority-serving institutions received awards in greater proportion than their representation among all applications for HCOP grants over the 4 fiscal years, the proportions varied from year to year. For fiscal years 2002, 2004, and 2005, minority-serving institutions were represented among grantees in the same, or in greater, proportion than they were among applications, submitting 25-28 percent of applications and receiving 25-35 percent of grants. Fiscal year 2003 stands out because of the smaller number of competitive grants awarded; that year, 10 competitive HCOP grants were awarded, 1 of which was awarded to a minority-serving institution (see table 3). The smaller number of competitive grants was mainly due to the relatively high number of noncompetitive continuation grants that received funding for that fiscal year. Among minority-serving institutions, historically black colleges and universities submitted the most applications and received the most awards, followed by Hispanic-serving institutions (see table 4). Some entities submitted more than one application over the 4 fiscal years of our review, and a given entity may have received more than one grant. For example, an entity may have applied for an HCOP grant for fiscal year 2002 and failed to receive a grant, then tried again in subsequent years. A new fiscal year 2002 grantee would have had to apply for a competitive continuation grant for fiscal year 2005 after the end of its 3-year project period. It is also possible for the same entity to have had more than one HCOP grant at the same time, provided that each grant had a distinct purpose and budget. In written comments on a draft of this report (see app. III), HRSA stated that the report met the goals of describing the award process and outlining the number and characteristics of HCOP applicants and grantees. HRSA suggested that, due to the small number of grantees, the summary of findings on our Highlights page present the numbers, rather than percentages, of minority institutions that were awarded grants between 2005 and 2006. For the summary, we believe it is appropriate to use percentages to convey that applications from minority-serving institutions generally received grants in greater proportion than all applications. As noted in the draft report, the percentages we present are for the 4-year period of fiscal years 2002 through 2005. HRSA provided two other comments suggesting revisions to clarify our discussion, which we generally incorporated. In addition, HRSA provided technical comments which we incorporated as appropriate. We are sending copies of this report to the Administrator of HRSA and appropriate congressional committees. We will also provide copies to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (312) 220-7600 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. We determined whether Health Careers Opportunity Program (HCOP) applicants and grantees were minority-serving institutions by using statutory definitions, lists of institutions that fall under these statutory definitions, and data from the Department of Education. The term "minority-serving institution" refers to an accredited institution of higher education eligible for federal support under title III or title V of the Higher Education Act of 1965; this support is administered by the Department of Education. These institutions include historically black colleges and universities, American Indian tribally controlled (or tribal) colleges and universities, Hispanic-serving institutions, Native Hawaiian-serving institutions, and Alaska Native-serving institutions. For our review, we defined historically black colleges and universities and tribal colleges and universities as institutions that met certain statutory definitions for institutions eligible to receive federal support under title III of the Higher Education Act of 1965. To identify an HCOP applicant or grantee as a historically black college or university, we compared a list of historically black colleges and universities published by the White House Initiative on Historically Black Colleges and Universities with the data we obtained from the Health Resources and Services Administration (HRSA) on HCOP grant applicants and recipients. To identify HCOP applicants and grantees that were designated as a tribal college or university, we compared a list published by the White House Initiative on Tribal Colleges and Universities with the data we obtained from HRSA on HCOP grant applicants and recipients. Hispanic-serving institutions, Native Hawaiian-serving institutions, and Alaska Native-serving institutions are eligible for federal funding under title III or title V of the Higher Education Act of 1965. Unlike historically black colleges and universities and tribal colleges and universities, however, eligibility of these institutions for funding is based on the percentage of enrolled minority students. As a result, the number of institutions that qualify as Hispanic-serving institutions, Native Hawaiian- serving institutions, and Alaska Native-serving institutions can vary from year to year. For our review, we defined Hispanic-serving institutions as those that received grants through the Developing Hispanic-Serving Institutions Program under title V of the Higher Education Act of 1965 for fiscal years 2002 through 2005. That is, we determined an institution's status as a Hispanic-serving institution for a particular fiscal year on the basis of whether the institution had a title V grant that year. To identify HCOP applicants and grantees that were Hispanic-serving institutions at the time of our review, we obtained lists of title V grantees for the Developing Hispanic-Serving Institutions Program from the Department of Education's Web site for fiscal years 1999 through 2005. We cross-checked the title V grantee lists with the membership of the Hispanic Association of Colleges and Universities and with lists of schools with significant Hispanic enrollment from the Department of Education's Office of Civil Rights. We compared these lists with the data we obtained from HRSA on HCOP grant applicants and recipients. In addition, we counted all HCOP applicants and grantees located in Puerto Rico as Hispanic-serving institutions. Because not all institutions that could be eligible for grants under title V of the Higher Education Act of 1965 apply for or receive title V grants, our counts of Hispanic-serving institutions at a given time are likely to be conservative. Likewise, we defined Native Hawaiian-serving institutions and Alaska Native-serving institutions as those that were eligible to receive grants under title III of the Higher Education Act of 1965 and that received such grants for fiscal years 2002 through 2005. As noted above, the exact number of entities designated as minority- serving institutions may vary from year to year. While we were able to classify the HCOP applicants and grantees for fiscal years 2002 through 2005, table 5 summarizes the different minority-serving institution designations and provides approximate counts for fiscal year 2005, the most recent year for which total counts were available. Table 6 shows, by location, applications and awards for competitive HCOP grants for fiscal years 2002 through 2005. The numbers represent applications, rather than individual applicant entities. An entity may have applied for a competitive HCOP grant more than once, and a single entity may have had more than one HCOP grant for separate and distinct HCOP projects. The locations are those of the grant applicants, although partnerships may cross state lines and result in HCOP-funded activities and services in more than one state. In addition to the contact named above, Kim Yamane, Assistant Director; Matt Byer; Ellen W. Chu; Karlin Richardson; Suzanne Rubins; and Hemi Tewarson made key contributions to this report. Health Professions Education Programs: Action Still Needed to Measure Impact. GAO-06-55. Washington, D.C.: February 28, 2006. Low-Income and Minority-Serving Institutions: Department of Education Could Improve its Monitoring and Assistance. GAO-04-961. Washington, D.C.: September 21, 2004. Health Professions Education: Clarifying the Role of Title VII and VIII Programs Could Improve Accountability. GAO/T-HEHS-97-117. Washington, D.C.: April 25, 1997.

To support the education and training of health professionals, the Health Resources and Services Administration (HRSA), in the Department of Health and Human Services (HHS), administers health professions education programs authorized under title VII of the Public Health Service Act. One of these programs, the Health Careers Opportunity Program (HCOP), provides grants to health professions schools and other entities to help students from disadvantaged backgrounds prepare for health professions education and training. Funding preference is given to grant applications that demonstrate a comprehensive approach involving other educational or health-related partners. Congressional committees have encouraged HRSA to give priority to applications from schools with a historic mission of educating minority students for health professions. In 2004, the appropriations conference committee asked GAO to review HRSA's process for awarding grants. This report addresses, for fiscal years 2002 through 2005, (1) HRSA's process for awarding HCOP grants and (2) the number and characteristics of HCOP applicants and grantees. GAO reviewed data from HRSA, interviewed HRSA officials, and reviewed relevant federal laws and agency documents from HHS and the Department of Education. HRSA followed a standard process to award HCOP grants, distributing funds on a noncompetitive basis to continue funding existing HCOP grants within their approved project periods, and then awarding the remaining funds on a competitive basis. For each of fiscal years 2002-05, HRSA competitively awarded between $4 million and $15 million from the approximately $34 million annually available for HCOP. To award competitive grants, HRSA used independent reviewers who assessed applications against published criteria, scored applications that met minimum criteria, and determined if they qualified for the funding preference. HRSA ranked the applications from highest to lowest score--putting those with the funding preference first--and awarded grants in decreasing rank order until the available funds were exhausted. Although HRSA had discretion to award grants out of rank order, the agency did not do so for fiscal years 2002-05. For fiscal years 2002-05, HRSA awarded a total of 99 competitive HCOP grants from 439 grant applications reviewed. Overall, minority-serving institutions submitted about 25 percent of the applications reviewed and received about 30 percent of the competitive grants; historically black colleges and universities were the most numerous grantees among minority-serving institutions, followed by Hispanic-serving institutions. HRSA commented that a draft of this report met the goals of describing the award process and outlining the number and characteristics of HCOP applicants and grantees.

The U.S. Army School of the Americas, located at Fort Benning, Georgia, is a military educational institution that has trained over 57,000 officers, cadets, noncommissioned officers (NCO), and civilians from Latin America and the United States over the past 50 years. According to the State Department, the training provided by the School is intended to be a long-term investment in a positive relationship with Latin America. Today's School is derived from several predecessor institutions, beginning with a 1946 Army school established primarily to provide technical instruction to U.S. personnel, with limited training for Latin Americans. In 1987, under Public Law 100-180 (10 U.S.C. 4415), Congress formally authorized the Secretary of the Army to operate the School with the purpose of providing military education and training to military personnel of Central American, South American, and Caribbean countries. Appendix I provides a chronology of the School's history. The School is funded from two sources: (1) the Army's operations and maintenance account, which covers overhead costs such as civilians' pay, guest instructor programs, supplies and equipment, certain travel expenses, and contracts, and (2) reimbursements from U.S. security assistance provided to Latin American countries, which cover costs associated with presenting the courses, including instructional supplies and materials; required travel for courses; and support for the School's library and publications. In fiscal year 1995, the School received $2.6 million from the Army's operations and maintenance account. In addition, the School's courses generated $1.2 million from foreign militaries using U.S. security assistance grant funds. The School retains about 35 percent of this amount to defray its costs for course offerings. Fort Benning uses another 37 percent to defray costs associated with infrastructure maintenance, and the remainder is transferred to Department of the Army headquarters. The last decade has seen remarkable change in Latin America as countries throughout the region have embraced political and economic freedom. Today, all Latin American nations, except Cuba, have democratically elected leaders, increasingly open economies, and increased political freedoms. It is within this changing political, military, and economic environment that the School of the Americas has been operating. The end of the Cold War and the spread of democratic government around the world have accelerated dramatic change in Latin America. Over the past 15 years, the region has seen a significant shift away from dictatorships and military regimes. Today, virtually all Latin American countries have representative governments, although the democratic institutions in many of these countries are in their embryonic stage.Reflecting the fragile nature of democracy in some countries, the 1991 Santiago Resolution of the Organization of American States called for the preservation and strengthening of democratic systems and was reinforced at the 1995 Defense Ministerial of the Americas in Williamsburg, Virginia. However, it remains unclear whether the democratic gains of the 1980s can be sustained. In some countries, civilian institutions are relatively weak and fragmented and are vulnerable to economic and social instability. Corruption within the governments, including military and law enforcement agencies, also threatens the continued stability of democratic governments. The move toward democratically elected governments has caused the role of the militaries in Latin America to undergo significant change. The militaries were frequently political, and largely autonomous, actors in regional affairs and often played a dominant role in their societies. In recent years, however, the militaries appear to have become less prone to political intervention. The concern exists, however, that this inclination is not permanent, and that democratization is not irreversible. The recent coup attempt in Paraguay, while rebuffed, demonstrates the fragile nature of democracy in Latin America. Further, human rights violations continue to be a concern in the region. The 1995 State Department report on human rights states that even though progress has been made, widespread abuses of human rights continue in some Latin American countries. For example, although progress was made in negotiations between the Guatemalan government and guerrillas and human rights activists were elected to the country's congress, serious human rights abuses continued to occur in Guatemala in 1995. In Mexico, serious problems also remain, such as extrajudicial killings by the police and illegal arrests. Colombia is another country in the region that continues to face major human rights problems associated with its military, including killings, torture, and disappearances. The State Department has expressed concerns about human rights violators' impunity from prosecution. The State Department's recent report on Colombia noted that the military has usually failed to prosecute human rights abuse cases involving military personnel. Several sources, including the Organization of American States, have expressed concern about Colombia's human rights record. In response, during its 1996 session, the United Nations Commission on Human Rights, of which Colombia is a member, authorized the High Commissioner on Human Rights to establish an office in Colombia--an unusual step. The office is expected to monitor and assess the human rights situation in Colombia, including Colombia's progress in correcting its human rights abuses; provide assistance to Colombia to correct those abuses; and report its findings at next year's convention. Economically, the region is shifting from protectionist and statist economic models to free markets and export-oriented growth. Leaders throughout the region recognize the need to achieve macroeconomic stability, and many countries are enduring painful economic adjustments. In some cases, economic reforms have further exacerbated the concentration of income and wealth and thus widened the already large disparity between the rich and the poor. Although the region's total gross domestic product increased between 1991 and 1993, an estimated 45 percent of the people are living in poverty. The end of the Cold War presented the United States with a new foreign policy opportunity in Latin America. The United States no longer needs to bolster the militaries to stop communism and has begun focusing more efforts on promoting economic and political freedom. At the December 1994 Summit of the Americas hosted by the United States, 34 democratically elected leaders from Latin America gathered to commit their governments to open new markets, create a free trade area throughout the hemisphere, strengthen the movement to democracy, and improve the quality of life for all people of the region. The United States is working through multilateral institutions to further the goals of the Summit of the Americas. In recent testimony, for example, the State Department described how the Inter-American Development Bank is working for sustainable development and promoting specific Summit mandates in the fields of health and education. Consistent with the changing political and economic environment, the United States is approaching security issues in the region in terms of mutual cooperation. Today, the U.S. policy reflects the retreat of the Communist threat and the political transformation in the Latin American region. It emphasizes support for democratically elected governments, defense cooperation, confidence-building measures, and the mitigation of transnational threats such as narcotrafficking and international terrorism. The United States considers educating and training foreign militaries and civilians a critical part of its national security strategy to pursue the specific goal of promoting democracy in the Latin American and Caribbean region. Senior Army officials told us that international military training programs expose students to U.S. military doctrine and practices and include instruction for foreign military members and civilians on developing defense resource management systems, regard for democratic values and civilian control of military, respect for human rights and the rule of law, and counterdrug operations. In the U.S. Security Strategy for the Americas, DOD identifies the School of the Americas and two other military training institutions as regional assets through which the United States can engage its counterparts in the region. Although the School of the Americas is one option among the many Army schools and installations offering courses to foreign military students, it is the predominant training choice for Latin Americans. While the number of students at the School has decreased over the past few years because of reduced U.S. funding for international military training, School officials expect an increase this year due to increases in training funding for 1996. Students at the School come primarily from their countries' military or police forces, with a significant proportion from military or police academies. Although some countries have sent more students to the School than others, the predominant countries represented at the School typically reflect U.S. interests in the region at a particular time. Of the 5,895 foreign students that came to the United States to attend U.S. Army training courses in fiscal year 1995, 842 (14 percent) were from Spanish-speaking Latin American and Caribbean countries. Of the 842, 745 (88 percent) of those attended the School of the Americas. The 97 Latin Americans that did not receive their Army training at the School attended courses at 24 other Army installations. Some of these students took courses not offered at the School, while others took similar courses but received their instruction in English. The 745 students who attended the School in 1995 represented a reduction in enrollment. Between 1984 and 1993, an average of 1,371 students attended the School each year, with attendance ranging from 996 in 1985 to 1,763 in 1992. According to School officials, a reduction in funding for international military training contributed to the decrease in the number of students. The IMET program funds allocated to the Latin American region were reduced from the 1993 level of $11.3 million to about $5.1 million in 1994 and about $4.8 million in 1995. This reduced allocation reflects the reduction in total IMET funding for those years--from $42.5 million in 1993 to about $22.3 million in 1994 and about $26.4 million in 1995. However, officials at the School project an increase in the number of students for 1996 since IMET funding for the Latin American region for 1996 was increased to $9.1 million. School officials said that the effect of the reduction in international training funds was further compounded by increases in the cost of the courses. Inflation particularly affected certain cost components, such as ammunition, flight support, course-related travel, and the publication of training materials. According to School officials, the cost of some courses has doubled over the past 5 or 6 years, in large measure because of increases in the cost components. As a result, foreign militaries could not afford to send higher numbers of students to the courses. According to School officials, because the curriculum is taught in Spanish, Latin American and Caribbean military forces can select students based on their military training needs without considering their English language skills. This allows the countries to save funds that might have to be spent for preparatory English language courses. Candidates are identified by foreign military officials and approved by U.S. officials at the U.S. embassies in Latin America. Instructions issued by the Secretary of State in January 1994, require U.S. officials to review records of prospective students for all U.S. schools to identify any past actions or affiliations considered undesirable, such as criminal activity, human rights abuses, or corruption. According to School officials, all prospective foreign students are subject to the same screening and selection criteria and procedures, whether they will attend the School or other U.S. military training institutions. Virtually all of the students selected for the School of the Americas have been members of their countries' military or police forces, with less than one percent civilian students. Officials at the School said that even though courses intended for civilian participation are offered, increasing civilian attendance is difficult for two reasons. First, government departments in many countries tend to be understaffed, and it is difficult for key civilian officials to leave their positions for several weeks to attend courses in the United States. Second, some foreign militaries and defense ministries prefer to spend available military training funds on members of the armed forces rather than civilians, despite encouragement from U.S. officials to select some civilians for relevant courses. Between 1990 and 1995, about 41 percent of the students were cadetsfrom Latin American military or police academies. Cadet-level courses are not new; they have been offered at the School as far back as the 1950s. According to School officials, instructing cadets is consistent with the mission of the School, as these students represent the next generation of military officers. Also, some countries have identified their military or police cadets as a top training priority. Since 1991, Chile has sent cadets to the School for an 8-day course specifically developed for them. According to School officials, Chile used a large proportion of its IMET funds for this one course in 1995. Students from 22 Latin American and Caribbean countries have attended courses at the School of the Americas since its inception. However, about half of those students have come from five countries--Colombia (17 percent), El Salvador (12 percent), Nicaragua (8 percent), Peru (7 percent), and Panama (6 percent). The countries that send more students to the School are generally the same countries receiving a higher level of U.S. military assistance, which can be used for training. For example, when the United States was providing large amounts of foreign assistance, including training, to El Salvador's military to counter the insurgent threat in the 1980s, about one-third of the students at the School came from El Salvador. Between 1991 and 1995, most of the students at the School came from Colombia, Honduras, and Chile. The curriculum of the School has changed from its early days, when automotive and radio repair, artillery mechanics, and cooking were taught along with infantry, artillery, and military police courses. By the 1970s, the curriculum included courses on counterinsurgency operations to train Latin American armed forces in their efforts to confront insurgencies in the region. The current curriculum encompasses a variety of courses that enhance combat and combat support skills, encourage the development of appropriate civil-military relations, and strengthen defense resource management techniques. Since 1990, the School has added nine new courses that reflect current U.S. interests in the region. Two of the new courses--democratic sustainment and civil-military operations--along with the existing resource management and command and general staff officer courses--meet DOD's criteria for the Expanded IMET program. Other new courses were developed to meet unique or urgent needs in the region. For example, at the request of the Organization of American States, the School developed a countermine course to train students to recognize, detect, and neutralize minefields and to be able to train demining teams in their countries. Since 1993, 25 students from nine countries have taken the course, and DOD officials told us that this training is currently being used in demining operations in Central America. According to DOD, the new Peace Operations course was developed in response to the expanding presence of peacekeeping operations around the world and to present U.S. doctrine and policy for peacekeeping to the Latin American forces. In 1995, 21 students, including 5 civilians, from nine countries attended the course. Other new training includes the executive and field grade logistics, border observation, and computer literacy courses as well as cadet-level intelligence and counterdrug courses. In 1996, the School at Fort Benning is offering 32 courses, 23 of which are targeted toward noncommissioned and junior to mid-level officers. The remaining nine courses are targeted toward cadets--eight for military cadets and one for police cadets. While none of the courses are intended solely for civilians, 10 courses include civilians in the targeted audience. The Helicopter School Battalion at Fort Rucker, Alabama, is offering 20 courses in helicopter flight operations and maintenance. Table 1 provides a brief description of the courses offered in 1996 and the number of students that attended these courses in 1995. The School of the Americas' curriculum is based on U.S. military doctrine and practices and uses materials from courses presented to U.S. military personnel. School officials told us that it is like other U.S. military institutions' curricula, except that it is presented in Spanish. For example, the military intelligence officer course at the School uses doctrine and materials developed by the U.S. Army Intelligence Center and School at Fort Huachuca, Arizona, and the executive logistics course uses material from the Defense Logistics Command and the U.S. Army Logistics Management College at Fort Lee, Virginia. Further, U.S. military students who attend the command and general staff officer course at the School receive the same professional military education credit as the U.S. military personnel who attend the course at Fort Leavenworth. Officials at the School pointed out that because all international training courses are based on U.S. doctrine, foreign students from other regions receive training in similar subjects as the students at the School. For example, in 1995, the U.S. Army Ranger course was provided to 43 foreign students from 17 countries, which exposed those students to similar training and exercises as the 17 students that attended the School's commando course. Similarly, the Army's infantry officer basic course was taught to 44 students from 21 countries, and similar training was provided to 17 students from Latin America at the School. (See app. II.) Instructional staff at the School can customize segments of the courses to incorporate case studies and practical exercises relevant to Latin America. For example, officials at the School said that civic action exercises conducted in Central America by U.S. and Latin American armed forces are discussed in the civil affairs segment of the command and general staff officer course. The course also includes 24 hours of instruction on the historical perspective of the roles of the family, church, government, and military in Latin America--instruction not included in the U.S. course. Reflecting the history of the region, School officials emphasized that the School provides instruction on human rights principles to all students. This human rights instruction is not presented at any other Army school. All of the School's courses, except the computer literacy course, include a mandatory 4-hour block of instruction on human rights issues in military operations, including law of land warfare, military law and ethics, civilian control of the military, and democratization. This instruction is expanded in some courses. For example, the command and general staff officer course devotes 3 days of instruction to the subject, and uses the My Lai massacre in Vietnam as a case study. School officials told us that they consider this case study an excellent illustration of issues related to professional military behavior, command and control, and changes in U.S. military attitudes and acceptance of the principles of human rights. They said that incidents in which Latin American militaries have been involved, such as the El Mozote massacre of hundreds of peasants in El Salvador in 1981, are also discussed. Courses at the School are taught by U.S. and Latin American military members as well as some civilian instructors. The School requires that instructors possess the appropriate skills and military background in such areas as logistics, infantry, engineering or helicopter operations. All instructors must also pass a special human rights instructor program before teaching any course. Instructors from Latin America are involved with all of the courses in the curriculum and work with U.S. instructors to develop and prepare instructional materials and teach segments of the courses. The School identifies the requirements for each foreign instructor position, including rank; branch qualifications, such as combat arms or airborne; and other prerequisites, such as graduation from a command and general staff officer college. The School sends these requirements to the U.S. embassies in Latin America to solicit nominations of foreign military members that meet the requirements. Like the process used to nominate students, the foreign militaries identify prospective instructors, who are subject to approval by U.S. officials at the embassies. Officials at the School said that the Latin American instructors have become increasingly important over the past several years. These instructors provide additional opportunities for the students and other instructors at the School to establish valuable military to military contacts. Salaries of the Latin American instructors are paid by their home country. While the School's staff levels fluctuate throughout the year, as of October 1995, a total of 239 staff were assigned to the School at Fort Benning, including 50 U.S. instructors and 33 instructors from Latin America. In 1995, TRADOC contracted for a study to analyze and develop recommendations concerning the future need for the School of the Americas and what purposes the School should serve. The study examined the issue of whether providing Spanish-language instruction to Latin Americans is still a valid requirement of the School. In addition, the study examined the appropriateness of organizationally placing the School under TRADOC, given the School's role as a foreign policy tool and different focus compared to other TRADOC installations. The report, issued in October 1995, concluded that the School is strategically important to the United States and supports short- and long-term U.S. economic, political, and military interests in Latin America. The report acknowledged that Spanish language instruction was an important factor allowing the School to contribute effectively to implementing U.S. foreign policy in Latin America and said that the Army should reaffirm Spanish as the language of instruction. However, it noted that concerns about the continued need for the School in the post-Cold War period have surfaced, driven in part by adverse publicity over human rights violations associated with past students of the School. The study recommended that responsibility for the School be transferred from TRADOC to the U.S. Southern Command because the School's role as a foreign policy tool makes it significantly different from other TRADOC installations. The study also acknowledged that negative publicity about the School would probably continue and that a new name for the School may be an appropriate way to break with the past. It suggested that the Department of Army provide additional opportunities for lower- and mid-grade civil servants from Latin America and make this an important thrust of the School. It also suggested that the Departments of Army and State study the desirability of establishing a Western Hemisphere Center for research, study, and instruction. This center would incorporate the School and other Spanish language military training schools and would be affiliated with the Inter-American Defense College. DOD officials told us they agree in principle with many of the recommendations in the study and are considering how best to implement some of them. For example, TRADOC has acted on the recommendation to establish a board of visitors, which met for the first time in May 1996, and the Office of the Secretary of Defense is considering establishing a security studies center for the region. For some of the recommendations on which DOD has agreed in principle, (1) the conditions prompting the recommendation have changed, (2) DOD is not the cognizant authority for action, or (3) organizational or legal hurdles impede action. DOD officials have recognized that the dearth of civilian experts in military and security affairs is a serious barrier to further democratization of Latin American defense establishments. In response, DOD is pursuing plans to open an Inter-American Center for Defense Studies in fiscal year 1998 to attract a new generation of civilians to careers in ministries of defense and foreign affairs as well as parliamentary committee staff. The Center intends to provide practical courses for promising civilians with university degrees, although military officers may attend. The curriculum would include courses on the development of threat assessments, strategic plans, budgets and acquisition plans, civil-military relations, and methods of legislative oversight. The Center would have features similar to the already established DOD centers for the study of regional security issues at the Marshall Center in Garmisch, Germany, and at the Asia-Pacific Center in Honolulu, Hawaii. The Center is not intended as a replacement or substitute for the School of the Americas. DOD officials contend that the School will continue to provide important training and links to Latin American militaries, which remain influential forces even as their roles in their societies evolve from dominance to integration. DOD concurred with our findings. Where appropriate, we have incorporated technical changes provided by DOD. DOD's comments are presented in appendix III. We developed information on the political, military, and economic characteristics in Latin America by talking to Latin American experts from both inside and outside the federal government, reviewing literature on the region, and using findings from other GAO reports. We discussed issues related to the School and the political, social, and economic environment with representatives from the Organization of American States, the Washington Office on Latin America, Demilitarization for Democracy Project, Latin American Working Group, North-South Center (affiliated with the University of Miami), Latin American Program of the Woodrow Wilson Center, Institute for National Strategic Studies, the Latin American Center of Stanford University, and area experts at the University of California, Irvine; American University; and the University of Colorado. To obtain information on the operations of the School of the Americas, we met with officials at the School, including instructional and administrative staff. These officials provided us with documentation on the history and current operations of the School, including attendance, curriculum, and budget information. We performed a detailed review of course contents in order to understand instructional objectives. We also compared the course curriculum and attendance at the school with the student attendance of Army security assistance-funded training used by all other countries in the world. To develop the data on students attending the School, the courses they took, and the countries they came from, we relied on documentation provided by School officials. To develop similar data on the courses and students at other Army schools in fiscal 1995, we relied on automated data prepared by TRADOC in Hampton, Virginia. We did not independently verify the accuracy of the data provided to us. We conducted our review from November 1995 to June 1996 in accordance with generally accepted government auditing standards. We plan no further distribution of this report until 15 days after its issue date. At that time, we will send copies of this report to the Secretaries of Defense and State and appropriate congressional committees. We will also send copies to other interested parties upon request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. The U.S. Army established the Latin America Center-Ground Division in the Panama Canal Zone to provide instruction to U.S. Army personnel in garrison technical skills such as food preparation, maintenance, and other support functions, with limited training for Latin Americans. U.S. Army renamed the institution the U.S. Army Caribbean School-Spanish Instruction and identified a secondary mission of instructing Latin American military personnel. Increased Latin American interest in U.S. military training led to the elimination of English language instruction to focus on instructing Latin American personnel. The institution became the U.S. Army School of the Americas, with Spanish declared the official language of the School. The School relocated to its current location at Fort Benning, Georgia, due to a conflict between U.S. and Panamanian officials regarding the operation and command of the School. The Army reassigned operational control of the School from the U.S. Southern Command to the U.S. Army Training and Doctrine Command. Under Public Law 100-180, Congress formally authorized the Secretary of the Army to operate the School with the purpose of providing military education and training to military personnel of Central American, South American, and Caribbean countries. A Helicopter School Battalion at the U.S Army Aviation Center, Fort Rucker, Alabama, was activated as part of the School to provide Spanish language instruction for helicopter pilots and technicians. Nancy T. Toolan Muriel J. Forster Kevin C. Handley F. James Shafer Nancy Ragsdale 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 provided information on the U.S. Army School of the Americas and a Department of Defense (DOD) initiative to strengthen civilian institutions involved in defense and security activities in Latin American countries. GAO found that: (1) the Latin American environment in which the School operates is undergoing radical political and economic change; (2) in addition, the role of the military in many of these societies is beginning to evolve from one of political dominance to a more professional model subordinate to the civilian authority; (3) although the School trains the majority of Latin American students that come to the United States for Army training, primarily because the curriculum is taught in Spanish, it provides a small percent of the training that the Army provides to foreign students from around the world; (4) virtually all of the 745 students attending the School in 1995 represented their countries' military or police forces, with few civilians attending the School; (5) many of the courses at the School provide instruction in military and combat skills; however, since 1990, the curriculum has been broadened to include courses addressing post-Cold War needs of the region; (6) the courses offered at the School are based on U.S. military doctrine, and foreign students from other regions receive basically the same courses at other Army training locations, with the exception of the School's emphasis on human rights; (7) courses are taught by U.S. and Latin American military personnel and some civilian instructors; (8) a recent study contracted for by the Army to determine whether the School should be retained and why concluded that the School should continue but recommended a number of changes; and (9) in response to the emerging post-Cold War need to strengthen civilian institutions in Latin America, DOD is considering establishing a separate institution to focus on civilian-military relations and the development of greater civilian expertise in the region's defense establishments.

As the central human resources agency for the federal government, OPM is tasked with ensuring that the government has an effective civilian workforce. To carry out this mission, OPM delivers human resources products and services including policies and procedures for recruiting and hiring, provides health and training benefit programs, and administers the retirement program for federal employees. According to the agency, approximately 2.7 million active federal employees and nearly 2.5 million retired federal employees rely on its services. According to OPM, the retirement program serves current and former federal employees by providing (1) tools and options for retirement planning and (2) retirement compensation. Two defined-benefit retirement plans that provide retirement, disability, and survivor benefits to federal employees are administered by the agency. The first plan, the Civil Service Retirement System (CSRS), provides retirement benefits for most federal employees hired before 1984. The second plan, the Federal Employees Retirement System (FERS), covers most employees hired in or after 1984 and provides benefits that include Social Security and a defined contribution system. OPM and employing agencies' human resources and payroll offices are responsible for processing federal employees' retirement applications. The process begins when an employee submits a paper retirement application to his or her employer's human resources office and is completed when the individual begins receiving regular monthly benefit payments (as illustrated in fig. 1). Once an employee submits an application, the human resources office provides retirement counseling services to the employee and augments the retirement application with additional paperwork, such as a separation form that finalizes the date the employee will retire. Then the agency provides the retirement package to the employee's payroll office. After the employee separates for retirement, the payroll office is responsible for reviewing the documents for correct signatures and information, making sure that all required forms have been submitted, and adding any additional paperwork that will be necessary for processing the retirement package. Once the payroll office has finalized the paperwork, the retirement package is mailed to OPM to continue the retirement process. Payroll offices are required to submit the package to OPM within 30 days of the retiree's separation date. Upon receipt of the retirement package, OPM calculates an interim payment based on information provided by the employing agency. The interim payments are partial payments that typically provide retirees with 80 percent of the total monthly benefit they will eventually receive.then starts the process of analyzing the retirement application and associated paperwork to determine the total monthly benefit amount to which the retiree is entitled. This process includes collecting additional information from the employing agency's human resources and payroll offices or from the retiree to ensure that all necessary data are available before calculating benefits. After OPM completes its review and authorizes payment, the retiree begins receiving 100 percent of the monthly retirement benefit payments. OPM then stores the paper retirement folder at the Retirement Operations Center in Boyers, Pennsylvania. The agency recently reported that the average time to process retirement claims was 156 days in 2012. According to the Deputy Associate Director for the Center of Retirement and Insurance Services, about 200 employees are directly involved in processing the approximately 100,000 retirement applications OPM receives annually. Retirement processing includes functions such as determining retirement eligibility, inputting data into benefit calculators, and providing customer service. The agency uses over 500 different procedures, laws, and regulations, which are documented on the agency's internal website, to process retirement applications. For example, the site contains memorandums that outline new procedures for handling special retirement applications, such as those for disability or court orders. Further, OPM's retirement processing involves the use of over 80 information systems that have approximately 400 interfaces with other internal and external systems. For instance, 26 internal systems interface with the Department of the Treasury to provide, among other things, information regarding the total amount of benefit payments to which an employee is entitled. OPM has reported that a greater retirement processing workload is expected due to an anticipated increase in the number of retirement applications over the next decade, although current retirement processing operations are at full capacity. Further, the agency has identified several factors that limit its ability to process retirement benefits in an efficient and timely manner. Specifically, OPM noted that current processes are paper-based and manually intensive, resulting in a higher number of errors and delays in providing benefit payments; the high costs, limited capabilities, and other problems with the existing information systems and processes pose increasing risks to the accuracy of benefit payments; current manual capabilities restrict customer service; federal employees have limited access to retirement records, making planning for retirement difficult; and attracting qualified personnel to operate and maintain the antiquated retirement systems, which have about 3 million lines of custom programming, is challenging. Recognizing the need to modernize its retirement processing, in the late 1980s OPM began initiatives that were aimed at automating its antiquated paper-based processes. Initial modernization visions called for developing an integrated system and automated processes to provide prompt and complete benefit payments. However, following attempts over more than two decades, the agency has not yet been successful in achieving the modernized retirement system that it envisioned. In early 1987, OPM began a program called the FERS Automated Processing System. However, after 8 years of planning, the agency decided to reevaluate the program, and the Office of Management and Budget requested an independent review of the program, which identified various management weaknesses. The independent review suggested areas for improvement and recommended terminating the program if immediate action was not taken. In mid-1996, OPM terminated the program. In 1997, OPM began planning a second modernization initiative, called the Retirement Systems Modernization (RSM) program. The agency originally intended to structure the program as an acquisition of commercially available hardware and software that would be modified in- house to meet its needs. From 1997 to 2001, OPM developed plans and analyses and began developing business and security requirements for the program. However, in June 2001, it decided to change the direction of the retirement modernization initiative. In late 2001, retaining the name RSM, the agency embarked upon its third initiative to modernize the retirement process and examined the possibility of privately sourced technologies and tools. Toward this end, the agency determined that contracting was a viable alternative and, in 2006, awarded three contracts for the automation of retirement processing, the conversion of paper records to electronic files, and consulting services to redesign its retirement operations. In February 2008, OPM renamed the program RetireEZ and deployed an automated retirement processing system. However, by May 2008 the agency determined that the system was not working as expected and suspended system operation. In October 2008, after 5 months of attempting to address quality issues, the agency terminated the contract for the system. In November 2008, OPM began restructuring the program and reported that its efforts to modernize retirement processing would continue. However, after several years of trying to revitalize the program, the agency terminated the retirement system modernization in February 2011. OPM's efforts to modernize its retirement system were hindered by weaknesses in several key IT management disciplines. Our experience with major modernization initiatives has shown that having sound management capabilities is essential to achieving successful outcomes. These capabilities include project management, risk management, organizational change management, system testing, cost estimating, progress reporting, planning, and oversight, among others. However, we found that OPM's capabilities in these areas were not sufficiently developed. For example, in reporting on RSM in February 2005, we noted weaknesses in project management, risk management, and organizational change management. Project management is the process for planning and managing all project-related activities, including defining how project components are interrelated. Effective project management allows the performance, cost, and schedule of the overall project to be measured and controlled in comparison to planned objectives. Although OPM had defined major retirement modernization project components, it had not defined the dependencies among them. Specifically, the agency had not identified critical tasks and their impact on the completion of other tasks. By not identifying critical dependencies among project components, OPM increased the risk that unforeseen delays in one activity could hinder progress in other activities. Risk management entails identifying potential problems before they occur. Risks should be identified as early as possible, analyzed, mitigated, and tracked to closure. OPM officials acknowledged that they did not have a process for identifying and tracking retirement modernization project risks and mitigation strategies on a regular basis but stated that the agency's project management consultant would assist it in implementing a risk management process. Lacking such a process, OPM did not have a mechanism to address potential problems that could adversely impact the cost, schedule, and quality of the retirement modernization project. Organizational change management includes preparing users for the changes to how their work will be performed as a result of a new system implementation. Effective organizational change management includes plans to prepare users for impacts the new system might have on their roles and responsibilities, and a process to manage those changes. Although OPM officials stated that change management posed a substantial challenge to the success of retirement modernization, they had not developed a detailed plan to help users transition to different job responsibilities. Without having and implementing such a plan, effective implementation of new systems could be hindered by confusion about user roles and responsibilities. We recommended that the Director of OPM ensure that the retirement modernization program office expeditiously establish processes for effective project management, risk management, and organizational change management. In response, the agency initiated steps toward establishing management processes for retirement modernization and demonstrated activities to address our recommendations. We reported again on OPM's retirement modernization in January 2008, as the agency was about to deploy a new automated retirement processing system. We noted weaknesses in additional key management capabilities, including system testing, cost estimating, and progress reporting. Effective testing is an essential activity of any project that includes system development. Generally, the purpose of testing is to identify defects or problems in meeting defined system requirements or satisfying system user needs. At the time of our review, 1 month before OPM planned to deploy a major system component, test results showed that the component had not performed as intended. We warned that until actual test results indicated improvement in the system, OPM risked deploying technology that would not accurately calculate retirement benefits. Although the agency planned to perform additional tests to verify that the system would work as intended, the schedule for conducting these tests became compressed from 5 months to 2-1/2 months, with several tests to be performed concurrently rather than sequentially. The agency stated that a lack of testing resources, including the availability of subject matter experts, and the need for further system development contributed to the delay of planned tests and the need for concurrent testing. The high degree of concurrent testing that OPM planned to meet its February 2008 deployment schedule increased the risk that the agency would not have the resources or time to verify that the planned system worked as expected. Cost estimating is the identification of individual project cost elements, using established methods and valid data to estimate future costs. Establishing a reliable cost estimate is important for developing a project budget and having a sound basis for measuring performance, including comparing the actual and planned costs of project activities. Although OPM developed a retirement modernization cost estimate, it was not supported by the documentation that is fundamental to a reliable cost estimate. Without a reliable cost estimate, OPM lacked a sound basis for formulating retirement modernization budgets or for developing the cost baseline that is necessary for measuring and predicting project performance. Earned value management (EVM) is a tool for measuring program progress by comparing the value of work accomplished with the amount of work expected to be accomplished. Fundamental to reliable EVM is the development of a baseline against which variances are calculated. OPM used EVM to measure and report monthly performance of the retirement modernization system. The reported results indicated that the project was progressing almost exactly as planned. However, this view of project performance was not reliable because the baseline on which it was based did not reflect the full scope of the project, had not been validated, and was unstable (i.e., subject to frequent changes). This EVM approach in effect ensured that material variances from planned performance would not be identified and that the state of the project would not be reliably reported. We recommended that the Director of OPM conduct effective system tests prior to system deployment and improve program cost estimation and progress reporting. OPM stated that it concurred with our recommendations and would take steps to address the weakness we identified. Nevertheless, OPM deployed a limited initial version of the modernized retirement system in February 2008. After unsuccessful efforts to address system quality issues, the agency suspended system operation, terminated the system contract, and began restructuring the modernization effort. In April 2009, we again reported on OPM's retirement modernization, noting that the agency still remained far from achieving the modernized Specifically, we retirement processing capabilities that it had planned.noted that significant weaknesses continued to exist in the areas of cost estimating, progress reporting, and testing, while also noting two additional weaknesses related to planning and oversight. Although it concurred with our January 2008 recommendation to develop a revised cost estimate for the retirement modernization effort, OPM had not completed initial steps for developing the new estimate by the time we issued our report in April 2009. We reported that the agency had not yet fully defined the estimate's purpose, developed an estimating plan, or defined the project's characteristics. By not completing these steps, OPM increased the risk that it would produce an unreliable estimate and not have a sound basis for measuring project performance and formulating retirement modernization budgets. OPM also concurred with our January 2008 recommendation to establish a basis for effective EVM but had not completed key steps as of the time of our report. Specifically, despite planning to use EVM to report the retirement modernization project's progress, the agency had not developed a reliable cost estimate and a validated baseline. Engaging in EVM reporting without first taking these fundamental steps could have again rendered the agency's assessments unreliable. As previously discussed, effective testing is an essential component of any project that includes developing systems. To be effectively managed, testing should be planned and conducted in a structured and disciplined fashion. Beginning the test planning process in the early stages of a project life cycle can reduce rework later. Early test planning in coordination with requirements development can provide major benefits. For example, planning for test activities during the development of requirements may reduce the number of defects identified later and the costs related to requirements rework or change requests. OPM's need to compress its testing schedule and conduct tests concurrently, as we reported in January 2008, illustrates the importance of planning test activities early in a project's life cycle. However, at the time of our April 2009 report, the agency had not begun to plan test activities in coordination with developing its requirements for the system it was planning at that time. Consequently, OPM increased the risk that it would again deploy a system that did not satisfy user expectations and meet requirements. Project management principles and effective practices emphasize the importance of having a plan that, among other things, incorporates all the critical areas of system development and is to be used as a means of determining what needs to be done, by whom, and when. Although OPM had developed a variety of informal documents and briefing slides that described retirement modernization activities, the agency did not have a complete plan that described how the program would proceed in the wake of its decision to terminate the system contract. As a result, we concluded that until the agency completed such a plan and used it to guide its efforts, it would not be properly positioned to proceed with its restructured retirement modernization initiative. Office of Management and Budget and GAO guidance call for agencies to ensure effective oversight of IT projects throughout all life- cycle phases. Critical to effective oversight are investment management boards made up of key executives who regularly track the progress of IT projects such as system acquisitions or modernizations. OPM's Investment Review Board was established to ensure that major investments are on track by reviewing their progress and identifying appropriate actions when investments encounter challenges. Despite meeting regularly and receiving information that indicated problems with the retirement modernization, the board did not ensure that retirement modernization investments were on track, nor did it determine appropriate actions for course correction when needed. For example, from January 2007 to August 2008, the board met and was presented with reports that described problems the program was facing, such as the lack of an integrated master schedule and earned value data that did not reflect the "reality or current status" of the program. However, meeting minutes indicated that no discussion or action was taken to address these problems. According to a member of the board, OPM had not established guidance regarding how the board is to communicate recommendations and needed corrective actions for investments it oversees. Without a fully functioning oversight body, OPM lacked insight into the retirement modernization and the ability to make needed course corrections that effective boards are intended to provide. Our April 2009 report made new recommendations that OPM address the weaknesses in the retirement modernization project that we identified. Although the agency began taking steps to address them, the recommendations were overtaken by the agency's decision in February 2011 to terminate the retirement modernization project. In mid-January 2012, OPM released a plan to undertake targeted, incremental improvements to retirement processing rather than a large- scale modernization, which described planned actions in four areas: hiring and training 56 new staff to adjudicate retirement claims and 20 additional staff to support the claims process; establishing higher production standards and identifying potential working with other agencies to improve the accuracy and completeness of the data they provide to OPM for use in retirement processing; and improving the department's IT by pursuing a long-term data flow strategy, exploring short-term strategies to leverage work performed by other agencies, and reviewing and upgrading systems used by retirement services. Through implementing these actions, OPM has said that it aims to eliminate the agency's retirement processing backlog and accurately process 90 percent of its cases within 60 days by July 31, 2013. However, as we testified in February 2012, that goal represents a substantial reduction from the agency's fiscal year 2009 retirement modernization goal to accurately process 99 percent of cases within 30 days. Moreover, the plan did not describe whether or how the agency intends to modify or decommission the over 80 legacy systems that it currently relies on to support retirement processing. Last month, OPM officials described steps the agency has begun taking to implement the January 2012 plan for retirement services. These steps include filling the 56 positions needed to adjudicate retirement claims and 20 positions needed to support the claims process; implementing retirement processing improvements identified during an external review of its retirement claims process, such as reorganizing benefits claims officers into two tiers to allow the processing of more complex inquiries by higher-level officers; and improving the accuracy and completeness of retirement data that other agencies provide to OPM by conducting audits of the agencies' application submissions and providing more frequent feedback and follow-up training. Additionally, the officials identified existing and planned IT improvements to support the retirement process. These efforts include providing retirees with the ability to view the status of their cases through OPM's web-based application, Services Online; developing the capability to accept electronic data that are transferred from one of the seven federal payroll processing centers; enhancing its internal web-based application, Data Viewer, to allow 11 other agencies to view retirement case packets; upgrading its data storage capacity and production printer; sponsoring a challenge, in cooperation with the National Aeronautics and Space Administration, for developers to create a system with accounting tools for processing service credits; updating reporting guides to include processes for sending electronic retirement data to OPM; and planning an initiative to develop an automated retirement case management system to replace the agency's existing document and case control system in fiscal year 2014. Nonetheless, while OPM is planning to replace its legacy document and case control system, agency officials stated that there were no major plans to decommission any of the agency's other legacy systems that support retirement processing. Although the Associate Director for Retirement Services stated that investing in IT is important for improving the efficiency of retirement claims processing, the agency has not yet planned for improving or replacing the remaining legacy systems that support retirement processing. In summary, despite OPM's longstanding recognition of the need to improve the timeliness and accuracy of retirement processing, the agency has thus far been unsuccessful in several attempts to develop the capabilities it has long sought. For over two decades, the agency's retirement modernization efforts were plagued by weaknesses in management capabilities that are critical to the success of such endeavors. Among the management disciplines the agency has struggled with are project management, risk management, organizational change management, cost estimating, system testing, progress reporting, planning, and oversight. The incremental steps the agency recently reported taking include dedicating additional resources to retirement processing; however, they do not address the more fundamental need to modernize its legacy IT systems in order to significantly improve the efficiency of the process. Until OPM tackles that challenge, and develops the management capabilities to carry it out successfully, it may face ongoing difficulties in meeting the needs of future retirees. Chairman Farenthold, Ranking Member Lynch, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have. If you have any questions concerning this statement, please contact Valerie C. Melvin, Director, Information Management and Technology Resources Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions include Mark T. Bird, Assistant Director; David A. Hong; and Lee A. McCracken. 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.

OPM is the central human resources agency for the federal government and, as such, is responsible for ensuring that the government has an effective civilian workforce. As part of its mission, OPM defines recruiting and hiring processes and procedures; provides federal employees with various benefits, such as health benefits; and administers the retirement program for federal employees. OPM's use of IT is critical in carrying out its responsibilities; in fiscal year 2013 the agency plans to invest about $85 million in IT systems and services. For over two decades, OPM has been attempting to modernize its federal employee retirement process by automating paper-based processes and replacing antiquated information systems. However, these efforts have been unsuccessful, and the agency canceled its most recent large-scale retirement modernization effort in February 2011. GAO was asked to summarize its work on challenges OPM has faced in attempting to modernize the federal employee retirement process and to describe the agency's recent reported actions to improve its retirement processing. To do this, GAO generally relied on previously published work. In a series of reviews, GAO found that the Office of Personnel Management's (OPM) retirement modernization efforts were hindered by weaknesses in key management practices that are essential to successful information technology (IT) modernization projects. For example, in 2005, GAO made recommendations to address weaknesses in the following areas: Project management: While OPM had defined major components of its retirement modernization effort, it had not identified the dependencies among them, increasing the risk that delays in one activity could have unforeseen impacts on the progress of others. Risk management: OPM did not have a process for identifying and tracking project risks and mitigation strategies on a regular basis. Thus, it lacked a mechanism to address potential problems that could adversely impact the cost, schedule, and quality of the modernization effort. Organizational change management: OPM had not adequately prepared its staff for changes to job responsibilities resulting from the modernization by developing a detailed transition plan. This could lead to confusion about roles and responsibilities and hinder effective system implementation. In 2008, as OPM was on the verge of deploying an automated retirement processing system, GAO reported deficiencies in and made recommendations to address additional management capabilities: Testing: The results of tests 1 month prior to the deployment of a major system component revealed that it had not performed as intended. These defects, along with a compressed testing schedule, increased the risk that the system would not work as intended upon deployment. Cost estimating: The cost estimate OPM developed was not fully reliable. This meant that the agency did not have a sound basis for formulating budgets or developing a program baseline. Progress reporting: The baseline against which OPM was measuring the progress of the program did not reflect the full scope of the project; this increased the risk that variances from planned performance would not be detected. In 2009, GAO reported that OPM continued to have deficiencies in its cost estimating, progress reporting, and testing practices and made recommendations to address these and other weaknesses in the planning and oversight of the modernization effort. OPM agreed with these recommendations and began to address them, but, in February 2011, it terminated the modernization effort. In January 2012, OPM released a plan to improve retirement processing that aimed at targeted, incremental improvements rather than a large-scale modernization. Toward this end, OPM has reported hiring new claims-processing staff, taking steps to identify potential process improvements, and working with other agencies to improve data quality. Further, the agency reported making IT improvements that allow retirees to view the status of their accounts and automating parts of the retirement application process. However, the plan reflects a less ambitious goal for retirement processing timeliness and does not address improving or replacing the legacy systems that support retirement processing. GAO is not making new recommendations at this time. GAO has previously made numerous recommendations to address IT management challenges that OPM has faced in carrying out its retirement modernization efforts. Fully addressing these challenges remains key to the success of OPM's efforts.

On August 5, 1998, PBS entered into a lease with Jack I. Bender & Sons, General Partnership to provide lease space and parking for SSUD at an annual net rent of $2,129,461. This figure exceeded the prospectus threshold of $1.93 million for fiscal year 2000, the year in which occupancy is to commence. A prospectus was not submitted to GSA's Senate and House authorizing committees at the time the lease was signed. As the federal government's primary real estate agent, GSA, through PBS, provides space for agencies in federally owned buildings or by leasing space in privately owned buildings. NCR is responsible for providing space for agencies in the Washington, D.C., metropolitan area. Pursuant to section 210(h)(1) of the Federal Property and Administrative Services Act of 1949, as amended, 40 U.S.C. 490(h), the Administrator of GSA is authorized to enter into lease agreements for periods of up to 20 years on such terms as the Administrator deems to be in the interest of the United States and necessary for the accommodation of federal agencies. Section 7(a) of the Public Buildings Act of 1959, as amended, 40 U.S.C. 606(a), among other things provides for a detailed project description, called a prospectus, containing a project cost estimate and justification to be submitted to GSA's Senate and House authorizing committees. A prospectus is (1) called for if the average annual rental of a lease is expected to exceed the prospectus threshold, as specified in the statute, and (2) adjusted by GSA annually, as authorized by the statute, to reflect changes in costs during the preceding year. Annually, the PBS National Office issues a Capital Investment and Leasing Program call asking all GSA regional offices to submit their prospectus- level projects. Each year the National Office provides the regions with the prospectus-level threshold and general guidance on preparing prospectuses. The National Office reviews the prospectuses submitted by the regions and the prospectuses that it approves are then consolidated into GSA's Capital Improvement and Leasing Program and submitted to the Office of Management and Budget (OMB) for approval. Once OMB approves the program, it is sent to GSA's authorizing committees. PBS stated that its policy since 1972 has been not to enter into any lease agreement if the annual rental exceeds the prospectus threshold unless the authorizing committees have approved a prospectus. At your request, we assessed the circumstances surrounding the award of the SSUD lease. As agreed, we did not evaluate NCR's overall process for identifying prospectus-level leases or for preparing prospectuses. To determine the circumstances surrounding the award of the lease for SSUD, we spoke with the cognizant NCR officials in the Regional Counsel's Office, Portfolio Management Division, and Property Acquisition and Realty Services Division; reviewed GSA's leasing policies and procedures; and discussed policy issues and guidance provided to regional offices with officials in PBS. We also spoke with two former NCR staffers--the original contracting officer for the SSUD lease and an attorney from the Regional Counsel's Office--since both played significant roles in this acquisition. We reviewed the contract file for the lease to determine the acquisition process used and the critical decision points. Only limited documentation was available to support some of what we considered to be the critical decisions, such as the initial decision that this action was not a prospectus- level acquisition. Thus, some of the information being provided in this report is based on what current and former GSA officials remembered about events that occurred up to 3 years ago. We also obtained information on actions taken by NCR to help prevent prospectus-level leases from being awarded without a prospectus being prepared. Further, we obtained and reviewed GSA's policies and guidance related to the preparation of lease prospectuses, and we verified that the rental-of- space account in the Federal Buildings Fund (FBF) had sufficient appropriated funds to cover the obligation for the SSUD lease. We discussed the specifics of the SSUD lease with an official in PBS' Office of Portfolio Management. We also contacted regional officials in 9 of GSA's 10 other regions to determine whether they had guidance in place specifying how to calculate the lease costs to be used to determine if a prospectus is needed for an acquisition, and whether the decision that a lease is not prospectus-level is revalidated when space requirements or market rental rates change. We were unable to contact the appropriate official in the remaining GSA region in time for inclusion in this report. We did our work between March and July, 1999, in accordance with generally accepted government auditing standards. On July 26, 1999, we requested comments on a draft of this report from the Administrator of GSA. GSA's written comments are discussed near the end of this letter. In NCR, it is initially the Portfolio Management Division's responsibility to review expiring leases to identify new leases that might be above the prospectus threshold and to prepare the prospectuses for those leases. In the case of the SSUD lease, there was no indication that Portfolio Management identified the lease as potentially needing a prospectus. According to the contracting officer, who has since left GSA, even though Portfolio Management had not identified this lease as needing a prospectus, when she began working on the SSUD lease in April 1996, she confirmed her expectation that the lease would be below the prospectus threshold. Her estimate of the lease costs was made by multiplying the expected market rental rate ($29 to $30 per square foot) by the estimated space requirement (50,000 square feet). This calculation resulted in an estimated total rent of $1.45 million to $1.5 million, which was below the fiscal year 1998 prospectus threshold initially being used for this lease of $1.81 million. Therefore, she went forward with the acquisition process as a nonprospectus-level lease. In the contract file, we found documents showing that early in the acquisition process there was information available indicating that the SSUD lease could be closer to the fiscal year 1998 prospectus threshold. A letter, dated June 27, 1996, to NCR from a Secret Service official estimated that SSUD would need 55,000 to 60,000 square feet of space. Using the contracting officer's estimated market rental rate ($29 to $30 per square foot), the dollar range of $1.6 million to $1.8 million for that much space would have been much closer to the fiscal year 1998 prospectus threshold. Although the actual space requirement had not yet been determined, it appears to us that PBS should have recognized that if the space requirement or rental rate were higher than expected, the lease could possibly exceed the fiscal year 1998 prospectus threshold. When the Solicitation for Offers (SFO) was issued in November 1997, it stated that SSUD required 69,500 to 72,250 rentable square feet of office and related space and 78 parking spaces. The SFO stated that this was not a prospectus-level lease. Therefore, to be considered, any offer must be below the prospectus threshold. There was nothing in the contract file to indicate that a check had been done after SSUD's space requirements were finalized to verify that NCR could still expect lease offers for this project to be below the prospectus threshold. Because of the increase in space needs over SSUD's June 1996 estimate, it would seem prudent to have done another prospectus-level calculation before issuing the SFO. Had this calculation been done using the actual minimum space requirement in the SFO (69,500 square feet) times the low end of the estimated market rental rate ($29) that the contracting officer had initially used, the estimated annual rent would have been about $2.02 million. This amount exceeded both the fiscal year 1998 prospectus threshold of $1.81 million that was initially used for this lease and the fiscal year 2000 threshold of $1.93 million that was later used. We believe that if an update of the prospectus calculation had been done at this point, the need to reevaluate the prospectus decision would have been apparent to NCR. Early in 1998, there were three offerors competing for the SSUD lease. About the time that NCR received the best and final offers, the original contracting officer left GSA. When the new contracting officer took over responsibility for the SSUD lease, he raised the question about the need for a prospectus on the basis of the offers received. In May 1998, the contracting officer reopened negotiations on the lease to clarify the calculation for determining compliance with the prospectus threshold. Before this time, there was no indication in the contract files that the offerors had been informed about how to calculate whether their offers would comply with the SFO requirement that the offer be below the prospectus threshold. In an attempt to clarify how to calculate the prospectus threshold, the contracting officer sent the offerors two letters in May 1998. His first letter, on May 8, 1998, specified that parking, operating expenses, and the cost of amortizing the tenant allowance for above standard requirements should be subtracted from the total full-service rental rate to determine if the offer would be below the prospectus threshold. A week later, on May 15, 1998, the contracting officer sent the offerors a second letter, amending the May 8 letter. This letter stated that only operating expenses and any concessions offered to the government should be subtracted from the total full-service rental rate when determining compliance with the prospectus threshold. Officials at the National Office and in NCR's Portfolio Management Division, stated the same calculation mentioned in the May 15 letter as the correct way to determine if an offer met the prospectus threshold. After receiving these letters from the contracting officer, attorneys for two of the offerors expressed concerns about the changes in the calculation being used to determine prospectus compliance at such a late stage in the process. Before the new contracting officer reopened the negotiations, correspondence between the offerors and NCR indicated that the offerors had been informed or led to believe that their offers met the basic requirements for the acquisition, including compliance with the requirement that their offers be below the prospectus threshold amount. Ultimately, none of the offers met that requirement on the basis of the calculation provided in the May 15 letter. The NCR officials involved with this lease said that there were discussions about how to respond to the letters from the offerors' attorneys and how to proceed with the acquisition. The officials said that their decision to try to complete this acquisition without a prospectus was based on the (1) time already invested in this acquisition, (2) concerns raised by the offerors' attorneys, and (3) need to award the lease in time for the new space to be ready when SSUD's current lease expires in February 2000. We found little written documentation in the contract files of the discussions that were held and the decisions made regarding the SSUD lease. The contracting officer said that he consulted primarily with an attorney in the Regional Counsel's Office on this matter. By telephone and E-mail, the attorney sought input from both the National Office and regional Portfolio Management officials. However, a consensus opinion on how to proceed with this lease was never developed. It appears that the contracting officer acted on advice from the attorney when he issued an amendment to the SFO in July 1998 informing the offerors that (1) the calculation for determining prospectus compliance was the aggregate cost of the contract, minus operating expenses, minus any tenant improvement allowance, and divided by the 20-year term of the lease and (2) the fiscal year 2000 prospectus threshold of $1.93 million would be used for this lease. According to the attorney, who has since left GSA, his advice was based on his understanding and interpretation of the guidance he received from various sources. Specifically, he said he advised the contracting officer that the cost of SSUD's above standard tenant requirements could be excluded from the prospectus calculation on the basis of discussions with his supervisor and his interpretation of a 1990 Comptroller General decision. However, the Comptroller General decision stated that the cost of "specials" (i.e., items above standard tenant requirements) could be excluded from the prospectus calculation because GSA elected to pay for the specials on a lump-sum basis from the tenant agency's appropriation. The general rule relating to above standard requirements is that if the costs are paid on a lump-sum basis, they are not included in the annual net rent payment. But, if the costs are amortized in the lease, they are included in the annual net rent payment. In the case of SSUD, it was clear early in the acquisition process that the cost of the above standard tenant requirements would be amortized over the term of the lease because the Secret Service did not have the funds available to pay for these costs by lump-sum payment. The attorney advised the contracting officer to use the fiscal year 2000 threshold because it will be the year when the lease payments begin. The contracting officer confirmed that this was consistent with the oral guidance provided by Portfolio Management in the National Office. The contracting officer ultimately set July 10, 1998, as the date for final revisions to the offers for the SSUD lease, and two final offers were received. The third offeror withdrew because it said that it could not meet the economic requirements specified in the amended SFO. Only one of the offers actually fell below the prospectus threshold as defined in the July 1998 amendment to the SFO. According to the contracting officer, once it was determined that only one offer met the requirements, he had the attorney in the Regional Counsel's Office, in accordance with NCR's practice, review and concur in the lease award before it was awarded. The Budget Office also reviewed the lease as an operating lease and certified that funds were available for the award. The contracting officer signed the SSUD lease for GSA on August 5, 1998. NCR reviewed this acquisition after the lease was awarded and questions were raised by a congressional staffer about whether it should have had a prospectus. According to an NCR official, it is GSA's policy to prepare lease prospectuses for all leases that exceed the prospectus threshold. NCR concluded that the SSUD lease did exceed the prospectus threshold, and that a prospectus should have been prepared in this case. NCR then prepared a prospectus and submitted it to GSA's authorizing committees on September 25, 1998. During NCR's review of this lease, it also determined that while the lease was treated as an operating lease when it was awarded, it was in fact a capital lease. As a result, about $22 million in budget authority had to be counted against GSA's fiscal year 1998 rental-of- space account for the lease. We verified that at the time the SSUD lease was signed, there were sufficient unobligated funds in the FBF rental-of- space account to cover the obligation. NCR officials said that in their opinions, awarding the SSUD lease without a prospectus resulted from NCR employees' "creatively" interpreting the prospectus threshold. According to a senior NCR official, this action was in response to the specific circumstances of this lease and does not indicate that there is a systemic problem within NCR. Although we did not evaluate NCR's overall process to determine if there were systemic problems, we found no specific written PBS guidance on what costs are to be included in the calculation to determine whether a lease will need a prospectus. Also, NCR's internal controls were not sufficient to ensure that the SSUD lease was correctly identified as prospectus-level, and that a prospectus was prepared and submitted to GSA's authorizing committees before the lease's award. To strengthen the internal controls, on October 26, 1998, NCR began requiring the Portfolio Management Division to verify all leases before they are awarded. The staff was told that "this verification must be made in sufficient time prior to award so that a different course of action (other than making an award) is available." However, there still is no written guidance on how to calculate the costs that should be used to determine if a lease is prospectus-level or not. Also, there is still no requirement to revalidate the prospectus decision when space requirements and/or market rental rates change during the course of the acquisition. We spoke with officials in 9 of GSA's 10 other regional offices to ask whether they had guidance in place specifying how to calculate if a prospectus is needed for a lease, and if they revalidate the decision that a lease is not prospectus-level when space requirements or market rental rates change. None of the officials with whom we spoke said they currently had specific written guidance to follow when determining if a lease prospectus was needed beyond the general guidance provided by the National Office. However, some of the officials said that the old leasing handbook, which is no longer used as guidance, specified that when determining whether a lease was prospectus-level, operating expenses should be subtracted from the total rent. Several officials said that it would be helpful to have specific written guidance on what costs to include and exclude when determining if a lease is expected to exceed the prospectus threshold. When we asked, these nine regional officials said they also did not specifically require that the decision that a lease was not prospectus-level be documented or revalidated when space requirements or market rental rates change. However, many of the officials said that this recheck is inherent in the process. The officials said that when the final offers are received, if those offers are above the prospectus threshold, the region cannot and does not go forward with the award. The lack of adequate internal controls over the leasing process at NCR resulted in PBS' signing a prospectus-level lease for the SSUD space on August 5, 1998, without first preparing and submitting a prospectus for the lease to GSA's authorizing committees. While NCR has instituted a new policy requiring its Portfolio Management Division to verify all leases before they are awarded, written guidance on how to calculate the average annual rental to be used to determine whether a prospectus is needed still does not exist. Also, NCR still does not require that the decision that a lease is not prospectus-level be documented when that initial decision is made, or that the decision be revalidated and documented when one or both of the factors on which such a decision is based requirements and market rental rates change. Officials in nine other GSA regions with whom we spoke said that written guidance on how to calculate the average annual rental and a requirement to document and revalidate decisions that a lease is not prospectus-level is also missing in these regions. We recommend that the Administrator of GSA direct the PBS Commissioner to issue explicit written guidance defining the specific cost elements that may be excluded from the total full-service rental rate when calculating whether a prospectus should be prepared for a proposed lease. This guidance should also cover the fiscal year threshold that should be used for making this determination for a capital lease and for an operating lease. We also recommend that the Administrator of GSA direct the PBS Commissioner to establish a requirement specifying that the decision that a lease is below prospectus-level be documented and revalidated whenever there is a change in one or both of the factors on which such a decision is could affect agency space requirements and market rental rates the outcome of the decision on whether a prospectus would be required. On August 20, 1999, we received written comments on a draft of this report from PBS' Commissioner. He said that the report accurately reflects the factual circumstances surrounding the award of this lease. While the Commissioner believes that the awarding of the SSUD lease without a prospectus was an anomaly, he said that he agrees with our recommendations that current written guidance is needed and has directed his staff to prepare such guidance. The Commissioner's letter is reproduced in appendix II. In addition, an NCR official provided some technical comments, which we incorporated as appropriate. We are sending copies of this report to Representative Robert E. Wise, Ranking Democratic Member of your Subcommittee; Senator John Chafee, Chairman, and Senator Max S. Baucus, Ranking Minority Member, Senate Committee on Environment and Public Works; the Honorable David J. Barram, Administrator, GSA; Mr. Nelson B. Alcalde, Regional Administrator, NCR, GSA; and to others upon request. If you have any questions about this report, please call me or Ron King on (202) 512-8387. Key contributors to this assignment were Maria Edelstein, Shirley Bates, and Susan Michal-Smith. Table I.1 contains a chronology of major events that transpired in relation to the award of the lease for the United States Secret Service Uniform Division (SSUD). Event The General Services Administration's (GSA) National Capital Region (NCR) and SSUD began discussing relocation from 1310 L Street. Secret Service provided NCR information on location requirements, generic security standards, and estimated space needs (55,000 and 60,000 square feet) so NCR could begin advertising the need for space to assess the properties that might be available for lease. Four offers were submitted on the basis of NCR's SFO. Offers were submitted by Jack I. Bender & Sons, General Partnership c/o Blake Construction, Inc.; 17 H Associates L.P. and 17 H II Limited Partnership c/o Carr America; Associated General Contractors c/o Dickstein Shapiro Morin & Oshinsky LLP; and 1920 L Street LLC c/o Leggat McCall Properties. The offerors were given an opportunity to present their offers and were notified of the areas in which their offers did not meet the requirements and were given the opportunity to correct these areas. Representatives from 1920 L Street LLC did not attend a scheduled meeting and failed to submit a best and final offer. Therefore, at this point there were three remaining offerors. Original contracting officer left GSA to work for the Secret Service and a new contracting officer took over the SSUD lease. The new contracting officer said that when he became involved with the SSUD lease he saw the need for a prospectus. Current contracting officer tried to clarify calculation for determining if offers meet the prospectus threshold. Letter to offerors defined the calculation as the total full-service rental rate, minus parking, minus operating expenses, and minus the cost of amortizing the tenant improvement allowance. The letter also specified that using the above calculation, the offers must not exceed the fiscal year 1998 prospectus threshold of $1.81 million. Contracting officer sent another letter to the offerors amending the May 8, 1998, letter. In this letter, the calculation for determining if offers meet the prospectus threshold was defined as the total full-service rental rate, minus operating expenses, and minus any concessions offered to the government. This letter also amended the prospectus threshold to fiscal year 2000, which is $1.93 million. Event Associated General Contractors of America withdrew from the competition for the SSUD lease because it said that it could not meet the economic requirements. Attorneys for the two remaining offerors, Jack I. Bender & Sons, General Partnership and 17 H Associates L.P. and 17 H II Limited Partnership, both wrote letters to GSA expressing concerns about the changes to the calculation for determining compliance with the prospectus threshold. Internal NCR discussions about how to calculate compliance with the prospectus threshold and which fiscal year to use for the threshold were held. Amendment number 6 to the SFO issued stating that the prospectus threshold being used for the SSUD lease is fiscal year 2000 ($1.93M) and the calculation for determining prospectus compliance is the aggregate cost of the contract (including parking), minus operating expenses and any tenant improvement allowance, and then divided by the 20- year term of the lease. Final amendment (number 7) to the SFO was issued setting July 10, 1998, as the date for final revisions to offers. Analysis done on offers, including initial offer submitted by Associated General Contractors of America, found that only the offer from Jack I. Bender & Sons, General Partnership met the prospectus threshold requirement as defined in amendment number 7 to the SFO. GSA signed a 20-year lease with Jack I. Bender & Sons, General Partnership for 72,250 rentable (64,500 usable) square feet of space at 1111 18th Street, Washington, D.C. A Senior Professional Staff Member for the Subcommittee on Economic Development, Public Buildings, Hazardous Materials and Pipeline Transportation called NCR to ask about the SSUD lease that was reported in the newspaper. He asked why the Subcommittee had not seen a prospectus for the lease since the reported size and cost of the lease appeared to be prospectus-level. A prospectus for the SSUD lease at 1111 18th Street was prepared and transmitted to GSA's authorizing committees. 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 provided information on new leased space acquired for the Secret Service's Uniformed Division (SSUD) at 1111 18th Street, N.W., Washington, D.C., by the Public Buildings Service (PBS). GAO noted that: (1) a lack of adequate internal controls over the leasing process at the General Services Administration's (GSA) National Capital Region (NCR) resulted in PBS' awarding a lease for SSUD on August 5, 1998, above the prospectus dollar threshold without first preparing and submitting a prospectus for the lease to GSA's Senate and House authorizing committees; (2) there was confusion about the costs that were to be considered in determining whether a prospectus was needed; (3) specific written guidance on how to calculate the cost did not exist; (4) although the space requirements increased about 40 percent--from about 50,000 square feet to about 70,000 square feet--during the acquisition process, procedures did not call for the revalidation of the decision that a prospectus was not needed when the space requirements or market rental rates used to make the decision changed during the acquisition process; (5) after a congressional staffer asked questions about the lease on August 31, 1998, NCR officials reviewed the award of the lease and determined that a prospectus should have been prepared and submitted to GSA's Senate and House authorizing committees as provided for in section 7(a) of the Public Buildings Act of 1959, as amended, 40 U.S.C. 606(a), and PBS' policy and procedures; (6) subsequently, NCR has instituted a new policy requiring its Portfolio Management Division to verify all leases before they are awarded; and (7) still, GSA has not developed specific guidance on how to calculate the cost to be used to determine whether a prospectus should be prepared, nor has GSA determined that it needs to revalidate prospectus decisions when space requirements or market rental rates change.

PRWORA made sweeping changes to national welfare policy, creating TANF and ending the federal entitlement to assistance for eligible needy families with children under Aid to Families with Dependent Children (AFDC). The Department of Health and Human Services (HHS) administers the TANF block grant program, which provides states with up to $16.5 billion each year through fiscal year 2002. TANF was designed to help needy families reduce their dependence on welfare and move toward economic independence. The law also greatly increased the discretion states have in the design and operation of their welfare programs, allowing states to determine forms of aid and the categories of families eligible for aid. TANF establishes time limits and work requirements for adults receiving aid and requires states to sustain 75 to 80 percent of their historic level of welfare spending through a MOE requirement. In addition, TANF gives states funding flexibility, which allows states to exclude some families from federal time limits and work requirements. TANF establishes a 60 month time limit for families receiving aid. States have the option of establishing shorter time limits for families in their state. A state that does not comply with the TANF time limit can be penalized by a 5 percent reduction in its block grant. While the intent of TANF is to provide temporary, time-limited aid, federal time limits do not apply to all forms of aid or to all families receiving aid. First, states are only to count toward the 60 month time limit any month in which an individual receives a service or benefit considered "assistance," which is defined in the TANF regulations as cash or other forms of benefits designed to meet a family's ongoing basic needs. Second, time limits do not apply to the following types of cases: 1. Child-only cases in which the adult in the household does not receive cash assistance.2. Families who received assistance while living in Indian country or an Native Alaskan village where 50 percent of the adults are not employed. Third, all states have the option to use federal funds to extend assistance beyond the federal 60 month limit for reasons of hardship, as defined by the state. States can extend assistance for up to 20 percent of the average monthly number of families receiving assistance ("20 percent extension").Finally, assistance that is provided solely through state MOE is not subject to the federal time limit. TANF also establishes work requirements for adults receiving aid. After 2 years of assistance, or sooner if the state determines the recipient is ready, TANF adults are generally required to be engaged in work as defined by the state. In addition, TANF establishes required work participation rates--a steadily rising specified minimum percentage of adult recipients who must participate in federally specified work or work-related activitieseach year for at least a minimum number of hours. States were required in federal fiscal year 2002 to meet a work participation rate of 50 percent for all TANF families with adult members--referred to as the rate for all families. States were also required to meet a much higher rate--90 percent--for two-parent families. States must meet these work participation rates to avoid financial penalties. While states have generally met the work participation rate for all families, many states have faced financial penalties due to failure to meet the two- parent required rate in recent years. HHS issued penalty notices to 19 states in fiscal year 1997, 14 in fiscal year 1998, 9 in fiscal year 1999, and 7 states in fiscal year 2000. In addition to establishing federal participation rate requirements, PRWORA specified that the required rates are to be reduced if a state's TANF caseload declines. States are allowed caseload reduction credits, which reduce each state's work participation requirement by 1 percentage point for each percentage point by which its average monthly caseload falls short of its fiscal year 1995 level (for reasons other than eligibility changes). While states are to meet federal participation requirements, they also have the flexibility to encourage and require TANF recipients to participate in any activity a state chooses or at any level of activity, although that activity or the hours of activity may not count toward the federal participation rates. In addition, federal time limits and work requirements may not apply in some states that were granted federal waivers to AFDC program rules in order to conduct demonstration programs to test state reforms. The Personal Responsibility, Work, and Family Promotion Act of 2002 passed by the House of Representatives (H.R. 4737) on May 16, 2002, reauthorizes the TANF block grant keeping in place key elements of TANF, such as time limits and work requirements. It also changes some aspects of TANF, including the participation rate requirements. It increases the federally mandated rate by 5 percent a year to 70 percent by 2007, revises the number of hours of participation and types of activities required, and made some alterations to the caseload reduction credit, among other changes. In addition, the act specifies that two-parent families would no longer be subject to a separate and higher work participation rate. The Senate is in the process of reauthorizing TANF as of June 2002. Previously, under AFDC, state funds accounted for 46 percent of total federal and state expenditures. Under PRWORA, the law requires states to sustain 75 to 80 percent of their historic level of spending on welfare through a MOE requirement to receive their federal TANF block grant. The federal TANF funds and state MOE funds can be considered more like funding streams than a single program and states may use their MOE to assist needy families in state programs other than their TANF programs. In fact, states have flexibility to expend their MOE funds for cash assistance in up to three different ways, some of which allow states to exclude some families from time limits and work requirements. A state may use its state MOE funds in three different ways to provide cash assistance for needy families. Commingling: A state can provide TANF cash assistance by commingling its state MOE with federal funds within its TANF program. Segregating: A state can provide some TANF cash assistance with state MOE accounted for separately from its federal funds within its TANF program. Separating: A state can use its state MOE to provide cash assistance to needy families in any one or more non-TANF state programs, referred to as "separate state programs." Each state may choose one or more of these options to provide cash assistance. In some cases, in this report, we refer to the second and third options as using "state-only" funds when the distinction between segregating and separating funds is not necessary. In addition, we focus only on cash assistance and not on other forms of aid or services, including, for example, child care and transportation, for which time limits and work requirements generally do not apply. (For more information on state funding choices, see app. I.) How a state structures its funds determines which TANF rules apply to the needy families being served. (See table 1.) When a state commingles funds, it must meet all TANF requirements. For example, states that commingle all their state MOE with federal funds are only able to exclude families from time limits through the 20 percent extension, cannot exclude families from counting toward the federal work participation rate, and cannot provide assistance to certain groups of legal immigrants. In addition, while not required by federal law, states may choose to apply work requirements or time limits on their state-funded assistance. States reported that in the fall of 2001, 2.1 million families received cash assistance funded with federal TANF or state MOE dollars. This includes about 110,000 families, or 5 percent, who were provided cash assistance through separate state programs funded by state MOE dollars. These families are not counted in the TANF caseload data reported by HHS. Twenty-six states used separate state programs to provide cash assistance, typically to legal immigrants and two-parent families. In most of these states, the separate state program caseload represented 5 percent or less of the total caseload. However, in four of these states, families served through separate state programs represented from 10 to 30 percent of the total cash assistance caseload. (For more information on the separate state program caseload by state and the populations served in the states' programs, see app. II.) It is noteworthy that the separate state program caseload represents a more significant share in two of the nation's most populous states-- California and New York. More specifically, the number of families receiving cash assistance through separate state programs in California alone--nearly 50,000--is greater than the total cash assistance caseload in most states. HHS began requiring states in fiscal year 2000 to provide information on families provided assistance through separate state programs and reported on the separate state program caseload in their recently issued Fourth Annual Report to Congress. However, this caseload is not included in the TANF caseload data. Child-only cases, while not generally in separate state programs, account for an even more significant proportion of the cash assistance caseload. Of the 2.1 million families receiving aid, 736,045, or one-third, were composed of children only. Generally, child-only cases are not subject to work requirements or time limits. The percentage of child-only cash assistance cases varied greatly among the states, ranging from 13 percent in Hawaii to 73 percent in Wyoming. In addition, as shown in figure 1, the types of child-only cases vary and can include families in which the caregiver is a nonparent, such as grandparent or other relative; parent is receiving Social Security or Supplemental Security Income (SSI) and not eligible for TANF; parent is a noncitizen ineligible for federally funded TANF; and parent has not complied with TANF program requirements and so has been denied benefits, called a sanction.(For more information on each state's total cash assistance and child-only caseloads, see app. III.) Reduced federal participation rate requirements and states' use of their MOE funds give states considerable flexibility in implementing work requirements. Almost all the states had more adults participating in work and work-related activities than they were required to, but the percentage of adults participating varied greatly among the states. Almost all of the families who received cash assistance through separate state programs were subject to state work requirements, even though federal work requirements did not apply. States faced greatly reduced federal participation rate requirements for fiscal year 2000, as caseload reduction credits were triggered by recent caseload declines. Welfare caseloads have declined dramatically, from 4.4 million in August 1996 to 2.1 million as of September 2001, marking a 52 percent decline in the number of families receiving cash welfare. As a result, the fiscal year 2000 participation rate requirement was adjusted downward from 40 percent to 0 in 31 states. (See table 2.) Even though most states faced relatively low or no participation rate requirements, about 30 percent of TANF adults were counted as meeting federal participation requirements nationwide. However, the federal participation rates varied greatly among the states, as shown in figure 2. Officials in one state told us that because the participation rate requirements are so low, states have more flexibility in choosing whether to enroll TANF recipients in work or in other types of activities or services, such as substance abuse treatment or mental health services, which do not count for purposes of the federal participation rate. State officials believe they can make such choices without fear of not meeting their federal work participation rates. In other cases, the lower participation rates give states more flexibility in exempting TANF recipients considered hard to employ from meeting work requirements. For more information on TANF and persons with disabilities, see our report entitled: U.S. General Accounting Office, Welfare Reform: More Coordinated Federal Effort Could Help States and Localities Move TANF Recipients with Impairments toward Employment, GAO-02-37 (Washington, D.C.: Oct. 31, 2002). of participation if allowed by a state. For example, in some states, this measure would include participation in mental health treatment activities. In addition, in one state we talked with, an adult working only 1 hour a week would be considered as participating in state-defined activities. In contrast, a minimum of 30 hours of work would generally be required to count as meeting the federal participation requirement. Using this state-defined rate, nationwide, about 56 percent of TANF adults were involved in work or work-related activities, based on the 47 states that provided data for fall 2001. The percentage of the adult caseload involved in work or work-related activities (as defined by the state) ranged from 6 percent to 93 percent. As shown in figure 3, the percentage of adults participating was 30 percent or less in 8 states, 31-50 percent in 20 states, and more than 50 percent in 19 states, according to state survey responses. (See app. IV for more specific data by state.) Providing cash assistance through separate state programs has offered states additional flexibility, as federal work requirements do not apply to families served through these programs. the 26 states with separate state programs, 16 states used these programs to provide cash assistance to two-parent families. Several state officials told us they provide aid in this way to avoid the risk of financial penalties for failing to meet the federal two-parent participation rate requirement. State officials told us that two- parent families often have as many or more challenges as single parents, making the higher participation rate for two-parent families difficult to meet. However, states that provided cash assistance through separate state programs typically imposed their own work requirements on families receiving aid. We found that approximately nine-tenths of the families receiving cash assistance in separate state programs are still subject to a state work requirement. While states generally imposed work requirements, about half of them also have policies in place to exclude families facing significant barriers to work from work requirements. For example, 13 states exclude families with an adult who is disabled and 13 states exclude families who care for someone with a disability. It is possible that states may rely more on separate state programs in the future to provide cash assistance free from federal work requirements as they take steps to meet state and local goals. H.R. 4737--the reauthorization bill passed by the House--eliminates the higher federal participation requirement for two-parent families that was often cited by states as a reason for using separate state programs. However, it also includes higher overall federal participation requirements for all families. States would still have the option to serve other families who they deem may have difficulty meeting higher federal requirements through separate state programs. With higher participation requirements for all families, the number of families that states may consider unable to meet higher federal work requirements could increase. Through the 20 percent federal extension and the use of state funds, states generally excluded the following types of families from federal and state time limits: families they considered "hard to employ," families that were working but not earning enough to move off TANF, and families that were cooperating with program requirements but had not yet found employment. During fall 2001, states excluded from federal or state time limits 11 percent of the 1.4 million cash assistance families with adults. The number of families excluded from time limits may increase in the future because most families have not yet reached their federal or state- imposed cash assistance time limit. States targeted time limit exclusions to families they considered hard to employ, families who were working but not earning enough to move off TANF, and families who were cooperating with program requirements. The majority of states excluded hard-to-employ families in which the parent had a disability or was caring for a child with a disability, families dealing with domestic violence, and families with a head of household of advanced age. (See fig. 4.) Some of these exclusions are granted on a temporary basis (such as for disabled recipients pending transfer to the Supplemental Security Income program), while others are granted for longer periods of time (such as for family heads of advanced age). Twenty-two states exclude working families or families participating in a work activity from time limits, either through the federal 20 percent extension or by using state-only funds. Maryland and Illinois, for example, "stop the clock" for families who are working or participating in a work activity by funding them with state-only dollars. Officials from both states told us that their states adopted this policy to reward working families for complying with program requirements. States that exclude families by using state-only funds use criteria similar to those used by states that rely solely on the federal 20 percent hardship extension. Using the 20 percent extension, states are able to extend time limits for a broad range of families, such as families cooperating with program requirements or making a "good faith effort" to find employment. For example, officials from Michigan, a state that commingles all of its state funds with federal funds, told us that they will use the 20 percent extension for all recipients following the rules of the program; if the number of families to whom they want to provide an extension begins to exceed 20 percent, they plan to continue providing assistance through state funds. Almost half of the states exclude families making a good faith effort to find employment. States have excluded from time limits 11 percent (about 154,000) of the approximately 1.4 million families with adults receiving federal- or state- funded cash assistance. (See app. V for the percent of exclusions by state.) As shown in figure 5, 45 percent of these families--mostly in Illinois, Massachusetts, and New York--were excluded through states use of state-only funds. An additional 43 percent of the families were excluded from time limits under federal waivers granted to states before welfare reform to conduct demonstration programs. Many of these waivers remain in effect. While states sometimes use state funds to exclude families from federal time limits, states are still applying a state time limit to a significant portion of state-funded families. Overall, 64 percent of families who receive cash assistance through separate state programs or segregated state funds are still subject to a state time limit. Twenty-six of the 33 states with state-funded families apply a state time limit to some or all of their state-funded families. (See app. VI for additional information on state choices regarding funding and time limits.) The percentage of the caseload that is excluded from time limits may increase because most families have not reached their time limit. In 22 states TANF had not been in effect long enough for families to reach either the federal or the state time limit by the time we conducted our survey.Even in those states where it was possible to have received 60 months of cash assistance, many families had not reached their time limit because they have cycled on and off welfare, slowing their accrual of time on assistance. State officials generally thought the 20 percent federal time- limit extension was adequate now, but were less sure about the future, given that many families have not yet reached the 60 month time limit. State officials we spoke with told us that they planned to rely more heavily on state MOE funds to continue assistance to significant numbers of families reaching the 60 month time limit. For example, California told us it estimated that over 100,000 families with adults would reach the federal time limit in the next year. California plans to use state-only funds to continue aid beyond 60 months to children by removing the adult from the case. California also plans to continue aid to families who are making a good faith effort to find employment and to families who are hard to employ because the adult is aged, disabled, caring for a disabled family member, or experiencing domestic violence. In addition, New York plans to continue assistance to families who reach the 60 month time limit through its separate state program. In December 2001, New York State had 44,027 families reach the 60 month federal time limit. Of these families, 28,781(65 percent) were transitioned to the state's separate state program funded with state MOE, 9,873 (22 percent) received the 20 percent extension, and the remaining 5,393 (12 percent) were transitioned off assistance. These families were among the first to reach time limits with more families to follow. At the time of our survey, we found that only 15 states had begun to use the federal 20 percent hardship extension; overall, these states were applying it to less than 1 percent of their adult caseload. While it is difficult to estimate the extent to which states may use the 20 percent extension as more families reach the 60 month time limit, it is important to note that states' child-only caseloads can result in significantly more than 20 percent of the adult TANF caseload receiving the extension. As discussed earlier, TANF allows each state to extend the 60 month time limit for up to 20 percent of the average monthly number of families receiving TANF assistance funded in whole or part with federal TANF funds. In each state, the maximum number of families who may receive extensions is equal to 20 percent of the total number of TANF families, including child-only cases. This results in a higher number of adults who can receive the extension than if the calculation were based on 20 percent of TANF families with adults. We estimated that the maximum percentage of adults who may receive the federal extension ranges from 77 percent in Wyoming to 24 percent in Vermont and New Mexico, based on our analysis of survey data for fall 2001. (For more on this analysis, see app. VII). Although states have had TANF programs in place for 5 years now, their experiences with key elements of TANF are still evolving. The dramatic caseload decline that greatly reduced the federally required participation rates gave states great flexibility in implementing work requirements. With this flexibility, the extent of involvement of TANF adults in federally or state-required activities varied greatly among the states. On the one hand, this means states have adapted their programs to meet state and local goals and needs. On the other hand, it means states with relatively low participation rates have more limited experience than other states in involving welfare recipients in work activities. This may affect their ability to meet federal participation rate requirements in the future. In addition, many states have used the flexibility allowed them in using state MOE to exclude families from or to extend federal time limits. In this way, states could ensure a safety net for families that state TANF program officials had determined needed more time to become self-sufficient or were unable to support themselves. Because so many families have not yet reached their time limits, much remains unknown about choices states will make in enforcing time limits and whether an appropriate balance will be struck between ensuring a safety net for families in need and creating a transitional aid system that promotes work and personal responsibility. Two issues that warrant attention in the future include wider implementation of the 20 percent federal time limit extension and states' use of separate state programs to provide cash assistance. First, as we reported, the 20 percent time limit extension, when applied to adults, represents a larger and varying share of adults among the states than when applied to all families, including child-only cases. As this extension policy is more widely used in the years ahead, it will be important to understand whether the 20 percent extension as currently calculated affords all states the access needed to support families experiencing hardship as well as supporting the federal goal of reducing welfare dependence. Second, with the use of state MOE through separate state programs, a not insignificant number of families--and potentially more in the years to come--receive cash assistance although they are not counted in welfare caseload data routinely reported by HHS. With continuing attention focused on the number of families receiving cash assistance and whether PRWORA has successfully reduced dependence on welfare, it is important that program administrators and policymakers have information on the size of the separate state program caseload. These data should be more regularly available to consider along with TANF caseload data as HHS has recently begun to collect and report information on states' separate state programs. In commenting on a draft of this report, HHS said that it agreed with the findings. HHS' s written comments are included in appendix VIII. We are sending copies of this report to the secretary of Health and Human Services and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-7215 or Gale Harris at (202) 512-7235. Other contacts and acknowledgments are listed in appendix IX. Most states use some form of state maintenance-of-effort (MOE) funding to provide cash assistance to families. Eighteen states relied solely on federal or commingled federal and state funds in their Temporary Assistance for Needy Families (TANF) programs to provide cash assistance, as shown in figure 6. The other 33 states used at least one of the state MOE funding options in addition to commingled funds: 7 had segregated state funds; 17 had separate state programs; and 9 had both segregated funds and separate state programs. States across the nation have opted to use state MOE funds to provide cash assistance. (See table 3.) States with larger caseloads are more likely to use segregated funds or separate state programs than smaller states; similarly, states with the smallest caseloads are more likely to commingle all of their state and federal funds. Even though two-thirds of the states have opted to use segregated funds, separate state programs, or both to provide cash assistance, only 11 percent of the total number of families receiving cash assistance is funded with these funds. States most often used separate state programs to serve two populations-- legal aliens and two-parent families--and applied their own state work requirements on these two populations. (See table 4.) Other examples of populations served by some states in their separate state programs include parents completing education or training (four states), parents or caretakers with a physical impairment (four states), families caring for a young child (three states). Not available. Percentage of TANF adults involved in work (as defined by state) 52 62 26 22 30 93 Not available. Four states were unable to provide us with information on the percent of adults participating in a state-defined work-activity. Delaware was not able to provide us with data on families excluded from time limits. Delaware was not able to provide data on their use of the federal 20 percent extension. The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) specifies that up to 20 percent of families receiving TANF assistance in each state can receive an extension to the 60 month federal time limit. Based on our analysis of survey data, we estimated that the maximum percentage of adults who could receive extensions ranged from 24 to 77 percent among the states, depending on the size of each state's child-only caseload. For example, Wyoming may extend time limits for up to 92 families, which represents 20 percent of the 458 TANF families in Wyoming. However, because almost three-fourths of its TANF families are child-only, only 119 families with adults would have time limits in place. This means that the state could provide extensions to 92 of the 119 TANF families with adults; this represents 77 percent rather than 20 percent of TANF families with adults. In contrast, in New Mexico, with its much smaller percentage of child-only families (15 percent), the maximum percentage of time-limit extensions that may be provided to families with adults is 24 percent rather than 20 percent. In addition to those named above, the following individuals made important contributions to this report: Elisabeth Anderson, Kara Kramer, and Kim Reniero. Patrick DiBattista and Beverly Ross also provided key technical assistance. Welfare Reform: States Provide TANF-Funded Work Support Services to Many Low-Income Families Who Do Not Receive Cash Assistance. GAO-02-615T. Washington, D.C.: April 10, 2002. Welfare Reform: States Provide TANF-Funded Services to Many Low- Income Families Who Do Not Receive Cash Assistance. GAO-02-564. Washington, D.C.: April 5, 2002. Welfare Reform: States Are Using TANF Flexibility to Adapt Work Requirements and Time Limits to Meet State and Local Needs. GAO-02-501T. Washington, D.C.: March 7, 2002. Welfare Reform: More Coordinated Federal Efforts Could Help States and Localities Move TANF Recipients with Impairments Toward Employment. GAO-02-37. Washington, D.C.: October 31, 2001. Welfare Reform: Challenges in Maintaining a Federal-State Fiscal Partnership. GAO-01-828. Washington, D.C.: August 10, 2001. Welfare Reform: Moving Hard-to-Employ Recipients Into the Workforce. GAO-01-368. Washington, D.C.: March 15, 2001. Welfare Reform: Work-Site-Based Activities Can Play an Important Role in TANF Programs. GAO/HEHS-00-122. Washington, D.C.: July 28, 2000. Welfare Reform: Improving State Automated Systems Requires Coordinated Federal Effort. GAO/HEHS-00-48. Washington, D.C.: April 27, 2000. Welfare Reform: State Sanction Policies and Number of Families Affected. GAO/HEHS-00-44. Washington, D.C.: March 31, 2000. Welfare Reform: Assessing the Effectiveness of Various Welfare-to-Work Approaches. GAO/HEHS-99-179. Washington, D.C.: September 7, 1999. Welfare Reform: Information on Former Recipients' Status. GAO/HEHS- 99-48. Washington, D.C.: April 28, 1999. Welfare Reform: States' Experiences in Providing Employment Assistance to TANF Clients. GAO/HEHS-99-22. Washington, D.C.: February 26, 1999.

Congress created the Temporary Assistance for Needy Families (TANF) block grant to replace the previous welfare program and help welfare recipients transition into employment. To this end, states are required to enforce work requirements, and face financial penalties if a minimum percentage of adults receiving cash assistance do not participate in work or work-related activities each year. This federal participation rate requirement has increased each year, reaching 50 percent for all families in fiscal year 2002, but it can be adjusted if caseload declines. In addition to work requirements, TANF places a 60 month lifetime limit on the amount of time families with adults can receive cash assistance. To receive TANF block grants, each state must also spend a specified amount of its own funds, referred to as state maintenance-of-effort (MOE) funds. The law allows states considerable flexibility to exclude families from work requirements and time limits. In addition, states may provide cash assistance to families and exempt them from work requirements and time limits by using state MOE in specified ways. States provided cash assistance funded by federal TANF or state MOE dollars to 2.1 million families in 2001. For 736,000 of these families, only the children in the family received assistance. When only children receive the benefits, it is typically because they are cared for by someone who is not their parent or because their parents are noncitizens. The percentage of adults in work or work-related activities varied greatly among the states because of the flexibility allowed. Most states met or exceeded their adjusted required rate in fiscal year 2000. However, the fiscal year 2000 federal participation rates varied, ranging from 6 percent to more than 70 percent. States excluded 154,000 families from federal or state time limits, or 11 percent of the 1.4 million families with an adult receiving cash assistance.

Given the consequences of a severe influenza pandemic, in 2006 GAO developed a strategy for our work that would help support Congress's decision making and oversight related to pandemic planning. Our strategy was built on a large body of work spanning two decades, including reviews of government responses to prior disasters such as Hurricanes Andrew and Katrina, the devastation caused by the 9/11 terror attacks, efforts to address the Year 2000 (Y2K) computer challenges, and assessments of public health capacities in the face of bioterrorism and emerging infectious diseases such as Severe Acute Respiratory Syndrome (SARS). The strategy was built around six key themes, as shown in figure 1. While all of these themes are interrelated, our earlier work underscored the importance of leadership, authority, and coordination, a theme that touches on all aspects of preparing for, responding to, and recovering from an influenza pandemic. Influenza pandemic--caused by a novel strain of influenza virus for which there is little resistance and which therefore is highly transmissible among humans--continues to be a real and significant threat facing the United States and the world. Unlike incidents that are discretely bounded in space or time (e.g., most natural or man-made disasters), an influenza pandemic is not a singular event, but is likely to come in waves, each lasting weeks or months, and pass through communities of all sizes across the nation and the world simultaneously. While the current H1N1 outbreak seems to have been relatively mild, the history of an influenza pandemic suggests it could return in a second wave this fall or winter in a more virulent form. While a pandemic will not directly damage physical infrastructure such as power lines or computer systems, it threatens the operation of critical systems by potentially removing the essential personnel needed to operate them from the workplace for weeks or months. In a severe pandemic, absences attributable to illnesses, the need to care for ill family members, and fear of infection may, according to the Centers for Disease Control and Prevention (CDC), reach a projected 40 percent during the peak weeks of a community outbreak, with lower rates of absence during the weeks before and after the peak. In addition, an influenza pandemic could result in 200,000 to 2 million deaths in the United States, depending on its severity. The Homeland Security Council (HSC) took an active approach to this potential disaster by, among other things, issuing the National Strategy for Pandemic Influenza (National Pandemic Strategy) in November 2005, and the National Pandemic Implementation Plan in May 2006. The National Pandemic Strategy is intended to provide a high-level overview of the approach that the federal government will take to prepare for and respond to an influenza pandemic. It also provides expectations for nonfederal entities--including state, local, and tribal governments; the private sector; international partners; and individuals--to prepare themselves and their communities. The National Pandemic Implementation Plan is intended to lay out broad implementation requirements and responsibilities among the appropriate federal agencies and clearly define expectations for nonfederal entities. The plan contains 324 action items related to these requirements, responsibilities, and expectations, most of which were to be completed before or by May 2009. HSC publicly reported on the status of the action items that were to be completed by 6 months, 1 year, and 2 years in December 2006, July 2007, and October 2008, respectively. HSC indicated in its October 2008 progress report that 75 percent of the action items have been completed. At the request of the House Homeland Security Committee, we have ongoing work assessing the status of implementing this plan. Federal government leadership roles and responsibilities for pandemic preparedness and response are evolving, and will require further testing before the relationships among the many federal leadership positions are well understood. Such clarity in leadership is even more crucial now, given the change in administration and the associated transition of senior federal officials. Most of these federal leadership roles involve shared responsibilities between the Department of Health and Human Services (HHS) and the Department of Homeland Security (DHS), and it is not clear how these would work in practice. According to the National Pandemic Strategy and Plan, the Secretary of HHS is to lead the federal medical response to a pandemic, and the Secretary of Homeland Security will lead the overall domestic incident management and federal coordination. In addition, under the Post-Katrina Emergency Management Reform Act of 2006, the Administrator of the Federal Emergency Management Agency (FEMA) was designated as the principal domestic emergency management advisor to the President, the HSC, and the Secretary of Homeland Security, adding further complexity to the leadership structure in the case of a pandemic. To assist in planning and coordinating efforts to respond to a pandemic, in December 2006 the Secretary of Homeland Security predesignated a national Principal Federal Official (PFO) for influenza pandemic and established five pandemic regions each with a regional PFO and Federal Coordinating Officers (FCO) for influenza pandemic. PFOs are responsible for facilitating federal domestic incident planning and coordination, and FCOs are responsible for coordinating federal resources support in a presidentially-declared major disaster or emergency. However, the relationship of these roles to each other as well as with other leadership roles in a pandemic is unclear. Moreover, as we testified in July 2007, state and local first responders were still uncertain about the need for both FCOs and PFOs and how they would work together in disaster response. Accordingly, we recommended in our August 2007 report on federal leadership roles and the National Pandemic Strategy that DHS and HHS develop rigorous testing, training, and exercises for influenza pandemic to ensure that federal leadership roles and responsibilities for a pandemic are clearly defined and understood and that leaders are able to effectively execute shared responsibilities to address emerging challenges. In response to our recommendation, HHS and DHS officials stated in January 2009 that several influenza pandemic exercises had been conducted since November 2007 that involved both agencies and other federal officials, but it is unclear whether these exercises rigorously tested federal leadership roles in a pandemic. In addition to concerns about clarifying federal roles and responsibilities for a pandemic and how shared leadership roles would work in practice, private sector officials told us that they are unclear about the respective roles and responsibilities of the federal and state governments during a pandemic emergency. The National Pandemic Implementation Plan states that in the event of an influenza pandemic, the distributed nature and sheer burden of the disease across the nation would mean that the federal government's support to any particular community is likely to be limited, with the primary response to a pandemic coming from states and local communities. Further, federal and private sector representatives we interviewed at the time of our October 2007 report identified several key challenges they face in coordinating federal and private sector efforts to protect the nation's critical infrastructure in the event of an influenza pandemic. One of these was a lack of clarity about the roles and responsibilities of federal and state governments on issues such as state border closures and influenza pandemic vaccine distribution. Coordination Mechanisms Mechanisms and networks for collaboration and coordination on pandemic preparedness between federal and state governments and the private sector exist, but they could be better utilized. In some instances, the federal and private sectors are working together through a set of coordinating councils, including sector-specific and cross-sector councils. To help protect the nation's critical infrastructure, DHS created these coordinating councils as the primary means of coordinating government and private sector efforts for industry sectors such as energy, food and agriculture, telecommunications, transportation, and water. Our October 2007 report found that DHS has used these critical infrastructure coordinating councils primarily to share pandemic information across sectors and government levels rather than to address many of the challenges identified by sector representatives, such as clarifying the roles and responsibilities between federal and state governments. We recommended in the October 2007 report that DHS encourage the councils to consider and address the range of coordination challenges in a potential influenza pandemic between the public and private sectors for critical infrastructure. DHS concurred with our recommendation and DHS officials informed us at the time of our February 2009 report that the department was working on initiatives to address it, such as developing pandemic contingency plan guidance tailored to each of the critical infrastructure sectors, and holding a series of "webinars" with a number of the sectors. Federal executive boards (FEB) bring together federal agency and community leaders in major metropolitan areas outside of Washington, D.C., to discuss issues of common interest, including an influenza pandemic. The Office of Personnel Management (OPM), which provides direction to the FEBs, and the FEBs have designated emergency preparedness, security, and safety as an FEB core function. The FEBs' emergency support role with its regional focus may make the boards a valuable asset in pandemic preparedness and response. As a natural outgrowth of their general civic activities and through activities such as hosting emergency preparedness training, some of the boards have established relationships with, for example, federal, state, and local governments; emergency management officials; first responders; and health officials in their communities. In a May 2007 report on the FEBs' ability to contribute to emergency operations, we found that many of the selected FEBs included in our review were building capacity for influenza pandemic response within their member agencies and community organizations by hosting influenza pandemic training and exercises. We recommended that, since FEBs are well positioned within local communities to bring together federal agency and community leaders, the Director of OPM work with FEMA to formally define the FEBs' role in emergency planning and response. As a result of our recommendation, FEBs were included in the National Response Framework (NRF) in January 2008 as one of the regional support structures that have the potential to contribute to development of situational awareness during an emergency. OPM and FEMA also signed a memorandum of understanding in August 2008 in which FEBs and FEMA agreed to work collaboratively in carrying out their respective roles in the promotion of the national emergency response system. International disease surveillance and detection efforts serve as an early warning system that could prevent the spread of an influenza pandemic outbreak. The United States and its international partners are involved in efforts to improve pandemic surveillance, including diagnostic capabilities, so that outbreaks can be quickly detected. Yet, as reported in 2007, international capacity for surveillance has many weaknesses, particularly in developing countries. As a result, assessments of the risks of the emergence of an influenza pandemic by U.S. agencies and international organizations, which were used to target assistance to countries at risk, were based on insufficiently detailed or incomplete information, limiting their value for comprehensive comparisons of risk levels by country. While the National Pandemic Strategy and National Pandemic Implementation Plan are important first steps in guiding national preparedness, important gaps exist that could hinder the ability of key stakeholders to effectively execute their responsibilities. In our August 2007 report on the National Pandemic Strategy and Implementation Plan, we found that while these documents are an important first step in guiding national preparedness, they do not fully address all six characteristics of an effective national strategy, as identified in our work. The documents fully address only one of the six characteristics, by reflecting a clear description and understanding of problems to be addressed. Further, the National Pandemic Strategy and Implementation Plan do not address one characteristic at all; they contain no discussion of what it will cost, where resources will be targeted to achieve the maximum benefits, and how benefits, risks, and costs will be balanced. Moreover, the documents do not provide a picture of priorities or how adjustments might be made in view of resource constraints. Although the remaining four characteristics are partially addressed, important gaps exist that could hinder the ability of key stakeholders to effectively execute their responsibilities. For example, state and local jurisdictions that will play crucial roles in preparing for and responding to a pandemic were not directly involved in developing the National Pandemic Implementation Plan, even though it relies on these stakeholders' efforts. Stakeholder involvement during the planning process is important to ensure that the federal government's and nonfederal entities' responsibilities are clearly understood and agreed upon. Further, relationships and priorities among actions were not clearly described, performance measures were not always linked to results, and insufficient information was provided about how the documents are integrated with other response-related plans, such as the NRF. We recommended that HSC establish a process for updating the National Pandemic Implementation Plan and that the updated plan should address these and other gaps. HSC did not comment on our recommendation and has not indicated if it plans to implement it. We reported in June 2008 that, according to CDC, all 50 states and the three localities that received federal pandemic funds have developed influenza pandemic plans and conducted pandemic exercises in accordance with federal funding guidance. A portion of the $5.62 billion that Congress appropriated in supplemental funding to HHS for pandemic preparedness in 2006--$600 million--was allocated for state and local planning and exercising. All of the 10 localities that we reviewed in depth had also developed plans and conducted exercises, and had incorporated lessons learned from pandemic exercises into their planning. However, an HHS-led interagency assessment of states' plans found on average that states had "many major gaps" in their influenza pandemic plans in 16 of 22 priority areas, such as school closure policies and community containment, which are community-level interventions designed to reduce the transmission of a pandemic virus. The remaining six priority areas were rated as having "a few major gaps." Subsequently, HHS led another interagency assessment of state influenza pandemic plans and reported in January 2009 that although they had made important progress, most states still had major gaps in their pandemic plans. As we had reported in June 2008, HHS, in coordination with DHS and other federal agencies, had convened a series of regional workshops for states in five influenza pandemic regions across the country. Because these workshops could be a useful model for sharing information and building relationships, we recommended that HHS and DHS, in coordination with other federal agencies, convene additional meetings with states to address the gaps in the states' pandemic plans. As reported in February 2009, HHS and DHS generally concurred with our recommendation, but have not yet held these additional meetings. HHS and DHS indicated at the time of our February 2009 report that while no additional meetings had been planned, states will have to continuously update their pandemic plans and submit them for review. We have also reported on the need for more guidance from the federal government to help states and localities in their planning. In June 2008, we reported that although the federal government has provided a variety of guidance, officials of the states and localities we reviewed told us that they would welcome additional guidance from the federal government in a number of areas, such as community containment, to help them to better plan and exercise for an influenza pandemic. Other state and local officials have identified similar concerns. According to the National Governors Association's (NGA) September 2008 issue brief on states' pandemic preparedness, states are concerned about a wide range of school-related issues, including when to close schools or dismiss students, how to maintain curriculum continuity during closures, and how to identify the appropriate time at which classes could resume. NGA also reported that states generally have very little awareness of the status of disease outbreaks, either in real time or in near real time, to allow them to know precisely when to recommend a school closure or reopening in a particular area. NGA reported that states wanted more guidance in the following areas: (1) workforce policies for the health care, public safety, and private sectors; (2) schools; (3) situational awareness such as information on the arrival or departure of a disease in a particular state, county, or community; (4) public involvement; and (5) public-private sector engagement. The private sector has also been planning for an influenza pandemic, but many challenges remain. To better protect critical infrastructure, federal agencies and the private sector have worked together across a number of sectors to plan for a pandemic, including developing general pandemic preparedness guidance, such as checklists for continuity of business operations during a pandemic. However, federal and private sector representatives have acknowledged that sustaining preparedness and readiness efforts for an influenza pandemic is a major challenge, primarily because of the uncertainty associated with a pandemic, limited financial and human resources, and the need to balance pandemic preparedness with other, more immediate, priorities, such as responding to outbreaks of foodborne illnesses in the food sector and, now, the effects of the financial crisis. In our March 2007 report on preparedness for an influenza pandemic in one of these critical infrastructure sectors--financial markets--we found that despite significant progress in preparing markets to withstand potential disease pandemics, securities and banking regulators could take additional steps to improve the readiness of the securities markets. The seven organizations that we reviewed--which included exchanges, clearing organizations, and payment-system processors--were working on planning and preparation efforts to reduce the likelihood that a worldwide influenza pandemic would disrupt their critical operations. However, only one of the seven had completed a formal plan. To increase the likelihood that the securities markets will be able to function during a pandemic, we recommended that the Chairman, Federal Reserve; the Comptroller of the Currency; and the Chairman, Securities and Exchange Commission (SEC); consider taking additional actions to ensure that market participants adequately prepare for a pandemic outbreak. In response to our recommendation, the Federal Reserve and the Office of the Comptroller of the Currency, in conjunction with the Federal Financial Institutions Examination Council and the SEC, directed all banking organizations under their supervision to ensure that the pandemic plans the financial institutions have in place are adequate to maintain critical operations during a severe outbreak. SEC issued similar requirements to the major securities industry market organizations. Improving the nation's response capability to catastrophic disasters, such as an influenza pandemic, is essential. Following a mass casualty event, health care systems would need the ability to adequately care for a large number of patients or patients with unusual or highly specialized medical needs. The ability of local or regional health care systems to deliver services could be compromised, at least in the short term, because the volume of patients would far exceed the available hospital beds, medical personnel, pharmaceuticals, equipment, and supplies. Further, in natural and man-made disasters, assistance from other states may be used to increase capacity, but in a pandemic, states would likely be reluctant to provide assistance to each other due to scarce resources and fears of infection. The $5.62 billion that Congress provided in supplemental funding to HHS in 2006 was for, among other things, (1) monitoring disease spread to support rapid response, (2) developing vaccines and vaccine production capacity, (3) stockpiling antivirals and other countermeasures, (4) upgrading state and local capacity, and (5) upgrading laboratories and research at CDC. Figure 2 shows that the majority of this supplemental funding--about 77 percent--was allocated for developing antivirals and vaccines for a pandemic, and purchasing medical supplies. Also, a portion of the funding for state and local preparedness--$170 million--was allocated for state antiviral purchases for their state stockpiles. An outbreak will require additional capacity in many areas, including the procurement of additional patient treatment space and the acquisition and distribution of medical and other critical supplies, such as antivirals and vaccines for an influenza pandemic. In a severe pandemic, the demand would exceed the available hospital bed capacity, which would be further challenged by the existing shortages of health care providers and their potential high rates of absenteeism. In addition, the availability of antivirals and vaccines could be inadequate to meet demand due to limited production, distribution, and administration capacity. The federal government has provided some guidance and funding to help states plan for additional capacity. For example, the federal government provided guidance for states to use when preparing for medical surge and on prioritizing target groups for an influenza pandemic vaccine. Some state officials reported, however, that they had not begun work on altered standards of care guidelines, that is, for providing care while allocating scarce equipment, supplies, and personnel in a way that saves the largest number of lives in mass casualty event, or had not completed drafting guidelines, because of the difficulty of addressing the medical, ethical, and legal issues involved. We recommended that HHS serve as a clearinghouse for sharing among the states altered standards of care guidelines developed by individual states or medical experts. HHS did not comment on the recommendation, and it has not indicated if it plans to implement it. Further, in our June 2008 report on state and local planning and exercising efforts for an influenza pandemic, we found that state and local officials reported that they wanted federal influenza pandemic guidance on facilitating medical surge, which was also one of the areas that the HHS-led assessment rated as having "many major gaps" nationally among states' influenza pandemic plans. The National Pandemic Implementation Plan emphasizes that government and public health officials must communicate clearly and continuously with the public throughout a pandemic. Accordingly, HHS, DHS, and other federal agencies have shared pandemic-related information in a number of ways, such as through Web sites, guidance, and state summits and meetings, and are using established networks, including coordinating councils for critical infrastructure protection, to share information about pandemic preparedness, response, and recovery. Federal agencies have established an influenza pandemic Web site (www.pandemicflu.gov) and disseminated pandemic preparedness checklists for workplaces, individuals and families, schools, health care and community organizations, and state and local governments. However, state and local officials from all of the states and localities we interviewed wanted additional federal influenza pandemic guidance from the federal government on specific topics, such as implementing community interventions, fatality management, and facilitating medical surge. Although the federal government has issued some guidance, it may not have reached state and local officials or may not have addressed the particular concerns or circumstances of the state and local officials we interviewed. In addition, private sector officials have told us that they would like clarification about the respective roles and responsibilities of the federal and state governments during an influenza pandemic emergency, such as for state border closures and influenza pandemic vaccine distribution. While the National Pandemic Strategy and Implementation Plan identify overarching goals and objectives for pandemic planning, the documents are not altogether clear on the roles, responsibilities, and requirements to carry out the plan. Some of the action items in the National Pandemic Implementation Plan, particularly those that are to be completed by state, local, and tribal governments or the private sector, do not identify an entity responsible for carrying out the action. Most of the plan's performance measures consist of actions to be completed, such as disseminating guidance, but the measures are not always clearly linked with intended results. This lack of clear linkages makes it difficult to ascertain whether progress has in fact been made toward achieving the national goals and objectives described in the National Pandemic Strategy and Implementation Plan. Without a clear linkage to anticipated results, these measures of activities do not give an indication of whether the purpose of the activity is achieved. In addition, as discussed earlier, the National Pandemic Implementation Plan does not establish priorities among its 324 action items, which becomes especially important as agencies and other parties strive to effectively manage scarce resources and ensure that the most important steps are accomplished. Moreover, the National Pandemic Strategy and Implementation Plan do not provide information on the financial resources needed to implement them, which is one of six characteristics of an effective national strategy that we have identified. As a result, the documents do not provide a picture of priorities or how adjustments might be made in view of resource constraints. The recent outbreak of H1N1 influenza virus should serve as a powerful reminder that the threat of a pandemic influenza, which seemed to fade from public awareness in recent years, never really disappeared. While federal agencies have taken action on many of our recommendations, almost half the recommendations that we have made over the past 3 years are still not fully implemented. For one thing, it is essential, given the change in administration and the associated transition of senior federal officials, that the shared leadership roles that have been established between HHS and DHS along with other responsible federal officials, are tested in rigorous tests and exercises. Likewise, DHS should continue to work with other federal agencies and private sector members of the critical infrastructure coordinating councils to help address the challenges of coordination and clarify roles and responsibilities of federal and state governments. DHS and HHS should also, in coordination with other federal agencies, continue to work with states and local governments to help them address identified gaps in their pandemic planning. Moreover, the 3-year period covered by the National Pandemic Implementation Plan is now over and it will be important for HSC to establish a process for updating the National Pandemic Implementation Plan so that the updated plan can address the gaps we have identified, as well as lessons learned from the current H1N1 outbreak. Pandemic influenzas, as I noted earlier, differ from other types of disasters in that they are not necessarily discrete events. While the current H1N1 outbreak seems to have been relatively mild, it could return in a second wave this fall or winter in a more virulent form. Given this risk, the administration and federal agencies should turn their attention to filling in some of the gaps our work has pointed out, while time is still on our side. Chairman Pryor, Senator Ensign, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions you may have. For further information regarding this statement, please contact Bernice Steinhardt, Director, Strategic Issues, at (202) 512-6543 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Sarah Veale, Assistant Director; Maya Chakko; Melissa Kornblau; Susan Sato; Ellen Grady; Karin Fangman; and members of GAO's Pandemic Working Group. The Secretary of HHS should expeditiously finalize guidance to assist state and local jurisdictions to determine how to effectively use limited supplies of antivirals and pre- pandemic vaccine in a pandemic, including prioritizing target groups for pre-pandemic vaccine. In December 2008, HHS released final guidance on antiviral drug use during an influenza pandemic. HHS officials informed us that they are drafting the guidance on pre-pandemic influenza vaccination. The Secretaries of HHS and Homeland Security should, in coordination with other federal agencies, convene additional meetings of the states in the five federal influenza pandemic regions to help them address identified gaps in their planning. HHS and DHS officials indicated that while no additional meetings are planned at this time, states will have to continuously update their pandemic plans and submit them for review. The Secretary of Homeland Security should work with sector-specific agencies and lead efforts to encourage the government and private sector members of the councils to consider and help address the challenges that will require coordination between the federal and private sectors involved with critical infrastructure and within the various sectors, in advance of, as well as during, a pandemic. DHS officials informed us that the department is working on initiatives, such as developing pandemic contingency plan guidance tailored to each of the critical infrastructure sectors, and holding a series of webinars with a number of the sectors. Influenza Pandemic: Further Efforts Are Needed to Ensure Clearer Federal Leadership Roles and an Effective National Strategy, GAO-07-781, August 14, 2007 (1) HHS and DHS officials stated that several influenza pandemic exercises had been conducted since November 2007 that involved both agencies and other federal officials, but it is unclear whether these exercises rigorously tested federal leadership roles in a pandemic. Influenza Pandemic: Opportunities Exist to Clarify Federal Leadership Roles and Improve Pandemic Planning, GAO-07-1257T, September 26, 2007 (1) The Secretaries of Homeland Security and HHS should work together to develop and conduct rigorous testing, training, and exercises for an influenza pandemic to ensure that the federal leadership roles are clearly defined and understood and that leaders are able to effectively execute shared responsibilities to address emerging challenges. Once the leadership roles have been clarified through testing, training, and exercising, the Secretaries of Homeland Security and HHS should ensure that these roles are clearly understood by state, local, and tribal governments; the private and nonprofit sectors; and the international community. (2) The Homeland Security Council (HSC) should establish a specific process and time frame for updating the National Pandemic Implementation Plan. The process should involve key nonfederal stakeholders and incorporate lessons learned from exercises and other sources. The National Pandemic Implementation Plan should also be improved by including the following information in the next update: (a) resources and investments needed to complete the action items and where they should be targeted, (b) a process and schedule for monitoring and publicly reporting on progress made on completing the action items, (c) clearer linkages with other strategies and plans, and (d) clearer descriptions of relationships or priorities among action items and greater use of outcome-focused performance measures. (2) HSC did not comment on the recommendation and has not indicated if it plans to implement it. Avian Influenza: USDA Has Taken Important Steps to Prepare for Outbreaks, but Better Planning Could Improve Response, GAO-07-652, June 11, 2007 (1) The Secretaries of Agriculture and Homeland Security should develop a memorandum of understanding that describes how the U.S. Department of Agriculture (USDA) and DHS will work together in the event of a declared presidential emergency or major disaster, or an Incident of National Significance, and test the effectiveness of this coordination during exercises. (1) Both USDA and DHS officials told us that they have taken preliminary steps to develop additional clarity and better define their coordination roles. For example the two agencies meet regularly to discuss such coordination. (2) The Secretary of Agriculture should, in consultation with other federal agencies, states, and the poultry industry, identify the capabilities necessary to respond to a probable scenario or scenarios for an outbreak of highly pathogenic avian influenza. The Secretary of Agriculture should also use this information to develop a response plan that identifies the critical tasks for responding to the selected outbreak scenario and, for each task, identifies the responsible entities, the location of resources needed, time frames, and completion status. Finally, the Secretary of Agriculture should test these capabilities in ongoing exercises to identify gaps and ways to overcome those gaps. (2) USDA officials told us that it has created a draft preparedness and response plan that identifies federal, state, and local actions, timelines, and responsibilities for responding to highly pathogenic avian influenza, but the plan has not been issued yet. (3) The Secretary of Agriculture should develop standard criteria for the components of state response plans for highly pathogenic avian influenza, enabling states to develop more complete plans and enabling USDA officials to more effectively review them. (3) USDA told us that it has drafted large volumes of guidance documents that are available on a secure Web site. However, the guidance is still under review and it is not clear what standard criteria from these documents USDA officials and states should apply when developing and reviewing plans. (4) The Secretary of Agriculture should focus additional work with states on how to overcome potential problems associated with unresolved issues, such as the difficulty in locating backyard birds and disposing of carcasses and materials (4) USDA officials have told us that the agency has developed online tools to help states make effective decisions about carcass disposal. In addition, USDA has created a secure Internet site that contains draft guidance for disease response, including highly pathogenic avian influenza, and it includes a discussion about many of the unresolved issues. (5) The Secretary of Agriculture should determine the amount of antiviral medication that USDA would need in order to protect animal health responders, given various highly pathogenic avian influenza scenarios. The Secretary of Agriculture should also determine how to obtain and provide supplies within 24 hours of an outbreak. (5) USDA officials told us that the National Veterinary Stockpile now contains enough antiviral medication to protect 3,000 animal health responders for 40 days. However, USDA has yet to determine the number of individuals that would need medicine based on a calculation of those exposed to the virus under a specific scenario. Further, USDA officials told us that a contract for additional medication for the stockpile has not yet been secured, which would better ensure that medications are available in the event of an outbreak of highly pathogenic avian influenza. Influenza Pandemic: HHS Needs to Continue Its Actions and Finalize Guidance for Pharmaceutical Interventions. GAO-08-671. Washington, D.C.: September 30, 2008. Influenza Pandemic: Federal Agencies Should Continue to Assist States to Address Gaps in Pandemic Planning. GAO-08-539. Washington, D.C.: June 19, 2008. Emergency Preparedness: States Are Planning for Medical Surge, but Could Benefit from Shared Guidance for Allocating Scarce Medical Resources. GAO-08-668. Washington, D.C.: June 13, 2008. Influenza Pandemic: Efforts Under Way to Address Constraints on Using Antivirals and Vaccines to Forestall a Pandemic. GAO-08-92. Washington, D.C.: December 21, 2007. Influenza Pandemic: Opportunities Exist to Address Critical Infrastructure Protection Challenges That Require Federal and Private Sector Coordination. GAO-08-36. Washington, D.C.: October 31, 2007. Influenza Pandemic: Federal Executive Boards' Ability to Contribute to Pandemic Preparedness. GAO-07-1259T. Washington, D.C.: September 28, 2007. Influenza Pandemic: Opportunities Exist to Clarify Federal Leadership Roles and Improve Pandemic Planning. GAO-07-1257T. Washington, D.C.: September 26, 2007. Influenza Pandemic: Further Efforts Are Needed to Ensure Clearer Federal Leadership Roles and an Effective National Strategy. GAO-07-781. Washington, D.C.: August 14, 2007. Emergency Management Assistance Compact: Enhancing EMAC's Collaborative and Administrative Capacity Should Improve National Disaster Response. GAO-07-854. Washington, D.C.: June 29, 2007. Influenza Pandemic: DOD Combatant Commands' Preparedness Efforts Could Benefit from More Clearly Defined Roles, Resources, and Risk Mitigation. GAO-07-696. Washington, D.C.: June 20, 2007. Influenza Pandemic: Efforts to Forestall Onset Are Under Way; Identifying Countries at Greatest Risk Entails Challenges. GAO-07-604. Washington, D.C.: June 20, 2007. Avian Influenza: USDA Has Taken Important Steps to Prepare for Outbreaks, but Better Planning Could Improve Response. GAO-07-652. Washington, D.C.: June 11, 2007. The Federal Workforce: Additional Steps Needed to Take Advantage of Federal Executive Boards' Ability to Contribute to Emergency Operations. GAO-07-515. Washington, D.C.: May 4, 2007. Financial Market Preparedness: Significant Progress Has Been Made, but Pandemic Planning and Other Challenges Remain. GAO-07-399. Washington, D.C.: March 29, 2007. Influenza Pandemic: DOD Has Taken Important Actions to Prepare, but Accountability, Funding, and Communications Need to be Clearer and Focused Departmentwide. GAO-06-1042. Washington, D.C.: September 21, 2006. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation's Preparedness, Response, and Recovery System. GAO-06-618. Washington, D.C.: September 6, 2006. 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As the recent outbreak of the H1N1 (swine flu) virus underscores, an influenza pandemic remains a real threat to our nation and to the world. Over the past 3 years, GAO has conducted a body of work to help the nation better prepare for a possible pandemic. In a February 2009 report, GAO synthesized the results of this work, pointing out that while the previous administration had taken a number of actions to plan for a pandemic, including developing a national strategy and implementation plan, much more needs to be done, and many gaps in preparedness and planning still remain. This statement is based on the February 2009 report which synthesized the results of 11 reports and two testimonies covering six thematic areas: (1) leadership, authority, and coordination; (2) detecting threats and managing risks; (3) planning, training, and exercising, (4) capacity to respond and recover; (5) information sharing and communication; and (6) performance and accountability. (1) Leadership roles and responsibilities for an influenza pandemic need to be clarified, tested, and exercised, and existing coordination mechanisms, such as critical infrastructure coordinating councils, could be better utilized to address challenges in coordination between the federal, state, and local governments and the private sector in preparing for a pandemic. (2) Efforts are underway to improve the surveillance and detection of pandemic-related threats in humans and animals, but targeting assistance to countries at the greatest risk has been based on incomplete information, particularly from developing countries. (3) Pandemic planning and exercising has occurred at the federal, state, and local government levels, but important planning gaps remain at all levels of government. (4) Further actions are needed to address the capacity to respond to and recover from an influenza pandemic, which will require additional capacity in patient treatment space, and the acquisition and distribution of medical and other critical supplies, such as antivirals and vaccines. (5) Federal agencies have provided considerable guidance and pandemic-related information to state and local governments, but could augment their efforts with additional information on state border closures and other topics. (6) Performance monitoring and accountability for pandemic preparedness needs strengthening. For example, the May 2006 National Strategy for Pandemic Influenza Implementation Plan does not establish priorities among its 324 action items and does not provide information on the financial resources needed to implement them. The recent outbreak of the H1N1 influenza virus should serve as a powerful reminder that the threat of a pandemic influenza, which seemed to fade from public awareness in recent years, never really disappeared. While federal agencies have taken action on 13 of GAO's 23 recommendations, 10 of the recommendations that GAO has made over the past 3 years are still not fully implemented. With the possibility that the H1N1 virus could return in a more virulent form in a second wave in the fall or winter, the administration and federal agencies should turn their attention to filling in the planning and preparedness gaps GAO's work has pointed out.

As you know, in connection with requests that we determine the average cost of an overnight stay at the Executive Residence and provide information on related overtime compensation for domestic staff within the Executive Residence, the Subcommittee asked us to determine the number of persons who were overnight guests in the Executive Residence and the total number of overnight stays since January 1993. The White House has publicly stated that there were 938 overnight guests and 831 of their names have been reported in the media. The White House told us that the names of the remaining people were not provided in order to preserve the privacy of the First Family. We understand that White House staff or other government employees who stayed overnight in the Executive Residence are not included in the total of 938 overnight guests. The White House has not stated how many nights the listed guests stayed. We have made no progress in confirming the aggregate number of overnight guests and determining the number of stays within the Executive Residence because we have obtained no records from the White House. To respond to the Subcommittee's request, we simply require access to documents or systems that will establish the aggregate number of guests and stays. If such documents or systems do not exist, we need to ascertain the overnight guests at the Executive Residence during the period indicated from source documents or systems maintained by the White House or others. Once the number of overnight guests is established, we need to determine the number of nights each overnight guest stayed at the Executive Residence. We can then determine and report the total number of overnight guests and stays since January 1993. We have discussed this review with White House Counsel staff and others, but have made no progress in obtaining the information needed to do the work requested. On April 24, 1997, we met with officials from several White House offices to advise them of the Subcommittee's request, including the request for information on overnight stays at the Executive Residence. On June 17, 1997, we provided the Associate Counsel to the President with an informal list of four areas related to the overnight stays that we wanted to discuss, including the nature, location, and people responsible for source documents and systems showing overnight stays at the Executive Residence. On July 11, 1997, we met with the Deputy Counsel and Associate Counsel to the President, at which time we discussed a number of areas, including the sources and methods used to compile the list of overnight guests that was previously made public. On July 28, 1997, the Associate Counsel sent us a list of names of those who were overnight guests at the Executive Residence and advised us that the list had been released to the public. We made several subsequent requests to the Associate Counsel for a follow-up meeting, and on September 19, 1997, we again met with the Deputy Counsel and Associate Counsel to discuss information relating to our review, but made no progress in obtaining any records. On October 16, 1997, we wrote to the Deputy Counsel to the President to insist on our access, by November 1, 1997, to all books, documents, papers, or other records related to the number of overnight guests at the Executive Residence and the beginning and ending dates of each guest stay since January 1993. We made that request to achieve our objective of counting and reporting the number of overnight guests and stays. The letter did not request the identity of the overnight guests or the reasons for their stay, although we recognize that the records that allow us to determine the number and duration of overnight stays may identify the guests by name. The Associate Counsel to the President replied by letter of October 23, 1997, that she and others had compiled the previously published list of overnight guests from documentation that included materials belonging to the First Family, including "personal and private correspondence." The letter characterized our request as one to "gain access to private and personal papers of the First Family." In expressing concern about GAO inspecting these materials, the Associate Counsel expressed a willingness to continue discussing the matter, but as of today we have received no records that would enable us to provide the Subcommittee with the requested information on overnight guests and stays at the Executive Residence. We are not unmindful of the sensitivity of using materials of the First Family in performing our review. Accordingly, we have been and continue to be open to reviewing other materials to determine the number and duration of overnight guests and stays at the Executive Residence. In this connection, our letter did not request the "private and personal papers of the First Family" or any other specific papers of the White House. We only requested documents "related to the number of overnight guests at the Executive Residence and the beginning and ending dates of each guest stay since January 1993." At the invitation of the Associate Counsel, we met yesterday with White House staff, including the Deputy Counsel and the Associate Counsel, to discuss our request. At that meeting, we presented a letter proposing that we discuss the possibility of alternative sources of information with the Executive Residence's Chief Usher, Administrative Assistant, Head Housekeeper, and others. During our discussions, the Deputy Counsel made clear that she was not representing that there were no other sources of the number of guests and stays, only that the list of guests released by the White House was compiled from private materials. She also stated that there was no concern about GAO determining the aggregate number of guests and stays from non-private materials. The White House is considering our formal request to discuss alternative sources of information with the Chief Usher and others. There were two legal issues raised in passing in the Associate Counsel's October 23 letter. She first argues that a privacy interest protects the First Family's notes and correspondence. Second, she reminded us that our statutory right of access encompasses "agency records" and advised that this right of access does not reach records of the First Family. I will briefly discuss each of these issues in turn. The Associate Counsel argues that GAO is seeking access to the "private and personal papers of the First Family," suggesting that Presidential privacy interests shield these documents from scrutiny. The Supreme Court has recognized that, while the President has voluntarily surrendered the privacy accorded non-public figures, the President and other public officials "are not wholly without constitutionally protected privacy rights in matters of personal life unrelated to any acts done by them in their public capacity." Nixon v. Administrator of General Services, 433 U.S. 425, 455, 457 (1977). This privacy interest is qualified--any intrusion must be weighed against the congressional, public, or other interest in reviewing the private materials. Id. at 458-465 (President's privacy interest in private documents and tape recorded conversations outweighed by limited intrusion by archivists to separate private from non-private materials, the lack of an alternative for separating private from other materials, the public interest in preserving historical materials mixed with private materials, and other factors); Nixon v. Freeman, 670 F.2d 346, 354, 362-3 (D.C. Cir. 1982), cert. denied, 459 U.S. 1035 (1982) (President's privacy interest in tape recorded conversations and in tape recorded diaries outweighed by limitations on proposed intrusions and other factors); Dellums v. Powell, 642 F.2d 1351, 1354, 1362-3 (D.C. Cir. 1980) (President's common law privacy interests entitled to considerable measure of deference by courts, but may be outweighed by competing interests). The power of Congress to investigate and obtain records in aid of its investigation is as broad as its power to legislate. McGrain v. Daugherty, 273 U.S. 173 (1926). When the executive branch withholds information from Congress based on an assertion of Presidential privacy or other protected interest, the courts have balanced this interest against the congressional need for the information. See, e.g., United States v. AT&T, 567 F.2d 121 (D.C. Cir. 1977), in which the court sought to balance the Congress' interest in assuring the proper expenditure of appropriated funds and the executive branch's interest in protecting the national security (requests from FBI to AT&T for warrantless wiretaps). Seeking workload information--how many people are staying overnight--for a taxpayer funded establishment, the Executive Residence, by the relevant Subcommittee of the House Committee on Appropriations is clearly a suitable congressional inquiry. See United States v. AT&T, 551 F.2d 384, 393 (D.C. Cir. 1976). There is no allegation that Congress is seeking to "expose for the sake of exposure," id.; in fact, the request is tailored to include aggregate numbers of Executive Residence guests and stays--not the identification of personal visitors or other private information. It is also significant that the intrusion here is at most minimal. GAO has proposed that it would not remove copies or original documents from the White House premises, but would merely use the materials to determine aggregate numbers. GAO's record of protecting confidential information is exemplary; careful observation of confidentiality restrictions is necessary for GAO to do its work. Finally, access to what the White House considers "private" materials is only necessary if they are the only source for the requested information. It is important to make clear the authority under which GAO is performing the review of overnight guests and stays at the Executive Residence. As previously stated, your request asked GAO to conduct several assignments. The first--an audit of five categories of unvouchered expenditures of the President and the Vice President--is conducted pursuant to sections 105(d) and 106(b) of title 3, United States Code. The statute specifically addresses unvouchered expenditures, describes the scope of our audit, establishes our right of access to records relating to the unvouchered expenditures, and limits our reporting responsibilities. In contrast, our review of the number of overnight guests and stays in the Executive Residence falls under section 712 of title 31, United States Code. Paragraph (1) of section 712 authorizes GAO to investigate all matters related to the use of public money. Paragraphs (4) and (5) of section 712 direct GAO to investigate and report matters ordered by a congressional committee having jurisdiction over appropriations and to give the help and information the committee requests. Access to records for reviews performed under section 712 is authorized by section 716 of title 31, United States Code. Section 716 provides that each agency shall give GAO the information it requires concerning the duties, powers, activities, organization, and financial transactions of the agency. GAO may inspect agency records to get the information. As a result of the 1982 codification of title 31 of the United States Code, sections 101 and 701 define the term "agency" for purposes of sections 712 and 716 to mean a "department, agency, or instrumentality" of the United States Government, but not the legislative branch or the Supreme Court. As broad as the term "agency" is now defined, the statutory language before the codification emphasizes its expansiveness. Before the codification, the relevant term was "department or establishment," defined in 31 U.S.C. 2 (1976) to include "any executive department, independent commission, board, bureau, office, agency, or other establishment of the Government." The 1982 codification of title 31 restated, without substantive change, the laws enacted before April 16, 1982, that were replaced by the codification. See Public Law 97-258, SS 4(a), 96 Stat. 1067 (1982). Similarly, the language of the access provision before codification illustrates how encompassing the term "records" is as used in section 716. The predecessor to section 716, 31 U.S.C. 54 (1976), used not just the term "records" but also such terms as "correspondence," "papers," and "written information" to describe the reach of our access authority. In analyzing the scope of our authority under sections 712 and 716, we are aware that the Executive Residence is not considered an "agency" for purposes of the Freedom of Information Act (FOIA). Sweetland v. Walters, 60 F.3d 852 (D.C. Cir. 1995). The FOIA definition of "agency" as interpreted by the courts has no relevance to the definition of "agency" in title 31. The FOIA controls public access to government information for the purpose of furthering the public's understanding of government operations. In light of that purpose, the Congress has explicitly ratified an interpretation of the term "agency" that excludes units of the Executive Office of the President with no substantial independent authority to direct executive branch officials. Armstrong v. Executive Office of the President, 90 F.3d 553, 557-8 (D.C. Cir. 1996). Here, disclosure to GAO is solely in aid of the congressional power to oversee, investigate, and legislate. Over the last century, the Supreme Court has characterized the scope of congressional power to investigate as penetrating and far-reaching as the potential power to enact legislation, oversee the operation of government, and appropriate funds under the Constitution. Barenblatt v. United States, 360 U.S. 109, 111 (1959); McGrain v. Daugherty, 273 U.S. 173 (1926). The Court presumes a valid legislative purpose for congressional inquiries, In re Chapman, 166 U.S. 661, 670 (1897), and will consider such sources as a committee chairman's opening statement to support the existence of a legislative purpose, Wilkinson v. United States, 365 U.S. 399, 410 (1961). This has been true even when the witness at a congressional investigation objected to the committee's questions on the grounds that they related to private affairs. Sinclair v. United States, 279 U.S. 263, 295 (1929). The Executive Residence is a government facility staffed by federal employees and funded with appropriated tax dollars. This Subcommittee considers budget requests by the President for the operation and maintenance of the Executive Residence. In so doing, it desires to have information relating to the operation of the Executive Residence and the workload of the government employees responsible for maintaining it, including overtime and duties associated with overnight guests, as well as the number of overnight guests and stays. Accordingly, for purposes of our audit and access authority, we believe the Executive Residence is an "establishment" of the United States and that papers, correspondence, and other written materials documenting its use, created by the President or First Lady or received by them from private parties, and used by government employees to compile statistics released to the public, are "records" as that term is used in 31 U.S.C. 716. Mr. Chairman, that concludes my statement. I will be pleased to answer questions you or other members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the status of its work on the number of overnight guests and stays in the Executive Residence at the White House, focusing on: (1) an audit of certain fiscal year 1996 expenditures, including those to operate the Executive Residence, that are accounted for solely on the certificate of the President or the Vice President and referred to as unvouchered activities; (2) a review of certain processes and procedures relating to reimbursable expenditures of the Executive Residence, such as those for political events; and (3) a review of the number and cost of overnight stays in the Executive Residence since January 1993. GAO noted that: (1) its first two assignments in this area, relating to audits of certain 1996 expenditures and a review of certain processes and procedures relating to reimbursable expenditures, are proceeding on schedule; (2) its third assignment relates to the number and costs of overnight stays in the Executive Residence since January 1993; (3) GAO requested access to all books, documents, papers, or other records related to the number of overnight guests at the Executive Residence to achieve its objective of counting and reporting the number of overnight guests and stays; (4) in an October 23, 1997, letter, the Associate Counsel to the President characterized GAO's request as one to gain access to private and personal papers of the First Family, but expressed a willingness to continue discussing the matter; (5) GAO is open to reviewing other materials to determine the number and duration of overnight guests and stays at the Executive Residence; (6) in the October 1997 letter, the Associate Counsel argued that a privacy interest protects the First Family's notes and correspondence, and stated that GAO's statutory right of access encompasses agency records and does not reach records of the First Family; (7) GAO believes that disclosure of the information is solely in aid of the congressional power to enact legislation, oversee the operation of government, and appropriate funds under the Constitution, with the presumption of a valid legislative purpose; (8) the Executive Residence is a government facility staffed by federal employees and funded with appropriated tax dollars; (9) this subcommittee considers budget requests by the President for the operation and maintenance of the Executive Residence, and in so doing, it desires to have information relating to the operation of the Executive Residence and the workload of the government employees responsible for maintaining it, including overtime and duties associated with overnight guests, as well as the number of overnight guests and stays; and (10) accordingly, for purposes of GAO's audit and access authority, GAO believes the correspondence, and other written materials documenting use of the Executive Residence, created by the President or First Lady or received by them from private parties, and used by government employees to compile statistics released to the public, are records as that term is used in 31 U.S.C. 716.

DHS, one of the 24 Chief Financial Officer (CFO) Act agencies, was formed from 22 agencies, including the following agencies or parts of agencies: the U.S. Customs Service, which was formerly located in the Department of the Treasury; the Federal Emergency Management Agency; the Coast Guard; and most of the Immigration and Naturalization Service, which was formerly located in the Department of Justice. Tables 1 and 2 show the representation of career employees at DHS and governmentwide as of September 2003 and September 2007, respectively. There were slight increases in percentage points among nearly all minority groups DHS-wide between 2003 and 2007. The greatest change DHS-wide was a decrease in White men. The greatest differences between the governmentwide data and DHS-wide data were among Hispanic men-- in both 2003 and 2007 the representation of Hispanic men was more than 10 percentage points higher than the representation governmentwide, and for White women, the representation was nearly 10 percentage points lower. For both 2003 and 2007, the representation of women at DHS, with the exception of Hispanic women, was below the governmentwide level, the biggest difference being among White and African American women. See appendix I for a breakdown of the DHS-wide representation data by DHS components. Taking a closer look at the DHS-wide data, table 3 shows the representation of career employees at DHS by pay plan/grade as of September 2003. Minority employees generally represented less than 10 percent of career employees among all the pay plans and grades. Examples of the exceptions included the representation of Hispanic men in the blue collar pay plan, grades 5 to 8, and grades 9 to 12, where they ranged from 15 to over 21 percent. In grades 1 to 4, African American women represented over 17 percent, and Hispanic women represented nearly 13 percent of employees. Among the higher grades and pay plans-- grades GS-13 to GS-15, SES, and SL/ST--the percentage of White women ranged from over 17 to more than 22 percent, and no minority group exceeded 9 percent of career employees. By 2007, the representation of career employees at DHS by pay plan/grade showed only slight increases and decreases. Exceptions, as shown in table 4, were in the percentage of White men in the SL/ST pay plan, which increased from 0 percent in 2003 to more than 65 percent in 2007, and White women, which during this period in the same pay plan increased from 0 percent to almost 28 percent. The representation of minorities was still less than 10 percent in grades GS-13 and above. As we have reported, leadership in agencies across the federal government, especially at senior executive levels, is essential to providing accountable, committed, consistent, and sustained attention to human capital and related organizational transformation issues. Having a diverse SES corps, which generally represents the most experienced segment of the federal workforce, can be an organizational strength that can bring a wider variety of perspectives and approaches to bear on policy development and implementation, strategic planning, problem solving, and decision making. The members of the career SES are the highest nonpolitically appointed leaders in the federal workforce, and we recently looked more closely at their representation governmentwide. Table 5 shows the total number of career SES and the percentage of women and minority SES in DHS and at the 23 other CFO Act agencies in 2003 and 2007. Overall at DHS, the total number of SES increased by more than 50 percent between 2003 and 2007 going from 208 to 325. Within that total, the percentage of women increased from 21.2 percent to 26.2 percent. In 2003, the representation of women within individual CFO Act agencies ranged from 15.9 to 40.7 percent, with more than two-thirds of the agencies having at least 25 percent women--DHS had 21.2 percent. The representation of minorities within the CFO Act agencies in 2003 ranged from 7.2 to 42.0 percent with more than two-thirds having at least 15 percent minorities--DHS had 15.9 percent. In 2007, the representation of women at these agencies ranged from 19.9 to 45.5 percent, with more than half of the agencies having 30 percent or more women--DHS had 26.2 percent. For minority representation, CFO Act agency rates ranged from 6.1 to 43.8 percent, with two-thirds having at least 15 percent or more minorities--DHS had 13.2 percent. Minority representation in the career SES governmentwide generally increased by less than 1 percentage point from September 2003 through September 2007 as shown in table 6. During this period, the representation of men in the SES decreased by 2.6 percentage points, and White men by 2.7 percentage points; whereas, the percentage of women increased by 2.7 percentage points. At DHS, the extent of change in the representation of career SES employees was generally greater than the change that occurred in the governmentwide SES from September 2003 through September 2007. For example, as shown in table 7, the percentage of White women in DHS's career SES was 23.1 percent in 2007, 5.8 percentage points above the 2003 rate of 17.3 percent. White men and African American men experienced the largest decrease in their representation in the career SES by 2007, dropping 3.1 and 2.3 percentage points, respectively. Overall, minorities decreased from 15.9 to 13.2 percent. The vast majority of potential successors for career SES positions will come from the GS pay plan for grades GS-15 and GS-14, the levels that serve as the SES developmental pool. Table 8 shows the changes in the representation of the SES developmental pool governmentwide from September 2003 to September 2007. Governmentwide, the total number of employees in the SES developmental pool decreased slightly from September 2003 to September 2007. The greatest change in representation was a decrease of 5.3 percentage points in the number of White men from 2003 to 2007. The percentage of women in the governmentwide SES developmental pool increased by 3.9 percentage points between 2003 and 2007, but the percentage of men in this developmental pool decreased by this same amount. By 2007, the representation of each of the minority groups in the governmentwide SES developmental pool increased by 1.3 percentage points or fewer, resulting in an overall increase of 3.7 percentage points for minorities. Unlike the total number of employees in the governmentwide SES developmental pool, those in DHS's SES developmental pool increased by more than half. The two greatest changes in representation within DHS's career SES developmental pool from September 2003 through September 2007 were for White men, which decreased by 4.2 percentage points, and minorities, which increased by 4.6 percentage points, of which African American women increased by 1.8 percentage points, as shown in table 9. While we did not analyze factors that contributed to changes in DHS workforce from September 2003 through September 2007, OPM and the Equal Employment Opportunity Commission (EEOC) in their oversight roles require federal agencies, including DHS, to analyze their workforces. Both OPM and EEOC also report on governmentwide representation levels. Under OPM's regulations implementing the Federal Equal Opportunity Recruitment Program (FEORP), agencies are required to determine where representation levels for covered groups are lower than the civilian labor force (CLF) and take steps to address those differences. EEOC's Management Directive 715 (MD-715) provides guidance and standards to federal agencies for establishing and maintaining effective equal employment opportunity (EEO) programs, including a framework for executive branch agencies to help ensure effective management, accountability, and self-analysis to determine whether barriers to EEO exist and to identify and develop strategies to mitigate or eliminate the barriers to participation. Specifically EEOC's MD-715 states that agency personnel programs and policies should be evaluated regularly to ascertain whether such programs have any barriers that tend to limit or restrict equitable opportunities for open competition in the workplace. The initial step is for agencies to analyze their workforce data with designated benchmarks, including the CLF. If analysis of their workforce profiles identifies potential barriers, agencies are to examine all related policies, procedures, and practices to determine whether an actual barrier exists. EEOC requires agencies to report the results of their analyses annually. A high-performance organization relies on a dynamic workforce with the requisite talents and up-to-date skills to ensure that it is equipped to accomplish its mission and achieve its goals. Such organizations typically foster a work environment in which people are enabled and motivated to contribute to continuous learning and improvement as well as mission accomplishment and which provides both accountability and fairness for all employees. In addition, the approach that a high-performance organization takes toward its workforce is inclusive and draws on the strengths of employees at all levels and of all backgrounds. This approach is consistent with that of diversity management. We have defined diversity management as a process intended to create and maintain a positive work environment where the similarities and differences of individuals are valued, so that all can reach their potential and maximize their contributions to an organization's strategic goals and objectives. In our past work, we identified nine leading practices in diversity management that experts agreed should be present in some combination for creating and managing diversity. The leading diversity management practices identified by a majority of experts were as follows: Top leadership commitment--a vision of diversity demonstrated and communicated throughout an organization by top-level management. Diversity as part of an organization's strategic plan--a diversity strategy and plan that are developed and aligned with the organization's strategic plan. Diversity linked to performance--the understanding that a more diverse and inclusive work environment can yield greater productivity and help improve individual and organizational performance. Measurement--a set of quantitative and qualitative measures of the effect of various aspects of an overall diversity program. Accountability--the means to ensure that leaders are responsible for diversity by linking their performance assessment and compensation to the progress of diversity initiatives. Succession planning--an ongoing, strategic process for identifying and developing a diverse pool of talent for an organization's potential future leaders. Recruitment--the process of attracting a supply of qualified, diverse applicants for employment. Employee involvement--the contribution of employees in driving diversity throughout an organization. Diversity training--organizational efforts to inform and educate management and staff about diversity. DHS's Acting Chief Human Capital Officer (CHCO) testified in April 2008 on actions the Department is taking to create and manage its workforce. These actions are consistent with leading diversity management practices in four areas: (1) a diversity strategy as part of its strategic plan, (2) recruitment, (3) employee involvement, and (4) succession planning. We have not conducted a review of DHS's diversity management efforts; therefore, we cannot comment on the effectiveness of DHS's implementation of these practices. In addition, because we do not highlight a particular practice, it is not meant to imply success or lack of success by DHS in implementing other diversity management practices. Diversity strategy as part of the strategic plan. DHS established an objective in its 2004 Strategic Plan to "ensure effective recruitment, development, compensation, succession management and leadership of a diverse workforce to provide optimal service at a responsible cost." In an August 2007 progress report on implementation of mission and management functions, we indicated that DHS had taken action to satisfy most of the elements related to developing a results-oriented strategic human capital plan. We noted that in addition to the strategic human capital plan that DHS issued in October 2004, which covers 2004 to 2008, the department developed a fiscal year 2007 and 2008 Human Capital Operational Plan, which provides measurable goals that the department is using to gauge the effectiveness of its human capital efforts. DHS officials provided us with a copy of DHS's Corporate Diversity Strategy, issued in March 2008, and stated that the department has developed a Diversity Action Plan, which it plans to submit to the DHS Diversity Council for approval in May 2008. The Diversity Strategy outlines DHS's policy of encouraging a diverse workforce and the value of a diverse workforce in accomplishing DHS's mission. Among the guiding principles is integrating diversity into the organization culture rather than as a stand alone program and recognizing that diversity is a matter of equity and fairness. To help ensure accountability, among other things, the strategy calls for establishing a senior-level Diversity Council, which DHS officials reported has been done, integrating diversity strategies into DHS's comprehensive human resource operation, and ensuring that all DHS leaders have access to training, tools, and support needed to serve as de facto diversity champions. Recruitment. To achieve its strategic plan objective of a diverse workforce, in his April 2008 testimony, DHS's Acting CHCO stated that recruitment strategies have been implemented at the department and component levels to improve diversity of the DHS talent pool. DHS officials told us that the department partners with several minority-serving institutions and participates in several intern, scholarship, and fellowship programs; officials provided a recruitment brochure. These officials also indicated that in October 2007, the DHS began a Veterans' Outreach Program as a means of recruiting a diverse workforce. This outreach strategy consists of (1) a Web site for one-stop employment and other information, (2) an advisory forum of external veterans as stakeholders, and (3) training in veterans' preference and reemployment rights for EEO and human capital specialists. DHS has also created an SES-level Director of Recruiting and Diversity within the Chief Human Capital Office. Employee Involvement. Employees can make valuable contributions in driving diversity throughout an organization. Our work on leading diversity management practices identified several forms these contributions can take, including mentoring and community outreach with private employers, public schools, and universities. DHS officials described actions the department is taking to provide opportunities for employees at various levels throughout the department to receive mentoring. In addition, DHS officials stated that they have developed formal partnerships with minority professional service organizations, including the Urban League's Black Executive Exchange Program, where DHS provides speakers that participate in outreach programs at historically black colleges and universities. DHS officials indicated they are pursuing similar partnerships with the National Association of Hispanic Federal Executives, the African American Federal Executive Association, and the Asian American Executive Network. Succession Planning. Succession planning is a comprehensive, ongoing strategic process that provides for forecasting an organization's senior leadership and other needs; identifying and developing candidates who have the potential to be future leaders; and selecting individuals from among a diverse pool of qualified candidates to meet executive resource needs. Succession planning and management can help an organization become what it needs to be, rather than simply recreate the existing organization. Leading organizations go beyond a "replacement" approach that focuses on identifying particular individuals as possible successors for specific top-ranking positions and engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future capacity. They anticipate the need for leaders and other key employees with the necessary competencies to successfully meet the complex challenges of the 21st century. For DHS, in addition to the changes that will occur as a result of the upcoming new administration, several factors including recent turnover and expected retirements provide opportunities for DHS to affect the diversity of its workforce and highlight the importance of succession planning. Recently, we reported that the overall attrition rates for permanent DHS employees (excluding SES and presidential appointees) at 8 percent and 7 percent in 2005 and 2006, respectively, exceeded the 4 percent average rate for all cabinet-level agencies. These higher attrition rates, about 14 to 17 percent, were among transportation security officers in DHS's Transportation Security Administration. The attrition rate for SES and presidential appointees was also higher than the average senior- level attrition rate for all cabinet-level departments. As for retirements, about 20 percent of career employees at DHS as of fiscal year 2007 are projected to be eligible to retire by 2012, and certain key occupations within the department are expected to have high retirement eligibility rates, such as customs and border protection agents--about 51 percent. In 2006, OPM reported that approximately 60 percent of the executive branch's 1.6 million white-collar employees and 90 percent of about 6,000 federal executives will be eligible for retirement over the next 10 years. Considering retirement eligibility and actual retirement rates of the SES is important because individuals normally do not enter the SES until well into their careers; thus SES retirement eligibility is much higher than for the workforce in general. If a significant number of SES members were to retire, it could result in a loss of leadership continuity, institutional knowledge, and expertise among the SES corps, with the degree of loss varying among agencies and occupations. Succession planning also is tied to the federal government's opportunity to affect the diversity of the executive corps through new appointments. Racial, ethnic, and gender diversity in the SES is an important component for the effective operation of the government. In September 2003, we reported that agencies in other countries use succession planning and management to achieve a more diverse workforce, maintain their leadership capacity, and increase the retention of high-potential staff. According to the Acting CHCO's April 3, 2008, testimony and discussion with senior level human capital officials, the department is taking steps to develop a qualified and diverse pool of applicants for SES positions by preparing its mid-career employees through a variety of leadership development programs. These programs include the DHS SES Candidate Development Program (primarily for GS-15s) and the DHS Fellows Program (for GS-13s, GS-14s, and GS-15s). See appendix II for representation data for both programs since their inception. According to DHS officials, the DHS Fellows Program, initiated in 2006, is a competitive developmental program where participants are placed in high-visibility rotational assignments, receive training in such areas as leadership, and form small groups to work on specific projects. After completion of this 11-month program, participants remain in their current assignments but, according to DHS officials, are prepared for advancement when the opportunities arise. Participants in both of the DHS leadership programs receive mentoring and coaching and rotational assignments. However, according to DHS officials, employees at other levels of the organization can also participate in ad hoc mentoring and rotational assignments. Effective training and development programs can enhance the federal government's ability to prepare its workforce and thereby achieve results. The efforts that DHS officials described are consistent with these practices. Chairman Thompson, Ranking Member King, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information regarding this statement, please contact George Stalcup, Director, Strategic Issues, on (202) 512-6806 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 statement included Belva Martin and Kiki Theodoropoulos, Assistant Directors; Karin Fangman; Mary Y. Martin; and Greg Wilmoth. Tables 10 and 11 below provide demographic data by race and gender on the Department of Homeland Security's (DHS) career employees by DHS component for September 2003 and September 2007. In 2003 and 2007, the U.S. Customs and Border Protection (USCBP) and the U.S. Immigration Customs Enforcement (USICE) had the highest percentage of Hispanic men, while the Transportation Security Administration (TSA) had the highest percentage of African American men. DHS officials stated that they have two formal leadership development programs to prepare future DHS leaders: the DHS Fellows Program for GS- 13, GS-14, and GS-15 staff (an 11-month program) and the DHS Senior Executive Service (SES) Candidate Development Program, generally for GS-15s (an 18-month program). Tables 12 and 13 below provide a breakdown of the representation of women and minorities in each of these programs.

The Department of Homeland Security (DHS) was created from a disparate group of agencies with multiple missions, values, and cultures into a cabinet department whose goals are to, among other things, protect U.S. borders and infrastructure, improve intelligence and information sharing, and prevent and respond to potential terrorist attacks. GAO designated the implementation and transformation of DHS as a high-risk area in 2003, and it remains so. While DHS has made progress, it continues to face challenges in transforming into an effective, integrated organization. In response to a request to provide information on diversity in DHS and steps DHS is taking to create and manage a diverse workforce, GAO is providing demographic data related to the federal government as a whole and DHS's workforce. GAO obtained these data from the Office of Personnel Management's (OPM) Central Personnel Data File (CPDF). GAO used its past work on leading diversity management practices (GAO-05-90) and reviewed data from DHS on its diversity management practices. Data in OPM's CPDF show that as of September 2007, the overall percentages of women and minorities have increased in the career SES governmentwide, the highest nonpolitically appointed leaders in the federal workforce, and the SES developmental pool for potential successors since September 2003. As part of GAO's recent analysis of the diversity of the SES and the SES developmental pool, GAO reviewed career, or permanent, SES appointments at DHS and DHS's SES developmental pool. During this 4-year period, the total number of career SES and those in the SES developmental pool for potential successors increased at DHS. The percentage of women in the SES increased, while the percentage of minorities decreased. For the SES developmental pool, the percentage of women and minorities increased. While GAO did not analyze the factors that contributed to changes in DHS's workforce for this period, OPM and the Equal Employment Opportunity Commission in their oversight roles require federal agencies, including DHS, to analyze their workforces. As part of a strategic human capital planning approach, agencies need to develop long-term strategies for acquiring, developing, motivating, and retaining a diverse workforce. An agency's human capital planning should address the demographic trends that the agency faces with its workforce, especially retirements, which provide opportunities for agencies to affect the diversity of their workforces. DHS reported taking steps to affect the diversity of its workforce. These steps are consistent with several leading diversity management practices: (1) a diversity strategy as part of its strategic plan, (2) recruitment, (3) employee involvement, and (4) succession planning. For example, DHS cited its use of intern programs for recruiting and its implementation of two leadership development programs for managing succession. GAO has not conducted a review of DHS's diversity management efforts; therefore, it cannot comment on the effectiveness of DHS's implementation of these practices.

Traditionally, "universal service" has meant providing residential customers with affordable, nationwide access to basic telephone service. The Telecommunications Act of 1996, among other things, extended universal service support to eligible schools and libraries. The Act also specified that every telecommunications carrier that provides interstate telecommunications services, unless exempted by FCC, must contribute to a universal service fund. Finally, the Act directed FCC to convene a federal-state Joint Board to specify which services should be supported by the federal universal service mechanisms and recommend regulatory changes to provide such support. In its May 1997 universal service order, FCC adopted the Joint Board's recommendation that eligible schools and libraries could receive discounts of between 20 to 90 percent on all telecommunications services, Internet access, and internal connections, subject to a $2.25 billion annual cap. Changes have been made to the program through a number of reconsideration orders, the latest of which was released on June 22, 1998. These orders define the size, time frame, and eligibility requirements for the schools and libraries program, the type and level of funding support available from universal service funds, and the administrative structure of the program, among other things. The general purpose of this program is to improve the access of schools and libraries to modern telecommunications services. Generally, any school that meets the Elementary and Secondary Education Act of 1965's definition of schools is eligible to participate, as are libraries that can receive assistance from a state's library administrative agency under the Library Services and Technology Act. In addition, the orders specifically define the three classes of services that are eligible for universal service support: telecommunications services, Internet access, and internal connections. FCC has defined the mechanism by which eligible schools and libraries will receive support from the universal service program. Specifically, schools and libraries do not receive direct funding from the program. Instead, they receive discounts on the costs of services provided by vendors. The amount of discount each school or library can receive under the program ranges from 20 to 90 percent and is determined using a matrix designed by FCC, with schools and libraries located in rural and low-income areas receiving the highest discounts from the fund. The universal service fund compensates the schools' and libraries' vendors for the amount of the discounts. The act did not prescribe a structure for administering the program. However, the FCC directed the establishment of the Schools and Libraries Corporation. FCC's Chairman selects or approves the Corporation's Board of Directors as well as the hiring and removing of the Chief Executive Officer. Under FCC's orders, the Corporation is responsible for administering certain functions of the program, including processing and reviewing the applications and administering an Internet site on the World Wide Web. FCC also specified that the Corporation can only engage in activities that are consistent with FCC orders and rules. FCC's latest reconsideration order significantly changed the program. Specifically, this order changed the funding year from a calendar year cycle to a fiscal year cycle and extended the first funding round period to 18 months. The order also adjusted the maximum amounts that could be collected and spent during 1998 and the first 6 months of 1999 and directed the Corporation to commit no more than $1.925 billion for the schools and libraries support program during this time frame. FCC also directed the Corporation to fund requests for telecommunication and Internet services first and then fund requests for internal connections. Those applicants eligible for the highest levels of discounts would receive funding priority for internal connections. The Corporation currently has 15 staff, all based in Washington, who manage the application and disbursement process and conduct outreach to potential applicants. To date, the Corporation has conducted over 130 outreach sessions informing schools and libraries about the program. In addition, the Corporation has established a web site that contains program applications, information, and updates. The Corporation also has provided training to its contractors' staff in answering applicants' questions and processing and reviewing applications. The Corporation has contracted out most of the application-processing, client support, and review functions to the National Exchange Carrier Association (NECA). NECA has 66 staff, the majority of whom are part of the program integrity assurance operation, which reviews the applications for compliance with the program's eligibility requirements. NECA has also subcontracted with two organizations to provide customer support, process and enter the applications into the Corporation's database, and establish and maintain the Corporation's web site. As of June 1998, these two subcontractors employed approximately 390 staff dedicated to Corporation activities. According to Corporation officials, however, the subcontractors' staffing levels could decrease as the system designs are finalized and the number of applications needing processing declines. The Corporation was established in the Fall 1997. The Corporation stated that its operating expenses for calendar year 1997 were approximately $1.9 million. For calendar year 1998, the first full year of program operations, the Corporation estimates its operating expenses at $18.8 million. Most of this estimate covers the costs of contracts, including the Corporation's contract with NECA and an independent auditor. Corporation staff stated, however, that the 1998 estimate may increase as program procedures and systems need to be redesigned in response to FCC's recent rule changes. To receive universal service support, schools and libraries must complete a two-stage application process which, for the program's first year of funding, began in January 1998. During the first stage, applicants post requests for services on the Corporation's web site so that vendors can provide the applicants with bids on the cost of providing the requested services. The Corporation has received to date nearly 48,000 of these initial applications (FCC Form 470). The second stage of the process begins after the schools and libraries have accepted a bid and entered into a contract with a service vendor. The applicants then submit on paper a second application (FCC Form 471) that details the types and costs of the services being contracted for, and the amount of the discount being requested. In its original order, FCC determined that applications would be funded on a first-come, first-served basis. Subsequently, FCC amended its rules and the Corporation established a 75-day window within which these second applications would be considered as arriving at the same time. This was done, in part, in order to reduce disparities between applicants with substantial administrative resources and applicants with fewer resources. As a result, the applications received within this window are not funded on a first-come, first-served basis. Approximately 32,600 applications were received during this initial window. The Corporation estimates that the applications contain approximately $2 billion in requests for discounts. The Corporation's contractors review the second applications for compliance with what the Corporation considers to be "minimum processing standards," which include a check for original signatures, completeness, and legibility. If the minimum standards are not met, the application is rejected. If the standards are met but other problems with the application are found, the application is sent to a problem resolution team that contacts the applicant to make corrections. After these problems are corrected, information from the application is entered into a database. FCC and the Corporation anticipated that all of the first year's applications would be processed by the end of June 1998. According to the Corporation, however, as of July 7, 1998, information from only about 20,400 of the 32,600 applications (about 62 percent) received within the initial window had been entered into the Corporation's database. Of the remaining applications, approximately 2,560 (8 percent) were rejected for not meeting minimum processing standards, 1,600 (5 percent) are in problem resolution, and 7,900 (24 percent) applications are awaiting data entry. According to Corporation officials, the delay occurred because the contractors have had to spend more time than expected in working with applicants to resolve problems. The officials stated that applicants found some parts of the applications and instructions confusing. In addition, the officials noted that the contractors made some mistakes initially in applying the minimum processing standards. Therefore, some rejected applicants are currently being contacted to resolve their problems, enter their data, and place them back in the initial application window. To ensure compliance with FCC rules and regulations, the Corporation relies on a combination of applicants' self-certifications, third-party reviews, and its own procedures. Applicants are required to self-certify that they are following the program's rules, and third parties, such as state-level education and library agencies, certify that the schools and libraries have technology plans in place that show how technology will be used to support their educational goals. In addition, the Corporation's staff and contractors check applications to ensure that applicants are eligible, services are eligible, and discount levels are appropriate. The way the Corporation is conducting key compliance tests, however, raises our concern about how effective the tests will be in detecting deviations from program rules. We are also concerned about the timing of detailed reviews that the Corporation plans to conduct on a set of applications judged to be "high risk," to provide further assurance that program rules are being followed. Currently, the Corporation is not planning to begin these selective, detailed reviews until after it issues commitment letters to applicants and their vendors informing them of the amount of funding that will be set aside to cover discounts for the services they are requesting. Should these subsequent reviews reveal systemic problems with the Corporation's quality assurance procedures or defects in the reviewed applications, the Corporation could find it difficult to take corrective actions since the commitment letters are, in essence, "green light" signals to the applicants and vendors to go ahead with the contracted services. If the Corporation finds major problems with some of the applications at this time, it may have to reduce or withdraw funding commitments previously made. These applicants might find themselves responsible for paying more of the cost of services received than they planned for. On the basis of the Joint Board's recommendations, FCC's orders specified that the application process for schools and libraries would be grounded on self-certification by applicants. This was done in the belief that the administrative burden on applicants should be limited, while still holding them accountable for the information they provide. Accordingly, a responsible official must sign the application, certifying that the information presented is correct. FCC can impose civil and criminal penalties for applicants making willfully false statements. In addition to this general self-certification that all of the information provided is accurate, each application requires specific self-certifications about certain information provided. For example, the "request for services" application (FCC Form 470) requires applicants to self-certify that they or the entities they represent are an eligible school or library and that all services for which discounts are requested will be used for educational purposes only. The "request for discounts" application (FCC Form 471) includes additional self-certifications, such as assurances that all applicable state or local laws or rules regarding procurement have been followed. The applicants must also self-certify they have the budgetary resources, not only to pay their share of the costs of requested services, but also those resources necessary to use and maintain the technology services for which discounts are requested. In addition to the self-certifications on the Form 470 and Form 471 applications, FCC requires applicants to have a separate technology plan that provides details on how they intend to integrate technology into their educational goals and curricula, as well as how they will pay for the costs of acquiring and maintaining the technology. FCC requires that the plans be independently approved. To implement this requirement, the Corporation designates third parties, such as state education and library agencies or private school associations, to review and approve the plans on the basis of criteria provided by the Corporation. The schools and libraries do not routinely submit copies of their technology plans for review by the Corporation. These technology plans do not have to be approved when the applications are submitted or even when the Corporation commits funding support to the applicants. However, the applicants must certify to the Corporation that their plans have been approved before any funds are disbursed to cover the services requested. As a result, most applicants' requests for discounted services are not routinely reviewed by the third-party reviewers in order to determine whether, in fact, the requested services are linked to the educational goals described in the applicants' approved plans. According to Corporation officials, the third-party reviewers approve the plan but are not required to review the application. And, as noted above, the Corporation receives the application but does not routinely receive copies of the technology plan, although it may do so if it selects the application for a detailed review, as discussed below. The Corporation recognizes that self-certification and third-party approvals alone are not adequate controls to ensure compliance with the program's rules. It has therefore established a program integrity assurance operation that is designed to help ensure that applications and invoices submitted to the Corporation are complete, accurate, and in compliance with FCC's rules. No program integrity tests are applied to the initial application for services (Form 470). Instead, the Corporation focuses on reviewing the information submitted by applicants in their subsequent application for discounts (Form 471). The Corporation's review of this application takes place in two stages. During the first stage, when the Form 471 application is submitted to the Corporation's contractor, it is reviewed to ensure that it has met minimum processing standards. This review includes checking to see that the application has been signed by an authorized official and that the applicant is clearly identified. If the application does not meet the minimum standards, it is rejected and returned to the applicant. If the application meets minimum standards but is in some way unclear, it undergoes a "problem resolution" process, during which the Corporation's contractor contacts the applicant to ask for clarification. At the second stage of the review process, the Corporation electronically compares information provided by the applicant against information in databases that the Corporation has compiled or purchased. Specifically, the Corporation runs three computer-assisted tests on each application. The set of tests: (a) compares the name of the applying school or library to a database of eligible schools and libraries, (b) looks for indications of whether any discounts are being requested for ineligible services, and (c) compares the discount requested by the applicant to the appropriate discount, as calculated from data maintained by the Corporation. Should these tests indicate potential problems with the eligibility of applicant, the eligibility of the services, or with the appropriateness of the discount, the Corporation's contractor contacts the applicant to resolve the issues identified. Depending on the additional information provided by the applicant, the application can be approved, revised, or rejected (in total or in part). Of about 20,000 applications entered into the database and tested as of July 7, 1998, roughly 14,000 were identified by at least one of the three tests as needing further review. As indicated above, the Corporation has already applied these three tests to more than one-half of the 32,600 applications it has received. However, the Corporation added new criteria on several occasions to improve the particular test used to identify potentially ineligible services. Specifically, it added several criteria related to services prohibited under FCC's rules after a number of applications had already been reviewed. As a result, different test standards have been applied to the applications already processed, depending on when they were reviewed. According to Corporation officials, they do not plan to use the updated criteria to recheck applications processed earlier to determine if any passed that should have been flagged for problem resolution. Another concern is the latitude of deviation allowed by the Corporation's automated test that checks whether an applicant is requesting an appropriate discount level. This automated test compares an applicant's requested discount with the appropriate discount as calculated from data in the Corporation's database. The Corporation is not reviewing all the applications showing discrepancies between the database calculation and the applicant's requested discount. Instead, it is allowing for a degree of deviation from the criteria established by FCC because, according to Corporation officials, the database used to conduct the test has some reliability problems. They are also concerned that reviewing all applications with any amount of deviation would increase processing time and costs without resulting in commensurate benefits. We recognize that internal controls should provide reasonable, but not absolute, assurance of deterring or detecting noncompliance with laws, regulations, and management policies. However, part of determining the reasonableness of controls involves assessing them in relation to the associated risks, costs, and benefits. A key risk in this instance is that allowing inappropriately high discount levels to some applicants reduces the amount of discount support available for others. To date, the Corporation has not performed a benefit-cost analysis to justify that its approach is reasonable. Specifically, the Corporation has not determined the total dollar amount of potentially inappropriate discounts that is passing unchallenged through its computer-based test. In addition to the tests described above, the Corporation plans to conduct other computer-assisted tests on the applications. For example, it plans on testing for duplicate applications. However, these tests have not been finalized. In addition to these computer-assisted tests, the Corporation plans to conduct more detailed manual reviews of applications that it considers to be "high risk." However, according to current plans, these reviews will not be performed until after funds are committed to applicants and vendors. To carry out these detailed reviews, the Corporation will designate applications as high risk if they (1) request a large total amount of funds, (2) request a large amount of funds compared with other applications on a per-unit basis (such as per-student or per-patron), (3) are from wealthy private schools, or (4) have been placed on an "alert list" of applications that have been identified in some way as potentially violating the program's rules. Although the procedures for these detailed reviews have not been finalized, the Corporation plans to require applicants to submit additional material to support the information provided in their applications, such as technology plans, budget information, requests for proposals, and bids. Using this material, the Corporation staff will give these high-risk applications a detailed review for compliance with the program's rules, such as those regarding eligibility of services and prohibitions against the improper consideration of "free services" in awarding contracts. Performing these reviews after commitment letters have been sent has some disadvantages. First, the reviews would not help the Corporation evaluate the effectiveness of its three automated compliance tests before funds are committed. As a result, it may not be able to identify and correct any systemic problems in its application review process prior to commitment. In addition, if the Corporation finds major problems at this time with the applications reviewed, it may have to reduce or withdraw funding commitments from applicants. This could cause problems for applicants that have begun receiving services on the basis of their commitment letters. These applicants might find themselves responsible for paying a higher cost for those services than they planned. The Corporation has not yet finalized all the procedures, systems, and internal controls that it needs in order to make funding commitments and approve vendor compensation for the discounted services provided to applicants. Corporation officials stated that some progress has been made in developing the procedures and controls needed to conduct these processes and in developing the automated systems needed to carry them out. However, the procedures are still subject to change. In fact, key control documents in this process--the commitment letters and the "Receipt of Service" form (FCC Form 486) which triggers the funds disbursement process -- have yet to be made final. Corporation officials could not estimate when these procedures and forms would be finalized. This situation is of concern because these procedures could be needed very shortly after commitment letters are sent to applicants and vendors. For example, applicants who are already receiving eligible services under existing contracts could quickly send in their Form 486s for processing once they receive commitment letters. Similarly, their vendors could quickly begin submitting invoices, and the Corporation could begin processing them once the related Form 486s have been accepted. The Corporation itself estimates that the invoices for payment could begin as soon as 15 days after commitment letters are sent. If the procedures and internal controls for this phase of the program are not in place when commitment letters are issued, the Corporation may find itself unable to process vendor invoices in a timely manner. According to Corporation officials, the delay in finalizing the commitment letters and disbursement procedures is due to the priority they have given to processing the backlog of applications as well as to anticipated changes in the program's rules. As discussed earlier, FCC made changes to the universal service program in June 1998. As described in the order, there were two primary changes to the schools and libraries discount program. First, the funding year was changed from a calendar year to a fiscal year, effective immediately. To ease the transition, the 1998 funding year was extended 6 months to end June 30, 1999. According to FCC, this change was made because delays in starting the program made it difficult for some schools to use the funds within the original time period and because a fiscal year calendar is more convenient for applicants and for the companies that pay for universal service. Second, the order changed the funding priorities for schools and libraries. Previously, FCC rules did not provide for any differentiation among applications that were received during the initial 75-day application window, except to specify that the last $250 million would be distributed on a priority basis to the applicants eligible for the highest discount levels. However, after recognizing that the funds provided by its orders would probably not cover all of the applicants' requests, FCC changed its priority rules so that all applications for telecommunications and Internet services would be funded first. The remaining funds would be distributed to applicants asking for internal connections, and those with the highest discount levels would be funded first. Corporation officials stated that they are still developing procedures to implement these changes, including procedures to allow applicants to amend their applications. In December 1997, FCC's Chairman requested the Corporation to contract with an independent auditor to verify that the program's processes and procedures provide the controls needed to mitigate against fraud, waste, and abuse. The Corporation accordingly engaged the services of an independent audit organization, which is currently reviewing the Corporation's systems and procedures and providing advice on improvements. According to current plans, the auditor's report is due to be completed before the Corporation authorizes the disbursement of funds. The independent audit is to include a review of the design of the program's integrity assurance operations. According to the Corporation, the audit objectives are to determine if the Corporation has designed the controls necessary to provide reasonable assurance that (1) all applications are processed in the order received; (2) only eligible schools and libraries receive discounts for eligible services; (3) the discount percentages are calculated in accordance with FCC's orders; (4) payments for reimbursements to vendors are timely; and (5) funding commitments do not exceed the program's limits. However, the Corporation stated that these control objectives have not been finalized and are subject to change. The auditor's scope of work, in this start-up phase, is focused on the design of the controls and will not include a verification of how effectively the controls have been applied. For example, the auditor will not review a sample of applications to determine whether the eligibility tests for applicants and services actually identified the applications that could have compliance problems. We believe that the independent audit can be useful in strengthening the program's integrity, even with its limited scope of work. We are concerned, however, about the timing of the auditor's final report, which is not due until after funding commitment letters have been issued to applicants and vendors. When we discussed our concern with Corporation officials, they proposed having the auditor brief the Corporation's Board of Directors on its preliminary results regarding "pre-commitment" procedures before the Corporation sends out funding commitment letters. This approach, however, does not adequately address our concerns. The briefing would not cover the procedures that the Corporation would use for its post-commitment review of applications that it designates as high risk. More important, the briefing would not cover the procedures, systems, and internal controls associated with disbursing funds. As noted earlier, applicants and vendors could begin sending in forms and invoices for funds disbursement as soon as 15 days after commitment letters have been sent out. It is therefore important that the Corporation have all of its disbursement procedures, systems, and controls in place and reviewed by the independent auditor before commitment letters are issued. If the auditor's final report comes later and identifies problems with disbursement procedures, it may be difficult for the Corporation to resolve them in a timely manner so that vendor invoices can be processed promptly and accurately. Currently, the Corporation does not know when the auditor's formal report will be completed, partly because it does not know when it will finalize the funds disbursement procedures, systems, and controls for the auditor to review. Performance measurement is critical to determining a program's progress in meeting its intended outcomes. Accordingly, the Congress, FCC, and the Corporation need clearly articulated goals and reliable performance data to assess the effectiveness of the schools and libraries program. FCC's combined "Strategic Plan for Fiscal Years 1997-2002 and Annual Performance Plan for Fiscal Year 1999," prepared in response to the Results Act, mentions the schools and libraries program in the context of a large number of telecommunications initiatives. However, this document provides no specific strategic goals, performance measures, or target levels of performance for the program as required by the act. The schools and libraries program is listed under the combined plan's "Policy and Rulemaking Activity Objective 2," which states that FCC "will encourage competition in the telecommunications industry through pro-competitive, deregulatory rulemakings, reducing consumer costs and increasing the telecommunications choices available to consumers." However, this is a high-level, comprehensive goal that includes a wide array of telecommunications initiatives, such as radio spectrum management, the allocation of toll-free numbers, the review of merger requests, and standard setting for global communications services. Moreover, for all of the varied activities under this goal, there is a single general performance indicator: "Performance will be measured by an annual compilation of the number of actions taken by the Commission to promote competition and an analysis of the result of these activities on consumers." While enhancing competition is part of FCC's mission, it is not clear how this statement translates into a strategic goal for the schools and libraries program. Similarly, the annual performance goal for the schools and libraries program in fiscal year 1999 is too general, stating simply that FCC "will work to improve the connections of classrooms, libraries and rural health care facilities to the Internet by the end of 1999 and to maintain affordable Telecommunications services to rural America." FCC needs to make the performance goals and measures for the program more specific to bring them in line with the Results Act's requirements. The act defines an annual performance goal as the target level of performance expressed as a tangible, measurable objective against which actual achievement is to be compared. An annual performance goal is to consist of two parts: (1) the performance measure that represents the specific characteristic of the program used to gauge performance and (2) the target level of performance to be achieved during a given fiscal year for the measure. According to Corporation officials, they have begun exploring options for performance measurement. For example, they have identified a number of existing data sources that could be used to develop baseline data and measure trends in areas such as Internet connections. While this is encouraging, it is important that FCC take the lead as part of its policy-making and oversight responsibilities for the program. FCC can build on the Corporation's preliminary work in revising its own annual performance plan to define specific goals and measures for the program. GAO has issued guidance on developing effective strategic plans which FCC should find useful. We recognize that a program in its first year of operation faces many challenges and difficulties. While the initial year cannot be expected to unfold without any problems, it is important that the program's managers identify the major risks facing the program and address them at the time when corrective actions would be most effective. This time is approaching for the Corporation as it prepares to issue its first set of funding commitment letters to successful applicants. Given our concerns over the program integrity assurance operations, we believe that the Corporation needs to complete additional actions before, rather than after, commitment letters are issued to applicants. Waiting until after commitment letters have been issued will make it difficult for the Corporation to take effective actions to correct any systemic problems in the application review procedures and could put the Corporation in the position of having to withdraw funding commitments from applicants, even those who have begun receiving services from vendors. Similarly, issuing commitment letters before all of the program's operating procedures, systems, and internal controls have been finalized and verified (especially those dealing with authorizing the disbursement of funds) would put the program's integrity at risk. To help strengthen the Corporation's program integrity assurance operations and help ensure that funding is properly directed to eligible applicants, for eligible and appropriate services, and at appropriate discount levels, we recommend that the FCC Chairman direct the Chief Executive Officer of the Schools and Libraries Corporation to complete the following actions before issuing any funding commitment letters to applicants: Conduct detailed reviews of a random sample of applications to assess not only the soundness of these applications but also the overall effectiveness of the Corporation's program integrity procedures for detecting ineligible applicants, ineligible services, and inappropriate discount levels as defined by FCC orders. Should these reviews reveal systemic weaknesses in program integrity procedures or their implementation, the Corporation should take corrective actions before committing any funds. Finalize procedures, automated systems, and internal controls for the post-commitment phase of the program's funding cycle, including funds disbursement. Obtain a report from its independent auditor that finds that the Corporation has developed an appropriate set of internal controls to mitigate against waste, fraud, and abuse. In addition, before issuing commitment letters for those applications identified as "high risk," the Corporation should conduct detailed reviews of the technology plans and related documents to determine whether the applicants have the resources to effectively use the services requested and whether the applications are in compliance with FCC rules regarding eligibility. Finally, we recommend that the FCC Chairman direct responsible FCC staff to develop goals, measures, and performance targets for the schools and libraries program that are consistent with the requirements of the Results Act. These measures should be defined by the end of this Federal fiscal year so that data collection and analysis activities can begin during the program's first funding cycle and goals can be communicated to future applicants. We performed our review during June and July 1998 in accordance with generally accepted government auditing standards. We met with officials from FCC and the Corporation to review the progress being made in starting up the schools and libraries program and implementing the first year's funding cycle. We also met with the Corporation's contractor in New Jersey, which has major responsibilities for processing and reviewing the program's applications. We reviewed guidance and procedures developed by FCC and the Corporation, along with status reports on the program's activities and cost data. We did not verify the accuracy of the information in these reports or the cost data. We discussed our findings and recommendations with FCC and Corporation officials. The Corporation's Chief Executive Officer agreed with our recommendations. In addition, in response to Corporation comments, we made a few revisions including clarifying the scope of the detailed compliance reviews. FCC's Common Carrier Bureau Chief stated that the recommendations are reasonable. Mr. Chairman, this concludes our testimony. We would be happy to answer any questions that you and members of the Committee may have at this time. 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 issues related to the Schools and Libraries Corporation's operating procedures and internal controls, focusing on: (1) its progress in reviewing applications; (2) the scope and timing of key compliance tests; (3) the status of its efforts to finalize its operating procedures; and (4) the status of the independent audit to determine whether the Corporation has developed an appropriate set of internal controls to mitigate against fraud, waste, and abuse. GAO noted that: (1) the Corporation has made substantial progress in establishing an operational framework for the program that is consistent with relevant Federal Communications Commission (FCC) orders; (2) with regard to processing applications, the Corporation has worked with schools and libraries to inform them about the program and its application procedures; (3) during the initial application period, which began on January 30, 1998, and ended on April 15, 1998, schools and libraries sent in over 32,600 applications for discounts; (4) however, processing these applications has taken longer than either the Corporation or FCC expected; (5) the Corporation relies on a combination of applicants' self-certifications, third-party reviews, and its own procedures to ensure compliance with FCC's rules and regulations; (6) the Corporation tests applications for compliance with rules on the eligibility of applicants and requested services, and on the amount of requested discounts; (7) also, while the Corporation plans to conduct additional tests and reviews to ensure that applications are consistent with program rules, their scope and timing have not been finalized; (8) while the Corporation has established procedures for initially reviewing the applications, it has not yet finalized all necessary procedures and related internal controls for the program; (9) GAO is particularly concerned about this because the Corporation estimates that invoices for payment could begin to arrive as soon as 15 days after commitment letters are sent out; (10) the FCC Chairman has called for an independent audit of the Corporation's internal controls to help mitigate against fraud, waste, and abuse; (11) since applicants and vendors could begin submitting forms and invoices for disbursement of funds as soon as 15 days after they receive their commitment letters, it is important that the Corporation have all of its disbursement procedures, systems, and controls in place and reviewed by the independent auditor before sending these letters; (12) the FCC has not developed performance goals and measures for this program consistent with the requirements of the Government Performance and Results Act of 1993; (13) FCC's Strategic Plan for Fiscal Year 1997-2002 and Annual Performance Plan for Fiscal Year 1999 mentions the schools and libraries program in the context of a large number of telecommunications initiatives, but establishes no specific performance measures or target levels of performance to be achieved by the program; and (14) the Corporation is still developing and finalizing some of its procedures and controls, and they are subject to change.

The Department of Defense (DOD) has been recovering nonrecurring research and development and one-time production costs on sales of weapon systems to foreign governments since 1967. The requirement to recover a proportionate amount of these costs was codified in the Arms Export Control Act in 1976, 22 U.S.C. section 2761 (e)(1)(B). The intent of the act was to control U.S. costs and the extent of weapons sales to foreign governments. The law required the recovery of costs on foreign military sales (government-to-government sales), but DOD retained its policy to collect nonrecurring costs on direct commercial sales (between the contractor and the buying entity) as it had been doing before the law was enacted. In 1992, DOD canceled its policy to recover nonrecurring costs on direct commercial sales in an effort to increase the competitiveness of U.S. firms in the world market. In 1995, a number of bills were introduced that could affect the recovery of nonrecurring costs on military sales. DOD interpreted the Arms Export Control Act as requiring the recovery of research and development costs on a pro rata basis. Between 1974 and 1977, DOD used a pro rata rate up to 4 percent of the total sales price. Currently, the services calculate the pro rata rate by dividing total research and development and other one-time production costs by the anticipated total number of units to be produced for both domestic and foreign use. A separate charge is calculated for each item of major defense equipment. The Defense Security Assistance Agency (DSAA) must approve all charges. They are published in the Major Defense Equipment List (MDEL) as part of DOD Manual 5105.38-M. DSAA officials acknowledged that the current pro rata calculation is complex and subject to error, particularly if sales fall short of or exceed projections. Nonrecurring cost charges are considered offsetting proprietary receipts and are deposited into the U.S. Treasury General Fund. They are credited to DOD's total budget authority and total outlays but cannot be spent unless specifically appropriated. The Arms Export Control Act also specifies that waivers or reduced charges of nonrecurring costs are permitted on sales to the North Atlantic Treaty Organization (NATO) countries, Australia, New Zealand, and Japan to further standardization and mutual defense treaties. However, each waiver and reduction requires written justification. DOD collected $181 million in nonrecurring costs under the foreign military sales program in fiscal year 1994. Fiscal year 1990-92 collections total $559.4 million--$337.3 million for foreign military sales and $222.1 million for direct commercial sales. Fiscal year 1993 collections totaled $177.9 million. DSAA estimated in February 1995 that collections during fiscal years 1995-99 could amount to $845 million. DSAA based these estimates primarily on past sales. DSAA also estimated that if the charge on foreign military sales is dropped as proposed, collections would decrease by $73 million through 1999. Some collections would continue based on deliveries to be made on current contracts. (See fig. 1.) A DSAA official stated that collections would probably stop completely in fiscal year 2002 if the charge is repealed in fiscal year 1995. In May 1995, DSAA estimated that if a requirement to collect nonrecurring costs on direct commercial sales were reimposed in fiscal year 1996, it would resume collections in fiscal year 1998, given production and delivery lead times, and recover about $198 million through fiscal year 1999. Table 1 shows estimated collections on both foreign military and direct commercial sales (including a charge on direct commercial sales). DOD waived $273 million in nonrecurring costs to NATO members and Japan in fiscal year 1994, about $92 million more than DOD collected in nonrecurring cost charges in the same year. About 90 percent of the waivers involved Norway's purchase of missiles and Turkey's purchase of missiles, aircraft, gun mounts, sonars, and vertical launchers. DOD's justification for the waivers involving Norway was to help achieve standardization, and the justification for waivers involving Turkey related to base rights agreements. Table 2 shows the aggregated totals of authorized waivers to NATO, 12 individual NATO countries, Australia, and Japan for fiscal years 1991 to 1994. Waivers on direct commercial sales represent sales agreements signed before the 1992 repeal. We focused our analysis on the comparison of current pro rata charges with flat rate charges of 3, 5, 8, and 10 percent on the acquisition cost of 68 weapon systems sold. First, we calculated the charges on four categories of weapons--projectiles, missiles, aircraft, and aircraft engines. The flat rate charges of 3 and 5 percent generally resulted in lower total charges for each category of weapon systems--in the aircraft category, the charge was considerably less at 3 percent--than the total pro rata charges. Flat rate charges of 8 and 10 percent in most cases resulted in comparable or considerably higher total charges than the current pro rata charges for the four categories of weapon systems. For example, a 3-percent flat rate charged on the sale of each of 27 aircraft resulted in total charges of $20.4 million, or $9.5 million less than the $29.9 million recovered under the pro rata system. On the other hand, a 10-percent flat rate charge on the sale of each of the 27 aircraft resulted in a total charge of $67.9 million, or $38 million more than the $29.9 million recovered under the pro rata system. On the 68 weapon systems we examined, current pro rata charges ranged from 0.07 percent to 15.95 percent of acquisition cost and averaged 5.18 percent. Thus, for a given flat rate of 3, 5, 8, or 10 percent, the difference between the flat rates and pro rata charges varies widely. For example, a 3-percent flat rate would be greater than a pro rata charge for 19 of the 27 aircraft we examined whereas a 3-percent flat rate was larger than the pro rata charge for only 2 of the 13 missiles we examined. However, on some sales of commonly sold military items, DOD might not recover the same level of charges using a nominal flat rate that it would under the pro rata system. For example, DOD anticipated collections of $279 million in nonrecurring cost charges on the sales of 228 F-16 A/B aircraft and 131 F-16 C/D aircraft when they are delivered to the buying countries. A flat rate of 3 percent on these sales would yield about one-half the pro rata charges; a 6-percent flat rate would yield an amount comparable to the pro rata charges. On sales of HARM AGM-88 missiles to three countries, total pro rata charges for the 181 missiles sold amount to $3.85 million. A 3-percent flat rate on these sales would provide only 40 percent of the pro rata charges; a 7.5-percent flat rate would yield an amount comparable to the pro rata charges. Appendix I compares the current pro rata charges with flat rate charges of 3, 5, 8, and 10 percent on the weapon systems we examined. The benefit of computing nonrecurring cost charges with a flat rate is its ease of administration. In addition, some of the U.S. government's research and development investment would be recovered, though perhaps not accurately or equitably for some specific weapons or categories of weapons. Total recoveries are affected by sales, which are affected by a buyer's assessment of economic factors such as price, quality, availability, and competition, and must also be considered. We did not analyze flat rate charges on commercial sales because of the proprietary nature of commercial sales prices. However, DSAA officials stated that the same rate would apply to both types of sales should the nonrecurring cost charge be reimposed on direct commercial sales. We reported in 1986 that the pro rata system had inaccuracies that prevented DOD from collecting accurate nonrecurring cost charges. For example, DOD was unable to accurately predict future costs and future U.S. and foreign quantity requirements. At that time, we recommended that DOD improve the existing pro rata system or develop a new approach for recovering research and development costs. The approach we suggested was to apply a flat rate to the acquisition price of all equipment sold abroad. We reported that with the use of a flat rate, DOD would recover comparable research and development costs yet simplify the complex administrative and review process of calculating a pro rata fee. In 1986, DOD opted to retain the pro rata calculation and stated that the Arms Export Control Act would need to be revised to permit the use of a flat rate fee. DOD's reasoning at the time was that a flat rate would not recover a "proportionate" share of investment on individual items as the law required. DSAA's General Counsel now interprets 22 U.S.C. section 2761 (e)(1)(B) as allowing a flat rate to be collected because the law requires recovery of a proportionate amount, not a pro rata share. Thus, the DSAA General Counsel concluded that the law would not have to be amended to permit the use of a flat rate. In our view, it is not clear that DOD would have authority under current law to use a flat rate. Supporters and opponents of recovery of nonrecurring costs differ on its benefits and drawbacks. On one hand, supporters of nonrecurring cost recovery that we spoke with, including arms control advocates, argue that nonrecurring cost charges should be collected on both foreign military sales and direct commercial sales for a number of reasons. Some supporters believe that, from an economic standpoint, the United States should recover all its costs and not subsidize the weapons industry by forgoing recovery of a portion of its research and development investments. Others believe that arms sales decisions should be based on national security concerns, not the economic interests of private firms. One group pointed to successful conversions of elements of the defense industry to competitive members of the international market for civilian goods as a means to counter declining defense production. Some arms control advocates assert that higher prices may deter sales and lessen any threat to the United States by reducing the availability of arms worldwide. Some supporters told us that recovered charges are deposited into the U.S. Treasury and thus relieve the U.S. budget deficit and benefit U.S. taxpayers. Some groups believe waivers to NATO and other foreign countries should be abolished as well. Opponents of recovery that we spoke with, generally industry representatives, favor repeal of the charge on foreign military sales and are adamantly against reimposing it on direct commercial sales. They expressed concerns that the charges raise sales prices and inhibit U.S. businesses' competitiveness in the world market. They asserted that any addition to the cost of weapons could price U.S. industry out of the world market with a cascading adverse impact on U.S. jobs, income, and tax revenue. They also stated that lost sales, whether government-to-government or direct commercial sales, raise prices to the U.S. military services because they lose the benefit of lower unit costs. Industry officials also stated that the charge is an unfair tax that does not accurately represent U.S. research and development investment and is applied in an arbitrary manner. Many industry representatives said that the U.S. research and development investment benefits U.S. forces regardless of foreign sales and should not be imposed on foreign customers. DOD officials stated that they believe the elimination of the recovery charge would not negatively affect national security interests and the elimination of the recovery charge would, overall, be beneficial to the United States. In a May 1995 report, we compared U.S. government support for military exports with that of France, Germany, and the United Kingdom. We pointed out that, among other things, (1) the United States has been the world's leading defense exporter since 1990, with almost 50 percent of the global market; (2) based on orders placed but not yet filled, U.S. industry will likely remain strong in the world market, at least for the short term; and (3) the U.S. government already provides substantial financial and other support to the U.S. defense exporters. Because of the large size of the U.S. domestic defense program, European businesses believe they are at a disadvantage when competing with U.S. firms. In written comments on a draft of this report, DOD concurred with the report. DOD indicated that (1) the Department fully supported the administration's proposal to repeal the statutory requirement to recover nonrecurring costs on foreign military sales of major defense equipment, (2) a consistent policy for foreign military and direct commercial sales is essential, and (3) the current imbalance between the two types of sales should be eliminated. DOD's comments are reprinted in appendix II. DOD also provided technical suggestions to clarify the report and they have been incorporated where appropriate. It should be pointed out that our review was not to assess the legislative proposals, but rather to focus primarily on the financial effects of using a flat rate instead of the current pro rata fees. We obtained information for this review from officials of DOD, DSAA, and the military services. We reviewed applicable statutes and DOD regulations governing recovery of nonrecurring costs on foreign military sales. We also discussed the benefits and drawbacks of recovering nonrecurring costs with supporters and opponents of recovery. To determine the effect of imposing a flat rate charge, we obtained from each of the services the acquisition value of selected major defense equipment sold under the foreign military sales program. We calculated nonrecurring cost charges using flat rates of 3, 5, 8, and 10 percent of the acquisition values of the selected weapon systems. We did our work between January and March 1995 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days from its issue date. At that time, we will send copies to the Chairmen of the Senate and House Committees on Appropriations, the Secretaries of Defense and State, and the Director of the Office of Management and Budget. Copies will also be made available to others on request. Please contact me on (202) 512-4128 if you or your staff have any questions concerning this report. Major contributors to this report were Diana Glod, Barbara Schmitt, and George Taylor. Table I.1: Pro Rata and Flat Rate Charges on Projectiles Nonrecurring pro rata charge (percent of acquisition cost) Table I.2: Pro Rata and Flat Rate Charges on Missiles Nonrecurring pro rata charge (percent of acquisition cost) Table I.3: Pro Rata and Flat Rate Charges on Aircraft Nonrecurring pro rata charge (percent of acquisition cost) (Table notes on next page) Without two J-85 engines. Without engines, AN/APG-63 radars, multistage improvement program, and towed electronic warfare system. With engines. Nonrecurring pro rata charge (percent of acquisition cost) 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 military exports, focusing on: (1) the government's recovery of nonrecurring research and development costs on sales of major defense equipment; (2) the effect of charging a flat or standard rate rather than the current pro rata fee; and (3) views from supporters and opponents on the recovery of these costs. GAO found that: (1) the Department of Defense recovered $181 million in nonrecurring costs on foreign military sales in fiscal year (FY) 1994 and estimated, based on historical trends, that collections could amount to $845 million between FY 1995 and 1999; (2) the Defense Security Assistance Agency waived almost $273 million in nonrecurring cost charges on sales to North Atlantic Treaty Organization countries and Japan in FY 1994; (3) the total value of waivers for FY 1991 through 1994 amounted to $773 million; (4) if the charge for nonrecurring costs is repealed, some collections would continue for a few more years as the charges are recovered on deliveries associated with prior years' sales; (5) if the legislative requirement to collect nonrecurring cost charges is not repealed, one alternative to the current pro rata charge is a flat rate charge, which would be easy to calculate and would not need to be periodically updated, as is the case in calculating a pro rata charge; (6) the effect of a flat rate varies depending on the way it is applied, in some cases the amount the U.S. government would collect on each unit sold would be less than the pro rate charge, in others it would be considerably more; (7) the total charges for each of four categories of 68 weapons systems (projectiles, missiles, aircraft, and aircraft engines) were generally lower than the current pro rata charges when using three and five percent flat rates but were comparable or higher for the most part when using eight and ten percent flat rates; (8) the differences between the pro rata charges and the flat rate charges for each of the 68 weapons systems varied widely for the same four flat rates and, for example, were considerably higher for some aircraft but lower for some missiles; (9) the average of the current pro rata charge on the acquisition cost of the 68 weapons systems was 5.18 percent; (10) supporters and opponents of recovery of nonrecurring costs differ on its benefits and drawbacks; (11) supporters, including some arms control advocates, believe that the charges serve national security interests by keeping weapons systems out of unstable regions of the world and the weapons industry should not be subsidized at taxpayers' expense; (12) opponents believe the charges adversely affect U.S. industry's competitiveness in the world market and could affect the U.S. economy in the long run; and (13) the United States has been the world's leading defense exporter since 1990, and based on orders received but not yet filled, the United States is likely to retain its first place position in the world market for at least the short term.

NISP was established by executive order in 1993 to replace industrial security programs operated by various federal agencies. The goal of the national program is to ensure that contractors' security programs detect and deter espionage and counter the threat posed by adversaries seeking classified information. Contractor facilities must be cleared prior to accessing or storing classified information and must implement certain safeguards to maintain their clearance. The National Industrial Security Program Operating Manual (NISPOM) prescribes the requirements, restrictions, and safeguards that contractors are to follow to prevent the unauthorized disclosure--or compromise--of classified information. DSS is responsible for providing oversight, advice, and assistance to U.S. contractor facilities that are cleared for access to classified information. Contractor facilities can range in size, be located anywhere in the United States, and include manufacturing plants, laboratories, and universities. Industrial security representatives work out of DSS field offices across the United States and serve as the primary points of contact for these facilities. Representatives' oversight involves educating facility personnel on security requirements, accrediting information systems that process classified information, approving classified storage containers, and assisting contractors with security violation investigations. DSS representatives also conduct periodic security reviews to assess whether contractor facilities are adhering to NISPOM requirements and to identify actual and potential security vulnerabilities. Contractors are required to self-report foreign business transactions on a Certificate Pertaining to Foreign Interests form. Examples of such transactions include foreign ownership of a contractor's stock, a contractor's agreements or contracts with foreign persons, and whether non-U.S. citizens sit on a contractor's board of directors. Contractors are required to report changes in foreign business transactions and to update this certificate every 5 years. Because a U.S. company can own a number of contractor facilities, the corporate headquarters or another legal entity within that company is required to complete the certificate. When contractors declare foreign transactions on their certificates and notify DSS, industrial security representatives are responsible for ensuring that contractors properly identify all relevant foreign business transactions. They are also required to collect, analyze, and verify pertinent information about these transactions. For example, by examining various corporate documents, the industrial security representatives are to determine corporate structures and ownership and identify key management officials. The representatives may consult with DSS counterintelligence officials, who can provide information about threats to U.S. classified information. If contractors' answers on the certificates indicate that foreign transactions meet certain DSS criteria or exceed thresholds, such as the percentage of company stock owned by foreign persons, the representatives forward these cases to DSS headquarters. DSS headquarters works with contractors to determine what, if any, protective measures are needed to reduce the risk of foreign interests gaining unauthorized access to U.S. classified information. Field staff are then responsible for monitoring contractor compliance with these measures. In overseeing contractor facilities and contractors under FOCI, DSS did not systematically collect and analyze information to assess the effectiveness of its operations. Without this analysis, DSS was limited in its ability to detect trends in the protection of classified information across facilities, to determine sources of security vulnerabilities, and to identify those facilities with the greatest risk of compromise. In addition, DSS was unable to determine whether contractors were reporting foreign business transactions as they occurred or how much time a contractor facility with unmitigated FOCI had access to classified information. In overseeing contractor facilities, we found DSS evaluated its performance in terms of process factors, such as the percentage of security reviews completed, percentage of security reviews that covered all pertinent areas of contractors' security programs, length of time needed to clear contractor facilities for access to classified information, and length of time needed to clear contractor personnel for access to classified information. While such indicators are important, they alone cannot measure where the greatest risks are, the types of violations that are occurring, and by whom. Performance indicators such as the ratings and number of findings that resulted from security reviews would have provided an indication as to whether DSS was achieving its mission. However, there were no such indicators to determine overall facility ratings, the sources of the violations, and their frequency. Without such information, DSS cannot ensure facilities are protecting the classified information entrusted to them. Similarly, DSS did not know how many contractors under FOCI were operating under all types of protective measures and, therefore, was unaware of the magnitude of potential FOCI-related security risks. Although DSS tracked information on contractors operating under some types of protective measures, it did not centrally compile data on contractors operating under all types of protective measures. Specifically, DSS headquarters maintained a central repository of data on contractors under voting trust agreements, proxy agreements, and special security agreements--protective measures intended to mitigate majority foreign ownership. However, information on contractors under three other protective measures--security control agreements, limited facility clearances, and board resolutions--were maintained in paper files in the field offices. DSS did not aggregate data on contractors for all six types of protective measures and did not track and analyze overall numbers. Such analysis would allow DSS to target areas for improved oversight. The NISPOM requires contractors with security clearances to report any material changes of business transactions previously notified to DSS. DSS is dependent on contractors to self-report transactions by filling out the Certificate Pertaining to Foreign Interests form. However, this form did not ask contractors to provide specific dates for when foreign transactions took place. Consequently, DSS did not know if contractors were reporting foreign business transactions as they occurred and lacked knowledge about how much time a contractor facility with unmitigated FOCI had access to classified information. In addition, DSS did not compile or analyze how much time passed before it became aware of foreign business transactions. DSS field staff told us that some contractors reported foreign business transactions as they occurred, while others reported transactions months later, if at all. During our review, we found a few instances in which contractors were not reporting foreign business transactions when they occurred. One contractor did not report FOCI until 21 months after awarding a subcontract to a foreign entity. Another contractor hired a foreign national as its corporate president but did not report to DSS, and DSS did not know about the change until 9 months later, when the industrial security representative came across the information on the contractor's Web site. In another example, DSS was not aware that a foreign national sat on a contractor's board of directors for 15 months until we discovered it while conducting our audit work. DSS also did not determine the time elapsed between the reporting of foreign business transactions by contractors with facility clearances until the implementation of protective measures or when suspensions of facility clearances occurred. Without protective measures in place, unmitigated FOCI at a cleared contractor increases the risk that foreign interests can gain unauthorized access to U.S. classified information. We found two cases in which contractors appeared to have operated with unmitigated FOCI before protective measures were implemented. For example, officials at one contractor stated they reported to DSS that their company had been acquired by a foreign entity. However, the contractor continued operating with unmitigated FOCI for at least 6 months. According to the NISPOM, DSS shall suspend the facility clearance of a contractor with unmitigated FOCI, and DSS relies on field office staff to make this determination. Contractor officials in both cases told us that their facility clearances were not suspended. Because information on suspended contractors with unmitigated FOCI is maintained in the field, DSS headquarters did not determine at an aggregate level the extent to which and under what conditions it suspends contractors' facility clearances due to unmitigated FOCI. Industrial security representatives often failed to determine whether security violations by facilities resulted in the loss, compromise, or suspected compromise of classified information or made determinations that were not in accordance with approved criteria. Determinations of loss, compromise, or suspected compromise are important because the affected government customer must be notified so it can evaluate the extent of damage to national security and take steps to mitigate that damage. Even when representatives made an appropriate determination, they often took several weeks and even months to notify the government customer because of difficulties in identifying the customer. As a result, the customer's opportunity to evaluate the extent of damage and take necessary corrective action was delayed. The NISPOM requires a facility to investigate all security violations. If classified information is suspected of being compromised or lost, the facility must provide its DSS industrial security representative with information on the circumstances of the incident and the corrective actions that have been taken to prevent future occurrences. The industrial security representative is to then review this information and, using the criteria specified in DSS's Industrial Security Operating Manual, make one of four final determinations: no compromise, suspected compromise, compromise, or loss. If a determination other than no compromise is made, the Industrial Security Operating Manual directs the representative to inform the government customer about the violation so a damage assessment can be conducted. However, for 39 of the 93 security violations that we reviewed, industrial security representatives made no determination regarding the compromise or loss of classified information. For example, in two cases involving one facility, the representative made no determination of compromise even though the facility reported the improper transmission of classified information via e-mail. In another eight cases at another facility, the representative made no determination despite employees' repeated failure to secure a safe room to ensure the protection of classified information. In the absence of a determination, the government customers were not notified of these violations and therefore were unable to take steps to assess and mitigate any damage that may have occurred. For the remaining 54 violations that we reviewed, representatives made determinations regarding the compromise or loss of information, but many were not consistent with the criteria contained in DSS's Industrial Security Operating Manual. Representatives made 30 inappropriate determinations, such as "compromise cannot be precluded" or "compromise cannot be determined." For example, in nine cases, the same facility reported that classified material was left unsecured, and the facility did not rule out compromise. In each of these cases, the industrial security representative did not rule out compromise but used an alternative determination. Senior DSS officials informed us that industrial security representatives should not make determinations other than the four established in the Industrial Security Operating Manual because the four have specific meanings based on accepted criteria. By not following the manual, representatives introduced variability in their determinations and, therefore, their decisions of whether to notify the government customer of a violation. The failure of representatives to always make determinations consistent with the Industrial Security Operating Manual was at least partially attributable to inadequate oversight. The Standards and Quality Branch is the unit within DSS responsible for ensuring that industrial security representatives properly administer the NISP. Branch officials regularly test and review field office chiefs and representatives on NISP requirements, particularly those related to granting clearances and conducting security reviews. However, the Standards and Quality Branch did not test or review how representatives responded to reported violations and made determinations regarding compromise. As a result, DSS did not know the extent to which representatives understood and were consistently applying Industrial Security Operating Manual requirements related to violations and, therefore, could not take appropriate action. While the Industrial Security Operating Manual did not specify a time requirement for notifying government customers when classified information had been lost or compromised, DSS was often unable to notify customers quickly because of difficulties in identifying the affected customers. DSS notified government customers regarding 16 of the 54 reported violations for which representatives made determinations. For 11 of these 16 violations, DSS did not notify the customer for more than 30 days after the contractor reported that information was lost, compromised, or suspected of being compromised. In one case, 5 months passed before an industrial security representative was able to notify a government customer that its information was suspected of being compromised. This delay was a result of the facility's inability to readily determine which government customer was affected by the compromise. DSS relied on the facility to provide this information. However, facilities that were operating as subcontractors often did not have that information readily available. DSS industrial security representatives faced several challenges in carrying out their FOCI responsibilities, largely due to complexities in verifying FOCI cases, limited tools to research FOCI transactions, insufficient FOCI training, staff turnover, and inconsistencies in implementing guidance on FOCI cases. For industrial security representatives, verifying if a contractor is under FOCI is complex. Representatives are required to understand the corporate structure of the legal entity completing the Certificate Pertaining to Foreign Interests form and to evaluate the types of foreign control or influence that exist for each entity within a corporate family. For example, representatives are required to verify information on stock ownership by determining the distribution of the stock among the stockholders and the influence or control the stockholders may have within the corporation. This entails identifying the type of stock and the number of shares owned by the foreign person(s) to determine authority and management prerogatives. Some industrial security representatives told us they did not always have the tools needed to verify if contractors are under FOCI. They conducted independent research using the Internet or returned to the contractor for more information to evaluate the FOCI relationships and hold discussions with management officials, such as the chief financial officer, treasurer, and legal counsel. DSS headquarters officials told us additional information sources, such as the Dun and Bradstreet database of millions of private and public companies were not available in the field. In addition, industrial security representatives stated they lacked the training and knowledge needed to better verify and oversee contractors under FOCI. For example, DSS did not require its representatives to have financial or legal training. While some FOCI training was provided, representatives largely depended on DSS guidance and on-the-job training to oversee a FOCI contractor. In so doing, representatives worked with more experienced staff or sought guidance, when needed, from DSS headquarters. Despite DSS efforts to provide training on FOCI, we found that the training needs on complex FOCI issues were still a concern to representatives. In fact, many said they needed more training to help with their responsibility of verifying FOCI information, including how to review corporate documents, strategic company relationships, and financial reports. In addition, officials from one-third of the field offices we reviewed noted staff retention problems. DSS officials at two of these field offices said that in particular they have problems retaining more experienced industrial security representatives. Compounding these challenges are inconsistencies among field offices in how industrial security representatives said they understood and implemented DSS guidance for reviewing contractors under FOCI. For example, per DSS guidance, security reviews and FOCI meetings should be performed every 12 months for contractors operating under special security agreements, security control agreements, voting trust agreements, and proxy agreements. However, we found that some industrial security representatives did not follow the guidance. One representative said a contractor under a special security agreement was subject to a security review every 18 months because the contractor did not store classified information on-site. In addition, two industrial security representatives told us they did not conduct annual FOCI meetings for contractors that were operating under a proxy agreement and security control agreement, respectively. We also found that industrial security representatives varied in their understanding or application of DSS guidance for when they should suspend a contractor's facility clearance when FOCI was unmitigated. The guidance indicates that when a contractor with a facility clearance is determined to be under FOCI that requires mitigation by DSS headquarters, the facility security clearance shall be suspended until a protective measure is implemented. However, we were told by officials in some field offices that they rarely suspend clearances when a contractor has unmitigated FOCI as long as the contractor is demonstrating good faith in an effort to provide documentation to DSS to identify the extent of FOCI and submit a FOCI mitigation plan to DSS. Officials in other field offices said they would suspend a contractor's facility clearance once they learned the contractor had unmitigated FOCI. In conclusion, we believe that the weaknesses identified in the NISP and other programs designed to protect technologies critical to U.S. national security present significant challenges and need to be addressed. Although in its initial response to our reports, DOD did not agree with many of our recommendations or the need for corrective actions, we understand that DSS has subsequently begun to address some of the issues we raised. While we have not reviewed any of these actions and therefore can not address their potential effectiveness, we welcome DSS's recognition that action is needed. Mr. Chairman this concludes my statement. I would be happy to answer any questions you or other members of the committee may have. For information about this testimony, please contact Ann Calvaresi Barr, Director, Acquisition and Sourcing Management, at (202) 512-4841 or [email protected]. Other individuals making key contributions to this product include Thomas J. Denomme, Brandon Booth, John Krump, Karen Sloan, Lillian Slodkowski, and Suzanne Sterling. 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 National Industrial Security Program (NISP) aims to ensure contractors appropriately safeguard the government's classified information. NISP, along with other laws, regulations, policies, and processes, is intended to protect technologies critical to maintaining military technological superiority and other U.S. national security interests. The Defense Security Service (DSS) within the Department of Defense (DOD) administers NISP on behalf of DOD and other federal agencies. DSS grants clearances to contractor facilities so they can access and, in some cases, store classified information. In 2005, DSS monitored over 11,000 facilities' security programs to ensure that they meet NISP requirements for protecting classified information. In 2004 and 2005, GAO issued reports that examined DSS responsibilities related to facilities accessing or storing classified information. The first report assessed DSS oversight of facilities and DSS actions after possible compromises of classified information. The second focused specifically on DSS oversight of contractors under foreign ownership, control, or influence (FOCI). This testimony summarizes the findings of these reports and their relevance to the effective protection of technologies critical to U.S. national security interests-- an area GAO designated as a governmentwide high-risk area in 2007. DSS did not systematically collect and analyze the information needed to assess its oversight of both contractor facilities and contractors under FOCI. While DSS maintained files on contractor facilities' security programs and their security violations, it did not use this information to determine, for example, whether certain types of violations are increasing or decreasing and why. As a result, DSS was unable to identify patterns of security violations across all facilities based on factors such as the type of work conducted, the facilities' government customer, or the facilities' corporate affiliation. Identifying such patterns would enable DSS to target needed actions to reduce the risk of classified information being compromised. With regard to contractors under FOCI, DSS did not collect and track the extent to which classified information was left in the hands of such contractors before measures were taken to reduce the risk of unauthorized foreign access. GAO found instances in which contractors did not report foreign business transactions to DSS for several months. DSS's process for notifying government agencies of possible compromises to their classified information has also been insufficient. When a contractor facility reports a violation and the possible compromise of classified information, DSS is required to determine whether a compromise occurred and to notify the affected government agency so it can assess any damage and take actions to mitigate the effects of the suspected compromise or loss. However, for nearly 75 percent of the 93 violations GAO reviewed, DSS either made no determination regarding compromise or made a determination that was inconsistent with established criteria. In addition, in many cases in which DSS was required to notify the affected agencies of possible information compromises, the notification took more than 30 days; in one case, notification was delayed 5 months. Despite the complexities involved in overseeing contactor facilities and contractors under FOCI, DSS field staff lacked the guidance, tools, and training necessary to effectively carry out their responsibilities. According to DSS field staff, they lacked research tools and training to fully understand, for example, the significance of corporate structures, legal ownership, and complex financial relationships when foreign entities are involved-- knowledge that is needed to effectively oversee contractors under FOCI. Staff turnover and failure to implement guidance consistently also detracted from field staff's ability to effectively carry out responsibilities. GAO has made numerous recommendations aimed at improving NISP and DSS's oversight of classified information that has been entrusted to contractors. Continued weaknesses in this and other areas that require rigorous oversight--such as export control, foreign acquisitions of U.S. companies, and foreign military sales--prompted GAO to designate the protection of critical technologies as high risk.

The military services and defense agencies face three long-standing challenges with processing, exploiting, and disseminating ISR data. First, since 2002, DOD has rapidly increased its ability to collect ISR data in Iraq and Afghanistan; however, its capacity for processing, exploiting, and dissemination is limited and has not kept pace with the increase in collection platforms and combat air patrols. For example, the Air Force has substantially increased the number of combat air patrols that ISR collection platforms are performing in the U.S. Central Command theater of operations. Specifically, the number of combat air patrols flown by the Air Force's Predator and Reaper unmanned aircraft systems has increased from 13 to 36 since 2007. Moreover, in the 2010 Quadrennial Defense Review Report, DOD stated that it will continue to expand the Predator and Reaper combat air patrols to 65 by fiscal year 2015. This increase in data collection will also increase the burden on the Air Force's ground processing system, which processes, exploits, and disseminates the ISR information collected by these platforms. Second, transmitting data from ISR collection platforms to ground stations where analysts process, exploit, and then disseminate intelligence to users requires high-capacity communications bandwidth. However, bandwidth can be limited in a theater of operations by the satellite and ground-based communication capacity. An insufficient amount of bandwidth affects the ability to send, receive, and download intelligence products that contain large amounts of data. For example, intelligence products derived from ISR geospatial data have high bandwidth requirements--the higher the resolution of the product, the longer the transmission time via a given bandwidth. DOD officials have acknowledged that limited bandwidth is a continual challenge in Iraq because of the warfighter's reliance on geospatial data. GAO and others have reported that DOD continues to face a growing need for communications bandwidth in combat operations. Third, the military services and defense agencies are challenged by shortages in the numbers of analytical staff available to exploit all of the electronic signals and geospatial ISR information being collected, raising the risk that important information may not be analyzed and made available to commanders in a timely manner. For example, according to U.S. Central Command officials, the command exploits less than one-half of the electronic signals intercepts collected from the Predator. According to DOD officials, finding native speakers of the collected languages to successfully translate and exploit data collected in those foreign languages is difficult, and training language analysts takes time and is difficult to manage with the deployment schedule. In addition, language analysts who translate and exploit electronic signals intelligence data must qualify for security clearances that require rigorous background examinations. The National Security Agency has experienced difficulties in hiring language analysts who can obtain clearances and have the appropriate skill levels in both English and the language for translation. DOD has recognized the need to enhance its processing, exploitation, and dissemination capabilities and is developing and implementing initiatives to do so, but its initiatives are in the early stages of implementation and it is too soon to tell how effective they will be in addressing current challenges. For example, in the short term, DOD has placed its priority for processing, exploitation, and disseminating electronic signals intelligence on the information collected in Afghanistan because the Commander of U.S. Central Command has designated those missions as a high priority. In the long term, DOD has taken several actions intended to sustain, expand, and improve processing, exploitation, and dissemination capabilities. For example, DOD has studies, such as an ISR force-sizing study, under way which include examining how to improve the management of its processing, exploitation, and dissemination capabilities. However, DOD has not set dates for when all of these studies will be complete and it is too soon to know whether they will lead to the desired effect of increased support to the warfighter for current operations. The Air Force and the National Security Agency also have plans to increase analyst personnel in response to the increase in ISR collection. The Air Force, reacting to scheduled increases in Predator and Reaper combat air patrols, is planning to add personnel who process, exploit, and disseminate ISR data. The National Security Agency also has taken steps to address shortages in language analyst personnel. For example, to better target its hiring effort for language analysts the agency is using U.S. Census Bureau data to locate centers of populations that contain the language skills needed to translate and exploit the foreign languages that are collected. According to National Security Agency officials, these efforts have helped increase the number of language analysts available to process and exploit collected signals intelligence data. DOD is also working on developing technical solutions to improve processing, movement, and storage of data. For example, files from wide-area sensors have to be saved to a computer disk and flown back to the United States for exploitation and dissemination because current networks in the theater of operations cannot handle the large amounts of data these sensors collect. U.S. Joint Forces Command is currently designing and testing technology already in use by the commercial entertainment industry to improve storage, movement, and access to full motion video data from wide-area sensors. Although DOD has recognized the need for maximizing the efficiency and effectiveness of the information it collects and has been taking steps to increase information sharing across the defense intelligence community, progress has been uneven among the military services. DOD began plans for its Distributed Common Ground/Surface System (DCGS), an interoperable family of systems that will enable users to access shared ISR information, in 1998. DOD subsequently directed the military services to transition their service-unique intelligence data processing systems into DCGS and each of the military services is at a different stage. As shown in table 1, the Air Force and the Navy each plan to have a fully functional version of DCGS by the end of fiscal years 2010 and 2013, respectively, and the Army does not expect to have a fully functional system until 2016. The Marine Corps has not yet established a completion date for the full operational capability of its DCGS. DOD has developed a system of standards and protocols, called the DCGS Integration Backbone (DIB), which serves as the foundation for interoperability between each of the four military services' DCGS programs. However, the services have not completed the process of prioritizing and tagging the data they want to share in accordance with these standards and protocols or developed timelines to do so. As a result, the services are not sharing all of their collected ISR data. Although the Air Force has the capability to share some Air Force- generated ISR information with other DOD users through the DIB standards and protocols, it has not developed timelines or taken steps to prioritize the types of additional data that should be shared with the defense intelligence community. The Army also has the capability to share some of its intelligence data with other users, but has experienced difficulties tagging all of its data because of its large inventory of legacy ISR systems. Moreover, the Army has not established timelines for sharing data. The Navy and Marine Corps are not currently tagging all of the ISR data they intend to share and have neither developed timelines nor taken steps to prioritize the types of data that should be shared with the defense intelligence community. The Under Secretary of Defense for Intelligence has responsibility for ensuring implementation of DOD intelligence policy, including monitoring the services' progress toward interoperability. Although the services are responsible for managing their DCGS programs and conforming to information-sharing standards, according to Office of the Under Secretary of Defense for Intelligence and military service officials, DOD has not developed overarching guidance, such as a concept of operations that provides needed direction and priorities for sharing intelligence information within the defense intelligence community. Without this overarching guidance, the services lack direction to set their own goals and objectives for prioritizing and sharing ISR information and therefore have not developed service-specific implementation plans that describe the prioritization and types of ISR data they intend to share with the defense intelligence community. For example, a concept of operations could provide direction to the military services and defense agencies to select data to prioritize for meta-data tagging and sharing, such as electronic signals intelligence data. As a result, it is not clear how much of the collected data are not being shared. Until DOD identifies what types of ISR information should be shared and assigns priorities for sharing data, it is unclear whether mission-critical information will be available to the warfighter. In addition, the inability of users to fully access existing information in a timely manner is a contributing factor to the increasing demand for additional ISR collection assets. Therefore, in our January 2010 report, we recommended that the Secretary of Defense take the following two actions: Direct the Under Secretary of Defense for Intelligence, in coordination with the Chairman of the Joint Chiefs of Staff and the Secretaries of the Army, Navy, and Air Force, to develop guidance, such as a concept of operations that provides overarching direction and priorities for sharing intelligence information across the defense intelligence community. Direct the Secretaries of the Army, Navy, and Air Force to develop service-specific implementation plans, consistent with the concept of operations, which set timelines and outline the prioritization and types of ISR data they will share with the defense intelligence community through the DIB. In written comments on our report, DOD agreed with our recommendations overall and stated that there is guidance either issued or in development to address our recommendations. However, this guidance does not fully address the intent of our recommendations, and we believe additional guidance is necessary. DOD officials cite ISR as vital to mission success in Iraq and Afghanistan, and Congress has responded by funding additional ISR assets. However, until all participants in the defense enterprise successfully share ISR information, inefficiencies will hamper the effectiveness of efforts to support the warfighter, and ISR data collection efforts may be unnecessarily duplicative. While the focus of my testimony has been on the processing, exploiting, and disseminating of ISR data, our prior work has also shown that collection taskings are fragmented in theater and visibility into how ISR assets are being used is lacking. These challenges increase the risk that operational commanders may not be receiving mission-critical ISR information, which can create the perception that additional collection assets are needed to fill gaps. Mr. Chairmen and members of the subcommittees, this concludes my prepared statement. I would be happy to answer any questions that you may have at this time. For further information regarding this testimony, please contact Davi M. D'Agostino at (202) 512-5431 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Margaret G. Morgan and Marc J. Schwartz, Assistant Directors; Grace A. Coleman; Gregory A. Marchand; Erika A. Prochaska; Kimberly C. Seay; and Walter K. Vance. In addition, Amy E. Brown; Amy D. Higgins; Timothy M. Persons; and Robert Robinson made significant contributions to the January 2010 report that supported this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Defense (DOD) has numerous intelligence, surveillance, and reconnaissance (ISR) systems--including manned and unmanned airborne, space-borne, maritime, and terrestrial systems--that play critical roles in support of current military operations. The demand for these capabilities has increased dramatically. Today's testimony addresses (1) the challenges the military services and defense agencies face processing, exploiting, and disseminating the information collected by ISR systems and (2) the extent to which the military services and defense agencies have developed the capabilities required to share ISR information. This testimony is based on GAO's January 2010 report on DOD's ISR data processing capabilities. GAO reviewed and analyzed documentation, guidance, and strategies of the military services and defense agencies in regard to processing, exploiting, and disseminating ISR data as well as information-sharing capabilities. GAO also visited numerous commands, military units, and locations in Iraq and the United States. The military services and defense agencies face long-standing challenges with processing, exploiting, and disseminating ISR data, and DOD has recently begun some initiatives to address these challenges. First, since 2002, DOD has rapidly increased its ability to collect ISR data in Iraq and Afghanistan, although its capacity for processing, exploiting, and dissemination is limited. Second, transmitting data from ISR collection platforms to ground stations where analysts process, exploit, and then disseminate intelligence to users requires high-capacity communications bandwidth. However, bandwidth can be limited in a theater of operations by the satellite and ground-based communication capacity, and this in turn affects the ability to send, receive, and download intelligence products that contain large amounts of data. Third, shortages of analytical staff with the required skill sets hamper the services' and defense agencies' abilities to exploit all ISR information being collected, thus raising the risk that important information may not be available to commanders in a timely manner. DOD is developing and implementing initiatives to enhance its processing, exploitation, and dissemination capabilities, such as increasing personnel, but its initiatives are in the early stages of implementation and it is too soon to tell how effective they will be in addressing current challenges. DOD is taking steps to improve the sharing of intelligence information across the department, but progress is uneven among the military services. DOD began plans for its Distributed Common Ground/Surface System (DCGS), an interoperable family of systems that will enable users to access shared ISR information in 1998. DOD subsequently directed the military services to transition their service-unique intelligence data processing systems into DCGS and each of the military services is at a different stage. While the Air Force and the Navy each plan to have a fully functional version of DCGS by the end of fiscal years 2010 and 2013, respectively, the Army does not expect to have a fully functional system until 2016. The Marine Corps has not yet established a completion date for the full operational capability of its DCGS. To facilitate the sharing of ISR data on this system, DOD developed the DCGS Integration Backbone, which provides common information standards and protocols. Although the services are responsible for managing their DCGS programs and conforming to information-sharing standards, according to the Office of the Under Secretary of Defense for Intelligence and military service officials, DOD has not developed overarching guidance, such as a concept of operations that provides direction and priorities for sharing intelligence information within the defense intelligence community. Without this overarching guidance, the services lack direction to set their own goals and objectives for prioritizing and sharing ISR information and therefore have not developed service-specific implementation plans that describe the prioritization and types of ISR data they intend to share. Moreover, the inability of users to fully access existing information contributes to the increasing demand for additional ISR collection assets.

DOD's primary military medical mission is to maintain the health of 1.6 million active duty service personnel and be prepared to deliver health care during wartime. Also, as an employer, DOD offers health care services to 6.6 million non-active duty beneficiaries, including active duty members' dependents and military retirees and their dependents. Most care is provided in 115 hospitals and 471 clinics--called military treatment facilities (MTF)--operated by the Army, Navy, and Air Force worldwide. This direct delivery system is supplemented by DOD-funded care provided in civilian facilities. In fiscal year 1997, DOD spent about $12 billion for direct care and about $3.5 billion for civilian care. In response to such challenges as increasing health care costs and uneven beneficiary access to care, in the late 1980s DOD initiated a series of congressionally directed demonstration programs to evaluate alternatives to its existing health care delivery approaches. Drawing from its experience with the demonstration projects, DOD then designed TRICARE as its managed care health program. The Office of the Assistant Secretary of Defense for Health Affairs sets TRICARE policy and has overall responsibility for the program. The Army, Navy, and Air Force Surgeons General have authority over the MTFs in their respective services. TRICARE is designed to give beneficiaries a choice of three benefit options. These are TRICARE Prime, the health maintenance organization (HMO) option; TRICARE Standard, a fee-for-service benefit replacing the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) program; and TRICARE Extra, a preferred provider option. do not pay an enrollment fee; retirees under age 65 and their dependents and survivors pay an annual enrollment fee of $230 for an individual and $460 for a family. Copayments under Prime are lower than under the other options. TRICARE Standard provides beneficiaries with the greatest freedom in selecting civilian physicians but requires the highest beneficiary cost share. Under TRICARE Extra, beneficiaries do not enroll or pay annual premiums but, by using physicians in the TRICARE network, are charged copayments that are 5 percent less than under TRICARE Standard. In restructuring its health care program, DOD designed a program that has proven difficult to implement. More than 4 years after initiating TRICARE, DOD is now 1 year behind its schedule for fully implementing the nationwide program, and that schedule may slip further. As DOD implements TRICARE, it is also continuing to make significant changes to the program's design. While these changes are aimed at improving TRICARE and addressing problems we and others have identified, they also create new implementation challenges. Moreover, DOD's progress in implementing TRICARE has been hampered by enrollment shortfalls and administrative problems. As part of its implementation of TRICARE, DOD has awarded large, complex, competitively bid contracts to supplement and support the health care provided in MTFs. These 5-year contracts are estimated to cost a total of about $15 billion. DOD had planned to award a total of seven contracts for the 11 TRICARE regions nationwide by September 30, 1996, and health care delivery under TRICARE was expected to have begun in all regions by May 1997. (The appendix contains a map of the 11 TRICARE regions.) sustained protests if the reconsideration requests are denied, could further delay implementation of TRICARE in three regions. In 1995, we reported that such problems as DOD's failure to evaluate offerors' bids according to solicitation criteria led to the sustained protest of a pre-TRICARE contract award covering California and Hawaii. In response, DOD put in place such improvements as a revised methodology for evaluating bids, which it believed would reduce the chance of protests being sustained. The recent sustained protests indicate, however, that problems with bid evaluations continue. industry experts, and us, DOD is developing a more simplified procurement approach, which it will begin to use this summer as the first of the existing TRICARE contracts is recompeted. This new approach is designed to incorporate performance-based requirements and best commercial practices. DOD expected that, to take full advantage of cost-effective managed care principles and practices, significant numbers of beneficiaries would enroll in TRICARE Prime--especially those who rely on the military system for their health care. However, as of October 1997, only about half of the eligible beneficiaries using the military health care system had enrolled in TRICARE Prime. DOD set targets to help ensure high enrollment in Prime. It expected, for example, that 100 percent of active duty members would enroll in Prime by the end of 1996. However, as of October 1997, only about 70 percent of active duty members had enrolled. Moreover, DOD expected that at least 90 percent of non-active duty beneficiaries targeted for enrollment would enroll in Prime within 1 year of TRICARE's implementation in each region. However, as of October 1997, in those regions where TRICARE had been implemented for at least a year, only about 57 percent of those targeted, or about 1.1 million beneficiaries, had enrolled. This less-than-optimal enrollment has several important implications. For example, DOD is less able to manage the utilization of health care for beneficiaries not enrolled in Prime. Under managed care, costs are contained in part through the use of primary care managers who ensure that beneficiaries receive necessary and appropriate care in the most cost-effective manner. Moreover, beneficiaries may sustain higher out-of-pocket health care costs if they choose not to enroll. Also, DOD is beginning to implement a new funding system-- enrollment-based capitation--that is designed to motivate and reward MTF commanders for maximizing their enrolled population. Under this approach, DOD will fund MTFs on the basis of the number of beneficiaries enrolled in Prime at the MTF. Previously, DOD had set per capita rates according to past levels of military spending. This new capitation method is designed to better mirror private sector managed care funding methods. Under enrollment-based capitation, MTFs will continue to receive funding for the care they provide to nonenrollees, but at a lower rate than for those enrolled. We have identified a number of reasons why beneficiaries may not be enrolling in Prime. Beneficiaries who are accustomed to receiving care in MTFs may not see the need to enroll. Retirees under 65 years of age and their dependents, who must pay an annual enrollment fee, may opt not to enroll for that reason. In addition, Prime is not available in all areas of the country--for example, in areas where there is no MTF and no civilian provider network. Also, some beneficiaries may choose to continue receiving care under TRICARE's traditional fee-for-service option. DOD asserts that it can provide care more cost-effectively in its MTFs than through civilian providers, and for that reason, TRICARE was designed to maximize the use of the MTFs before relying on civilian care. However, although enrollment capacity still exists in MTFs, beneficiaries are being allowed to enroll in civilian facilities that are near MTFs. As of late last year, about 74 percent of MTFs' primary care capacity had been assigned to Prime enrollees. Thus, it appears that DOD could more fully and cost-effectively use its facilities before enrolling beneficiaries in civilian-provided care. access to quality care. Physicians raised concerns about untimely claims reimbursement, a slow preauthorization process to approve medical treatment, and unreliable customer telephone service, among other things. Some physicians also complained about the lower, "discounted" rates paid to TRICARE network physicians under its Prime and Extra options. Because of these administrative and cost issues, some physicians are becoming disillusioned with TRICARE. As we have noted, DOD's goals in establishing TRICARE were to improve access while maintaining quality and controlling costs. DOD efforts to set goals and to measure access and quality are incomplete, however, and do not enable DOD or others to fully assess whether TRICARE has improved beneficiaries' access to and quality of health care. Moreover, DOD's failure to achieve expected cost savings under TRICARE raises questions about DOD's cost-savings claims. DOD has not set programwide goals and performance measures to track its progress in meeting TRICARE access and quality program goals for care provided in MTFs and by contractors. DOD has developed a military health system performance report card that includes goals and measures for some aspects of access and quality, such as 95-percent beneficiary satisfaction with access to appointments and system resources. However, this report card applies only to MTFs and does not include care provided through civilian contractors--an estimated one-third of DOD's peacetime health care delivery efforts. Under its managed care support contracts, DOD does set performance-related requirements, and contractors report to DOD their performance in meeting these requirements. However, this information is not yet compiled or consolidated with military facility data to provide a programwide picture. beneficiary satisfaction levels, on average, exceed those in civilian HMOs. However, DOD survey officials told us it is too soon to use the surveys' results to assess TRICARE because the program is new and not yet implemented nationwide. Also, they said the results from surveys conducted to date constitute an insufficient basis from which to identify trends. Although important, beneficiaries' perceptions do not totally measure DOD's actual performance. To supplement beneficiary satisfaction information on access to care, we recommended in 1996 that DOD collect data on the timeliness of appointments. While DOD agreed with our recommendation, it has yet to fully implement this data collection effort. Moreover, the beneficiary satisfaction information DOD uses in its report card to measure access is based on monthly surveys of patients receiving outpatient care. Relying on the outpatient survey provides limited information on access and may mask the extent of difficulty beneficiaries face since it only collects information from those patients who were able to obtain care at a military facility. As required by the Congress, DOD has contracted for independent evaluations of TRICARE's progress in improving access, maintaining quality, and controlling costs. These studies are currently under way but are not expected to be completed until June 1999. Given the importance of TRICARE, and concerns about access and quality raised by beneficiary groups and recent media reports, we are also planning to examine DOD health care access and quality issues. When TRICARE was designed, the Congress required that the program be cost neutral--that is, that TRICARE costs not exceed the health care costs DOD would have incurred without the program. To control TRICARE costs, DOD planned to achieve cost savings from managed care efforts and initiatives. However, there are reasons now to question how current and analytically complete DOD's savings claims are. An important cost-saving feature of DOD's partnership between military and civilian health care entities under TRICARE is resource sharing. To share resources, the contractor supplements the capacity of a military hospital or clinic by providing civilian personnel, equipment, or supplies. DOD had estimated that resource sharing could save about $700 million over 5 years. We reported last summer, however, that DOD and the contractors had made agreements likely to save about 5 percent of DOD's overall resource sharing goal. At that rate, after 9 to 24 months of operation, DOD could have expected to realize only about $36 million. DOD's plans to undertake a more current and complete cost analysis of MTF direct and contractor-provided care to determine TRICARE's cost-effectiveness. Until this analysis is completed, questions will remain regarding the extent to which the legislative objective for TRICARE's cost-effectiveness is being achieved. DOD's efforts to fully implement TRICARE are occurring at a time when not only are changes being made in the organization to manage the program but other, perhaps more significant, changes are being contemplated for the military health care system itself. Planning for these changes and incorporating them into TRICARE is making an already complex task even more difficult. On February 10, 1998, as part of a DOD-wide reform initiative to consolidate headquarters functions, DOD established within the Office of the Assistant Secretary of Defense for Health Affairs what it called the TRICARE Management Activity. This activity unifies several Health Affairs operational elements with two field activities, including the TRICARE Support Office, which is responsible for TRICARE procurement activities. The activity is expected to strengthen program oversight and performance by developing and using specific performance measures for the program's costs, quality, and health care access. We have found such measures to be needed. A second significant organizational change that may affect the future of TRICARE relates to the imminent retirement of the now Acting Assistant Secretary of Defense, who has served in Health Affairs for the past 9 years and has been a key force in the design and development of TRICARE. Strong leadership will be needed in the future as implementation of TRICARE proceeds, and filling this void will be a major challenge. provided to enrollees above the amount DOD currently spends for them. Under this concept--known as Medicare subvention--DOD believes it can provide care to older retirees in MTFs at a lower cost than Medicare HMOs can. Medicare subvention will improve enrollees' access to care in MTFs and will allow Medicare HMOs to contract with DOD to provide specialty and inpatient care. While this program adds to the health care options available to certain military beneficiaries, it also introduces additional administrative complexities to the already complex TRICARE program, such as the need for new contracts with Medicare HMOs. Many legislative proposals have been introduced in the 105th Congress that would authorize, either for all Medicare-eligible military beneficiaries or for Medicare eligibles and certain other non-active duty beneficiaries, enrollment in one of the many Federal Employees Health Benefits Program (FEHBP) plans. Enactment of an FEHBP option for these beneficiaries could dramatically alter TRICARE by reducing beneficiaries' demand for military health care. The most significant change in the system may occur if and when DOD completes its now overdue update of what is known as its "733 study," which was completed in April 1994. In this study, conducted pursuant to section 733 of the National Defense Authorization Act for fiscal years 1992 and 1993, DOD's Office of Program Analysis and Evaluation (PA&E) challenged the Cold War assumption that all military medical personnel employed during peacetime are needed for wartime. The study concluded that DOD's wartime medical requirements are far lower--by as much as half--than the medical system then programmed for fiscal year 1999. Although no action was taken by DOD as a result of that study, the Deputy Secretary of Defense, in August 1995, directed that the study be updated and improved. We understand that PA&E has nearly completed the study and that DOD top management will likely review it before its release. If the updated review results in conclusions similar to those in the 733 study, and if DOD acts on those conclusions, the potential reductions in military medical personnel and facilities could be significant. TRICARE's primary cost-saving advantages are rooted in the delivery of managed care at military facilities, and any significant reduction in such capacity would necessitate that beneficiaries be provided care in the contractors' networks. This would alter the potential cost-effectiveness of the program. Mr. Chairman, this concludes my prepared statement. I will be glad to respond to any questions you or other Subcommittee members may have. We look forward to continuing to work with the Subcommittee as it exercises its oversight of this important program. Defense Health Care: Reimbursement Rates Appropriately Set; Other Problems Concern Physicians (GAO/HEHS-98-80, Feb. 26, 1998). Defense Health Care: DOD Could Improve Its Beneficiary Feedback Approaches (GAO/HEHS-98-51, Feb. 6, 1998). Defense Health Care: TRICARE Resource Sharing Program Failing to Achieve Expected Savings (GAO/HEHS-97-130, Aug. 22, 1997). Defense Health Care: Actions Under Way to Address Many TRICARE Contract Change Order Problems (GAO/HEHS-97-141, July 14, 1997). Military Retirees' Health Care: Costs and Other Implications of Options to Enhance Older Retirees' Benefits (GAO/HEHS-97-134, June 20, 1997). Defense Health Care: Dental Contractor Overcame Obstacles, but More Proactive Oversight Needed (GAO/HEHS-97-58, Feb. 28, 1997). Defense Health Care: Limits to Older Retirees' Access to Care and Proposals for Change (GAO/T-HEHS-97-84, Feb. 27, 1997). Defense Health Care: New Managed Care Plan Progressing, but Cost and Performance Issues Remain (GAO/HEHS-96-128, June 14, 1996). Defense Health Care: Medicare Costs and Other Issues May Affect Uniformed Services Treatment Facilities' Future (GAO/HEHS-96-124, May 17, 1996). Defense Health Care: Effects of Mandated Cost Sharing on Uniformed Services Treatment Facilities Likely to Be Minor (GAO/HEHS-96-141, May 13, 1996). Defense Health Care: TRICARE Progressing, but Some Cost and Performance Issues Remain (GAO/T-HEHS-96-100, Mar. 7, 1996). Defense Health Care: Despite TRICARE Procurement Improvements, Problems Remain (GAO/HEHS-95-142, Aug. 3, 1995). Defense Health Care: Issues and Challenges Confronting Military Medicine (GAO/HEHS-95-104, Mar. 22, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the status of the Department of Defense's (DOD) implementation of its managed health care program, TRICARE, focusing on: (1) DOD's progress in implementing TRICARE; (2) whether DOD is adequately assessing TRICARE'S effects on military health care access, quality, and cost; and (3) the implications of ongoing and proposed changes in the military health care system itself for TRICARE's future. GAO noted that: (1) TRICARE was established in an era of military downsizing and rapidly escalating DOD health costs; (2) it was envisioned as a way to maintain beneficiary access to high-quality care while containing costs; (3) designing and implementing TRICARE to achieve these objectives, however, has proven to be a complex and difficult undertaking involving many stakeholders, including Congress, the individual services and their many facilities and contractors, and the more than 8 million beneficiaries of the military health care system; (4) DOD has taken steps to improve the program as it has evolved, but much remains to be done before TRICARE becomes the smooth-running and beneficiary-friendly endeavor envisioned by its developers; (5) moreover, many questions concerning its cost-effectiveness and ability to meet beneficiary access and quality of care concerns are still to be answered; (6) in addition to operational difficulties, TRICARE is likely to continue to be implemented amid many changes that could profoundly affect not only the program but the entire military health care system; and (7) the result of the continuing evolution of TRICARE and the collective effects of these individual changes on it remain to be seen.

During the three decades in which uranium was used in the government's nuclear weapons and energy programs, for every ounce of uranium that was extracted from ore, 99 ounces of waste were produced in the form of mill tailings--a finely ground, sand-like material. By the time the government's need for uranium peaked in the late 1960s, tons of mill tailings had been produced at the processing sites. After fulfilling their government contracts, many companies closed down their uranium mills and left large piles of tailings at the mill sites. Because the tailings were not disposed of properly, they were spread by wind, water, and human intervention, thus contaminating properties beyond the mill sites. In some communities, the tailings were used as building materials for homes, schools, office buildings, and roads because at the time the health risks were not commonly known. The tailings and waste liquids from processing uranium ore also contaminated the groundwater. Tailings from the ore processing resulted in radioactive contamination at about 50 sites (located mostly in the southwestern United States) and at 5,276 nearby properties. The most hazardous constituent of uranium mill tailings is radium. Radium produces radon, a radioactive gas whose decay products can cause lung cancer. The amount of radon released from a pile of tailings remains constant for about 80,000 years. Tailings also emit gamma radiation, which can increase the incidence of cancer and genetic risks. Other potentially hazardous substances in the tailings include arsenic, molybdenum, and selenium. DOE's cleanup authority was established by the Uranium Mill Tailings Radiation Control Act of 1978. Title I of the act governs the cleanup of uranium ore processing sites that were already inactive at the time the legislation was passed. These 24 sites are referred to as Title I sites. Under the act, DOE is to clean up the Title I sites, as well as the nearby properties that were contaminated. In doing so, DOE works closely with the affected states and Indian tribes. DOE pays for most of this cleanup, but the affected states contribute 10 percent of the costs for remedial actions. Title II of the act covers the cleanup of sites that were still active when the act was passed. These 26 sites are referred to as Title II sites. Title II sites are cleaned up mostly at the expense of the private companies that own and operate them. They are then turned over to the federal government for long-term custody. Before a Title II site is turned over to the government, the Nuclear Regulatory Commission (NRC) works with the sites' owners/operators to make sure that sufficient funds will be available to cover the costs of long-term monitoring and maintenance. The cleanup of surface contamination consists of four key steps: (1) identifying the type and extent of the contamination; (2) obtaining a disposal site; (3) developing an action plan, which describes the cleanup method and specifies the design requirements; and (4) carrying out the cleanup using the selected method. Generally, the primary cleanup method consists of enclosing the tailings in a disposal cell--a containment area that is covered with compacted clay to prevent the release of radon and then topped with rocks or vegetation. Similarly, the cleanup of groundwater contamination consists of identifying the type and extent of the contamination, developing an action plan, and carrying out the cleanup using the selected method. According to DOE, depending on the type and extent of the contamination, and the possible health risks, the appropriate method may be (1) leaving the groundwater as it is, (2) allowing it to cleanse itself over time (called natural flushing), or (3) using an active cleanup technique such as pumping the water out of the ground and treating it. Mr. Chairman, we now return to the topics discussed in our report: the status and cost of DOE's surface and groundwater cleanup and the factors that could affect the federal government's costs in the future. Since our report was issued on December 15, 1995, DOE has made additional progress in cleaning up and licensing Title I sites. As of April 1996, DOE's surface cleanup was complete at 16 of the 24 Title I sites, under way at 6 additional sites, and on hold at the remaining 2 sites. Of the 16 sites where DOE has completed the cleanup, 4 have been licensed by NRC as meeting the standards of the Environmental Protection Agency (EPA). At 10 of the other 12 sites, DOE is working on obtaining such a license, and the remaining 2 sites do not require licensing because the tailings were relocated to other sites. Additionally, DOE has completed the surface cleanup at about 97 percent of the 5,276 nearby properties that were also contaminated. Although DOE expects to complete the surface cleanup of the Title I sites by the beginning of 1997, it does not expect all of NRC activities to be completed until the end of 1998. As for the cleanup of groundwater at the Title I sites, DOE began this task in 1991 and currently expects to complete it in about 2014. Since its inception in 1979, DOE's project for cleaning up the Title I sites has grown in size and in cost. In 1982, DOE estimated that the cleanups would be completed in 7 years and that only one pile of tailings would need to be relocated. By 1992, however, the Department was estimating that the surface cleanup would be completed in 1998 and that 13 piles of tailings would need to be relocated. The project's expansion was caused by several factors, including the development of EPA's new groundwater protection standards; the establishment or revision of other federal standards addressing such things as the transport of the tailings and the safety of workers; and the unexpected discovery of additional tailings, both at the processing sites and at newly identified, affected properties nearby. In addition, DOE made changes in its cleanup strategies to respond to state and local concerns. For example, at the Grand Junction, Colorado, site, the county's concern about safety led to the construction of railroad transfer facilities and the use of both rail cars and trucks to transport contaminated materials. The cheaper method of simply trucking the materials would have routed extensive truck traffic through heavily populated areas. Along with the project's expansion came cost increases. In the early 1980s, DOE estimated that the total cleanup cost--for both the surface and groundwater--would be about $1.7 billion. By November 1995, this estimate had grown to $2.4 billion. DOE spent $2 billion on surface cleanup activities through fiscal year 1994 and expects to spend about $300 million more through 1998. As for groundwater, DOE has not started any cleanup. By June 1995, the Department had spent about $16.7 million on site characterization and various planning activities. To make the cleanup as cost-effective as it can, DOE is proposing to leave the groundwater as it is at 13 sites, allow the groundwater to cleanse itself over time at another 9 sites, and use an active cleanup method at 2 locations, in Monument Valley and Tuba City, Arizona. The final selection of cleanup strategies depends largely on DOE's reaching agreement with the affected states and tribes. At this point, however, DOE has yet to finalize agreements on any of the groundwater cleanup strategies it is proposing. At the time we issued our report, the cleanups were projected to cost at least another $130 million using the proposed strategies, and perhaps as much as another $202 million. More recently, DOE has indicated that the Department could reduce these costs by shifting some of the larger costs to earlier years; reducing the amounts built into the strategies for contingencies, and using newer, performance-based contracting methods. Once all of the sites have been cleaned up, the federal government's responsibilities, and the costs associated with them, will continue far into the future. What these future costs will amount to is currently unknown and will depend largely on how three issues are resolved. First, because the effort to clean up the groundwater is in its infancy, its final scope and cost will depend largely on the remediation methods chosen and the financial participation of the affected states. Since the time we issued our report, DOE has reported some progress in developing its groundwater cleanup plans. However, it is still too early to know whether the affected states or tribes will ultimately persuade DOE to implement more costly remedies than those the Department has proposed or whether any of the technical assumptions underlying DOE's proposed strategies will prove to be invalid. If either of these outcomes occurs, DOE may implement more costly cleanup strategies, and thereby increase the final cost of the groundwater cleanup. In its fiscal year 1997 congressional budget request, DOE identified five sites where it believes it may have to implement more expensive alternatives than the ones it initially proposed. In addition, the final cost of the groundwater cleanup depends on the ability and willingness of the affected states to pay their share of the cleanup costs. According to DOE, several states may not have funding for the groundwater cleanup program. DOE believes that it is prohibited from cleaning up the contamination if the states do not pay their share. Accordingly, as we noted in our report, we believe that the Congress may want to consider whether and under what circumstances DOE can complete the cleanup of the sites if the states do not provide financial support. Second, DOE may incur further costs to dispose of uranium mill tailings that are unearthed in the future in the Grand Junction, Colorado, area. DOE has already cleaned up the Grand Junction processing site and over 4,000 nearby properties, at a cost of about $700 million. Nevertheless, in the past, about a million cubic yards of tailings were used in burying utility lines and constructing roads in the area and remain today under the utility corridors and road surfaces. In future years, utility and road repairs will likely unearth these tailings, resulting in a potential public health hazard if the tailings are mishandled. In response to this problem, DOE has worked with NRC and Colorado officials to develop a plan for temporarily storing the tailings as they are unearthed and periodically transporting them to a nearby disposal cell--referred to as the Cheney cell, located near the city of Grand Junction--for permanent disposal. Under this plan, the city or county would be responsible for hauling the tailings to the disposal cell, and DOE would be responsible for the cost of placing the tailings in the cell. The plan envisions that a portion of the Cheney disposal cell would remain open, at an annual cost of roughly $200,000. When the cell is full, or after a period of 20 to 25 years, it would be closed. However, DOE does not currently have the authority to implement this plan because the law requires that all disposal cells be closed upon the completion of the surface cleanup. Accordingly, we suggested in our report that the Congress might want to consider whether DOE should be authorized to keep a portion of the Cheney disposal cell open to dispose of tailings that are unearthed in the future in this area. Finally, DOE's costs for long-term care are still somewhat uncertain. DOE will ultimately be responsible for the long-term custody, that is, the surveillance and maintenance, of both Title I and Title II sites, but the Department bears the financial responsibility for these activities only at Title I sites. For Title II sites, the owners/operators are responsible for funding the long-term surveillance and maintenance. Although NRC's minimum one-time charge to site owners/operators is supposed to be sufficient to cover the cost of the long-term custody so that they, not the federal government, bear these costs in full, at the time we issued our December 1995 report, NRC had not reviewed its estimate of basic surveillance costs since 1980, and DOE was estimating that basic monitoring would cost about three times more than NRC had estimated. Since then, NRC and DOE have worked together to determine what level of basic monitoring should occur and how comprehensive the inspection reports should be. However, DOE still maintains that ongoing routine maintenance will be needed at all sites, while NRC's charge does not provide any amount for ongoing maintenance. In light of the consequent potential shortfall in maintenance funds, our report recommended that NRC and DOE work together to update the charge for basic surveillance and determine whether routine maintenance will be required at each site. On the basis of our recommendations, NRC officials agreed to reexamine the charge and determine the need for routine maintenance at each site. They also said that they are working with DOE to clarify the Department's role in determining the funding requirements for long-term custody. Mr. Chairman, this concludes our prepared statement. We will be pleased to answer any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the status and cost of the Department of Energy's (DOE) uranium mill tailings cleanup program and the factors that could affect future costs. GAO noted that: (1) surface contamination cleanup has been completed at two-thirds of the identified sites and is underway at most of the others; (2) if DOE completes its surface cleanup program in 1998, it will have cost $2.3 billion, taken 8 years longer than expected, and be $621 million over budget; (3) DOE cleanup costs increased because there were more contaminated sites than originally anticipated, some sites were more contaminated than others, and changes were needed to respond to state and local concerns; (4) the future cost of the uranium mill tailings cleanup will largely depend on the future DOE role in the program, remediation methods used, and the willingness of states to share final cleanup costs; and (5) the Nuclear Regulatory Commission needs to ensure that enough funds are collected from the responsible parties to protect U.S. taxpayers from future cleanup costs.

Long-term care includes many types of services needed by individuals who have a physical disability, a mental disability, or both. Long-term care services can be provided in a variety of settings, including an individual's home or an institution, such as a nursing home. To be eligible for Medicaid coverage for long-term care, individuals must be within certain eligibility categories--such as those that are aged or disabled--and meet functional and financial criteria. Within broad federal standards, states determine whether an individual meets the functional criteria for long-term care coverage by assessing an individual's ability to carry out activities of daily living (ADL), such as eating and getting around the house; and instrumental activities of daily living (IADL), such as preparing meals and shopping for groceries. The financial eligibility criteria are based on individuals' assets--income and resources together. States are responsible for determining whether applicants meet the financial and other eligibility criteria for Medicaid coverage for long-term care. To qualify for Medicaid coverage for long-term care, individuals must have assets that fall below established standards, which vary by state, but are within standards set by the federal government. The Medicaid program bases its characterization of assets--income and resources--on that used in the Supplemental Security Income program. Income is something received during a calendar month, paid either in cash or in- kind, that is used or could be used to meet food or shelter needs; resources are cash or real or personal property that are owned that can be converted to cash and be used for food or shelter. (See table 1 for examples of different types of income and resources.) In establishing policy for determining financial eligibility for Medicaid coverage for long- term care, states can decide, within federal standards, which assets are countable. For example, states may disregard certain types or amounts of income, and may elect not to count certain resources. In most states, to be financially eligible for Medicaid coverage for long-term care, individuals must have $2,000 or less in countable resources ($3,000 for a married couple). Federal law limits Medicaid payment for long-term care services for persons who divest themselves of--or "transfer"--their assets for less than FMV within a specified time period. As a result, when an individual applies for Medicaid coverage for long-term care, states conduct a review, or "look back," to determine whether the applicant (or his or her spouse, if married) transferred assets to another person or party. If the state determines an applicant transferred an asset for less than FMV during the look-back period, the individual may be ineligible for Medicaid coverage for long-term care for a period of time, called the penalty period. The DRA extended the look-back period for transfers made on or after February 8, 2006, to 60 months; prior to that, it was generally 36 months. The DRA also specified circumstances under which the purchase of certain assets--such as an annuity, promissory note or loan, or life estate--is considered a transfer for less than FMV, and when entrance fees for CCRCs are countable for purposes of determining Medicaid eligibility. Additionally, while an individual's primary residence is generally not a countable resource for determining Medicaid eligibility, the DRA specified when an individual with substantial equity interest in his or her home is to be excluded from eligibility for Medicaid payment for long-term care; the amount of allowable equity interest is established by each state within federal guidelines. See table 2 for a summary of these DRA provisions. Most, but not all, of these DRA provisions became applicable on the date the law was enacted, February 8, 2006. To assess applicants' financial eligibility for Medicaid coverage for long- term care, and to determine whether they transferred assets for less than FMV, states generally require applicants to submit applications and to provide documentation of certain assets reported on the applications. State Medicaid programs may also obtain information from third parties, such as financial institutions or other government agencies, such as the Social Security Administration. Such information helps states verify the accuracy of applicants' reported assets, as well as determine whether applicants have assets they failed to report or transferred for less than FMV during the look-back period. The processing of Medicaid applications--including the collection of documentation and information from applicants and third parties--is generally performed by local or county-based eligibility workers. In 2008, Congress passed legislation that required states to implement electronic asset verification systems (AVS) to verify the assets of aged, blind, or disabled applicants for Medicaid, including those seeking Medicaid coverage for long-term care, with financial institutions. An AVS would provide states with an electronic mechanism to contact multiple financial institutions, including those not reported by an applicant, to determine if an applicant has, or had, an account and the value of any existing accounts. The law provides for states' implementation of these systems to occur on a rolling basis; the first systems were to be implemented by the end of fiscal year 2009, with all states implementing systems by the end of fiscal year 2013. (See table 3.) States reported requiring applicants to provide documentation for most of the 13 types of assets contained in our survey; however, the types and number of months of documentation that the states considered to be acceptable proof for determining an applicant's financial eligibility for Medicaid coverage for long-term care varied. Specifically, 44 states required documentation for at least 12 of the 13 types of assets. All states reported requiring documentation of annuities, burial contracts and prepaid funeral arrangements, financial and investment resources, life estates, and trusts, while fewer states reported requiring documentation of other types of assets. States were least likely to require documentation of vehicles (38 states) and primary residence (37 states), resources that states may choose not to count for purposes of determining financial eligibility for Medicaid coverage for long-term care. (See fig. 1.) Officials from several states reported not requiring documentation for a particular type of asset because the state was able to obtain the necessary information from a third party. For example, while 50 states reported requiring applicants to submit documentation of earned income, one state did not have such a requirement because the amount of earned income was verified through an interface with the state's Department of Labor. It was less clear how states assessed other assets--such as vehicles or CCRC entrance fees--absent documentation. Our survey also showed that states varied in how they treated specific types of documentation; that is, whether the documentation was required, acceptable as proof by itself, acceptable as proof with other documentation, or not acceptable as proof of an applicant's assets. For example, while states generally found a written statement of earnings from an employer as acceptable documentation of earned income, there was more variation in how they treated other types of documentation. (See table 4.) States also varied in the number of months of documentation required from applicants, especially as it related to financial and investment resources. Although all 51 states reported requiring documentation of financial and investment resources, 27 required only current documentation, while the remaining 24 required both current and past documentation. Of the 24 states that required documentation of both current and past financial and investment resources, most required 60 months of documentation, while the remaining states required fewer months of documentation. (See fig. 2.) There was some variation, but to a lesser extent, in the amount of documentation of earned and unearned income that states required from applicants. Of the 50 states that required applicants to provide earned income documentation, 47 required only current documentation. Of the 3 remaining states, 2 required 3 months of documentation and 1 required 2 months of documentation. Of the 49 states that required unearned income documentation, 47 only required documentation of current unearned income. The other 2 states required 3 months of documentation. In addition to the documentation required to assess whether applicants' assets were within state financial eligibility levels, 38 states reported requiring additional documentation from at least some applicants to identify assets transferred for less than FMV. Of these 38 states, 16 indicated they required additional documentation only if an applicant reported making a transfer, 5 reported doing so only if an applicant's information was questionable, and 8 reported both of these reasons. Of the remaining 9 states, 7 required additional documentation from all applicants, and 2 did not specify the circumstances that would result in a request for additional documentation. Appendix II provides additional information on states' asset documentation requirements for individuals applying for Medicaid coverage for long-term care. All 51 states reported that they obtained some amount of asset information from third parties, although the extent of the screenings conducted varied by state. No state had implemented an electronic AVS, which would allow them to contact multiple financial institutions-- including those not reported by an applicant--to determine the existence and value of any accounts belonging to an applicant. States reported challenges to implementing an AVS including not having sufficient resources. To varying degrees, states reported obtaining information from third parties through a variety of mechanisms, including data matches, direct contact with financial institutions, and property and vehicle records searches. Some states also reported taking additional verification steps to determine if an applicant transferred assets for less than FMV during the look-back period. All 51 states reported that they conduct data matches with the Social Security Administration to verify at least some applicants' assets. However, states' use of data matches with other sources of asset information--primarily related to income--varied, ranging from 48 states reporting data matches with state unemployment records, to as few as 6 states reporting data matches with state tax records. On average, states conducted data matches with 6 of the 10 sources included in our survey; the number of sources states reported using ranged from 1 to 9.In addition to variations in the use of data match sources, states varied in terms of the proportion of applicants screened, and when during the eligibility process the state conducted the screen. For example, most states reported conducting a data match with the Social Security Administration generally before determining an applicant's eligibility. In contrast, of the 30 states that reported conducting a data match with the Internal Revenue Service for at least some applicants, 21 reported doing so generally after determining eligibility. (See table 5 for summary information and app. III for more detailed information about the data matches conducted by states.) Twenty-four states reported that they contact financial institutions to verify at least some applicants' financial and investment resources, while the remaining 27 did not. However, these 24 states varied in terms of the range of financial institutions they contacted and the proportion of applicants about whom they inquired. (See table 6.) Some states reported contacting multiple types of financial institutions, such as institutions applicants reported having accounts with, and some that applicants did not report. However, 13 of the 24 states reported contacting only financial institutions with whom the applicant reported having an account; of these 13 states, 3 states contacted financial institutions for all applicants, while the other 10 states did so for some applicants. These 13 states, and the 27 that reported not contacting any financial institutions, are unlikely to identify accounts that an applicant failed to report. Of the remaining 11 states that reported contacting financial institutions not reported by an applicant, 3 reported contacting only local institutions, whereas the other 8 contacted a combination of local, statewide, and national institutions. Regarding the proportion of applicants for which states contact financial institutions, half of the 24 states reported they only contact financial institutions if an applicant submits insufficient information or provides questionable information. Of the 24 states that reported they contact financial institutions to request information, the type of information--account balances or itemized statements--and the number of months they request varied. (See fig. 3.) Specifically, half of these states requested itemized statements that include information on each transaction, while the other half requested monthly account balances. Most of the states that requested account balances did so for 3 or fewer months. Of the 12 states that requested itemized statements, 5 requested 60 months of statements, 3 requested only the statement for the current month, and the other 4 states requested between 3 and 36 months of information. Most of the states (20 of 24) reported that they contact financial institutions for asset information before determining eligibility. Appendix IV provides additional information about states' contact with financial institutions to verify applicants' assets. Thirty-five states reported that they conduct some type of property records search to verify at least some applicants' real property. The extent of the searches varied in terms of the geographic area covered and the proportion of applicants for which property searches were conducted. (See table 7.) Of the 35 states that reported conducting property searches, 2 states conduct property searches only within an applicant's county of residence. Of the 33 states that reported conducting property searches beyond an applicant's county of residence, 8 do so only if they have reason to believe the applicant lived in another county or state. Additionally, 12 of the 35 states indicated they conduct property searches only when an applicant submits questionable or insufficient information, an applicant reports the property, or a combination of both factors. States reported being able to conduct property searches using several types of information, including an applicant's name (33 states), property address (32 states), property zip code (12 states), or an applicant's Social Security number (10 states). Most of the states (29 of the 35) reported that they generally conduct property searches before determining eligibility. Appendix V provides additional information about the property searches conducted by states. Thirty states reported that they conduct searches of Department of Motor Vehicles' (DMV) records to verify at least some applicants' vehicles. Specifically, 14 states reported conducting vehicle searches for all applicants and 1 state reported conducting searches for most of its applicants. The remaining 15 reported conducting such searches for less than half of their applicants; of these 15 states, 6 indicated that they only conduct searches of vehicle records if they receive information from an applicant that they deem questionable. States reported being able to search these records using several types of information, including an applicant's name (29 states), a vehicle identification number (20 states), and an applicant's driver's license or license plate number (18 states each). Most of the states (25 of the 30 states) reported that they generally conduct DMV searches before determining eligibility. Appendix VI provides additional information about the vehicle searches conducted by states. Twenty-two states reported taking additional steps to obtain information from third parties, such as conducting additional property searches, to identify assets transferred for less than FMV; 7 states reported doing this for all applicants; and 15 states reported doing this for some applicants. Of the 15 states that reported taking additional verification steps for just some applicants, most of them indicated they do so only if they question the information provided by applicants or have reason to believe a transfer may have occurred, such as if an applicant reported making a transfer. Appendix VII provides information on the proportion of applicants for which each state reported taking additional verification steps to identify assets transferred for less than FMV during the look-back period. Although 25 states were supposed to have implemented their electronic AVS to obtain information from financial institutions by the end of fiscal year 2011, no state had implemented one at the time of our survey. Eighteen states reported that they were in the process of implementing an AVS, while the remaining 33 states had yet to begin implementation. When asked about the challenges to implementing an AVS, 32 states reported that they did not have enough resources--such as money, staff, or time--required to implement such a system, and 18 states reported that it had been or would be challenging to get financial institutions to participate and provide information. One state reported that it had initially planned to have its AVS implemented by December 2011, but was unable to do so because financial institutions in the state were unwilling to participate in the AVS until state legislation is passed that releases the financial institutions from any liability, ensures they are fairly reimbursed for their services, and makes the process voluntary. The state Medicaid program is seeking such legislation during the state's 2012 legislative session and then plans to proceed with implementing its AVS. CMS acknowledged that states may have challenges that could affect their ability to implement an AVS as scheduled. CMS officials were aware of states' progress in implementing the AVS and told us that the agency was regularly communicating with states regarding AVS implementation. On the basis of states' responses to questions about the documentation required from applicants and the asset information obtained from third parties, it is unclear whether some states obtain sufficient information to implement certain DRA provisions, particularly the provisions related to the look-back period and home equity. The results of our survey raise questions about some states' implementation of the DRA, but are not conclusive, and we have additional work planned related to Medicaid long-term care financial eligibility. Look-back Period. We asked states about (1) the number of months of financial and investment resources documentation required to determine eligibility, (2) additional documentation required to identify assets transferred for less than fair market value, and (3) number of months of documentation obtained directly from financial institutions. When considering states' responses to those questions, we found that 31 states reported obtaining less than 60 months of information about at least some applicants' assets. Three of the 31 states reported requiring a single month of documentation from applicants and did not obtain any information from financial institutions. CMS officials noted that it is costly and time consuming to conduct a review for the 60 month look-back period. Thus, these officials stated, it was understandable for states to use discretion and only conduct reviews when there is reason to believe that a transfer could have been made during the look-back period. For example, a state might determine the need to conduct a more thorough review as a result of red flags found through other checks, such as when an applicant has very high income and no resources. However, the application forms in 6 of the 31 states did not ask about transfers made during the entire look-back period. Thus, it is unclear how these 6 states would know whether assets were transferred for less than FMV in the 60 months prior to application, and how all 31 states would be able to detect unreported transfers of assets made during the entire look-back period. In contrast, 20 states reported requiring 60 months of documentation from all applicants, 5 of which also requested 60 months of information from financial institutions for at least some applicants. Home Equity. Fourteen states reported not requiring documentation of a primary residence. Of these 14 states, 8 indicated that they conduct property record searches in the county of residence for at least some applicants to try to obtain information about property the applicant may own. Additionally, 1 state indicated that it could obtain information about an applicant's primary residence from a third party. The remaining 5 states reported they did not conduct property records searches; as such, it is unclear how these states would determine if an applicant owns a home that he or she failed to report, and the value of an applicant's equity interest in the home. Of the 37 states that reported requiring applicants to submit documentation of a primary residence, only 3 reported requiring documentation that could provide the state with information on the value of the home or an applicant's equity interest in the home. The remaining 34 states reported requiring documentation about applicants' primary residence, but the documentation received may not provide all of the information necessary to determine if applicants' equity interest in their homes exceeds the state's allowable amount. Life Estates. Among the 32 states that provided information on our survey about life estates, 2 states reported not assessing the length of time an applicant with a life estate resided in the property. The remaining 30 states reported requiring some type of proof in order to determine the amount of time an applicant resided in the property after the purchase of the life estate interest. On the basis of our analysis of state responses, 7 of the 30 states reported relying only on a statement from an applicant or another person who owns the residence to determine the length of time an applicant resided in the property; however, 2 of these 7 states said that they would require more documentation if they determined that the information they received was questionable. The remaining 23 states reported relying on documentation, such as a utility bill; a statement from an applicant; a statement from a third party; or some combination of these sources to determine the length of time an applicant lived in the property. CCRCs. On the basis of our survey results, most states--46 of 51--reported requiring applicants to provide documentation of CCRC or life care community entrance fees, such as a copy of the contract or agreement. Thus, these states should have sufficient information to determine if, under the DRA, an applicant's entrance fees should be countable resources for determining Medicaid eligibility. However, it is unclear how the remaining 5 states would be able to determine if an applicant has paid such fees, and whether they should be counted toward the applicant's Medicaid long-term care eligibility determination. Promissory Notes. Fifty states reported on our survey that they require applicants to provide documentation of promissory notes or loans; such documentation should allow the state to determine if a note meets the requirements specified in the DRA, such as providing for payments to be made in equal installments throughout the course of the loan, or if a note should be treated as a transfer of assets for less than FMV. Annuities. In responding to our survey, all states reported requiring documentation of annuities and thus should have sufficient information to determine whether an annuity should be considered a transfer of assets for less than FMV under the DRA. Additionally, our review of 49 states' long-term care application forms found that 45 required the disclosure of any interest the applicant or spouse has in an annuity and 27 contained statements regarding the state becoming a remainder beneficiary of such annuities. (See app. VIII.) As the demand for long-term care services increases and federal and state resources continue to be strained, it is important to ensure that only eligible individuals receive Medicaid coverage for long-term care. Since each state is responsible for day-to-day implementation of its Medicaid program, variation in policies and practices for determining financial eligibility is expected. However, some of the variation we found may raise questions regarding how states determine Medicaid eligibility for long- term care and enforce certain provisions of the DRA. States must balance the costs of eligibility determination efforts with the need to ensure that those efforts provide sufficient information to implement federal requirements. While third-party verification of applicants' financial information likely provides states with the best assurance of having a complete picture of an applicant's financial status, it can be a complex and costly process that requires a significant amount of information and review. Given the complexities involved, it may be reasonable for states to adhere to a risk-based approach and focus their eligibility determination efforts on applicants who appear to be more likely to have assets or to have transferred assets that would make them ineligible. The electronic AVS that is required by law may help states identify some unreported or transferred assets. However, it is too early to assess its overall effectiveness, which will ultimately depend on the breadth of the financial institutions participating and the depth of the information obtained. We provided a draft of this report to HHS for its review, and HHS provided written comments (see app. IX). HHS concurred with our findings and noted that the results of our comprehensive report will serve as a resource for all interested parties. Further, HHS indicated that the report will be helpful for targeting CMS's ongoing technical assistance and oversight efforts with states. 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 Administrator of CMS and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix X. State reported it did not count a primary residence when determining an applicant's eligibility--and therefore did not require documentation--if an applicant was living in the home or intended to return home. State reported it did not require documentation of primary residence unless it appeared as though the primary residence could exceed the allowable amount of equity interest. State reported it did not require documentation of primary residence because it was not countable when determining an applicant's eligibility. State reported it did not count a primary residence when determining an applicant's eligibility--and therefore did not require documentation--if an applicant's spouse, child under 20 years old, or disabled child was living in the home. State reported requiring documentation of vehicle loan value only if it affected eligibility determination. State reported requiring documentation of a life insurance policy if the applicant reported that it had a face value of $10,000 or more. State reported it did not require documentation of primary residence unless the applicant reported the value of the residence was within $200,000 of the allowable amount of equity interest. = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. = Not acceptable as proof. -- = Response not provided. = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. = Not acceptable as proof. -- = Response not provided. = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. = Not acceptable as proof. -- = Response not provided. = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. = Not acceptable as proof. -- = Response not provided. Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. -- = Response not provided. = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. = Not acceptable as proof. -- = Response not provided. = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. = Not acceptable as proof. -- = Response not provided. = Required. = Acceptable as proof by itself. = Acceptable as proof with other documentation. = Not acceptable as proof. -- = Response not provided. = All applicants. = Most (more than half) applicants. = Some applicants. = No applicants. -- = Response not provided. = All applicants. = Most (more than half) applicants. = Some applicants. = No applicants. -- = Response not provided. = Generally before eligibility determination. = Sometimes before and sometimes after eligibility determination. = Generally after eligibility determination. N/A = Not applicable, state did not conduct data match with respective source. -- = Response not provided. = Generally before eligibility determination. = Sometimes before and sometimes after eligibility determination. = Generally after eligibility determination. N/A = Not applicable, state did not conduct data match with respective source. -- = Response not provided. Appendix IV: States' Contact with Financial Institutions to Verify Applicants' Assets State Alaska Arizona Connecticut Illinois Indiana Kentucky Louisiana Maine Maryland Michigan Missouri New Jersey New York Rhode Island South Carolina Texas Vermont = All applicants. = Most (more than half) applicants. = Some applicants. = No applicants. -- = Response not provided. -- = Response not provided. = Generally before eligibility determination. = Sometimes before and sometimes after eligibility determination. = Generally after eligibility determination. Appendix V: States' Use of Property Records Searches to Verify Applicants' Assets State Alabama Alaska Arizona Colorado Connecticut Delaware Hawaii Illinois Iowa Kansas Kentucky Louisiana Maine Maryland Michigan Mississippi Missouri Montana Nevada New Hampshire New York North Carolina Ohio Oklahoma Oregon Pennsylvania Rhode Island = All applicants. = Most (more than half) applicants. = Some applicants. = No applicants. -- = Response not provided. -- -- = Response not provided. = Generally before eligibility determination. = Sometimes before and sometimes after eligibility determination. = Generally after eligibility determination. Pennsylvania Rhode Island South Carolina = All applicants. = Most (more than half) applicants. = Some applicants. = No applicants. -- = Response not provided. = Generally before eligibility determination. = Sometimes before and sometimes after eligibility determination. = Generally after eligibility determination. Rhode Island South Carolina South Dakota Tennessee Texas = All applicants. = Some applicants. = No applicants. -- = Response not provided. Appendix VIII: GAO Analysis of Annuity Language Contained in States' Application Forms * Application form contained language regarding Name the state as a remainder 27 State collected information from applicants through an interview rather than a paper application form. In addition to the contact named above, Michelle B. Rosenberg, Assistant Director; Emily Binek; Julianne Flowers; Kaycee M. Glavich; Shirin Hormozi; Emily Loriso; Christina Ritchie; and Phillip J. Stadler made key contributions to this report.

Medicaid--a joint federal-state health care financing program for certain low income individuals--paid for nearly half of the nation's $263 billion long-term care expenditures in 2010. To be financially eligible for Medicaid coverage for long-term care, applicants cannot have assets--income and resources--above certain limits. Federal law discourages individuals from artificially impoverishing themselves in order to establish financial eligibility for Medicaid. Specifically, those who transfer assets for less than fair market value during a specified time period--or "look-back" period--before applying for Medicaid may be ineligible for coverage for longterm care for a period of time. The DRA extended the look-back period to 60 months and introduced new requirements for the treatment of certain types of assets, such as annuities, in determining eligibility. States are responsible for assessing applicants' eligibility for Medicaid, the criteria for which varies by state. GAO was asked to provide information on states' requirements and practices for assessing the financial eligibility of applicants for Medicaid long-term care coverage. GAO examined the extent to which states (1) require documentation of assets from applicants, (2) obtain information from third parties to verify applicants' assets, and (3) obtain information about applicants' assets that could be used to implement eligibility-related DRA provisions. From October 2011 to November 2011, GAO surveyed Medicaid officials from each of the 50 states and the District of Columbia. GAO also interviewed officials from CMS, the agency within HHS that oversees Medicaid. States reported requiring applicants to provide documentation for most of the 13 types of assets included in GAO's survey. States varied in the extent to which they obtained information from third parties to verify applicants' assets. For example, all states conducted data matches with the Social Security Administration but used other sources to a lesser extent. While states' implementation of an electronic asset verification system (AVS) was required on a rolling basis beginning in 2009, no state had fully implemented an AVS at the time of GAO's survey. Among the implementation challenges reported by states were lack of resources and getting financial institutions to participate. Officials from the Centers for Medicare & Medicaid Services (CMS) were aware of states' progress and challenges and told GAO that they regularly communicated with states on AVS implementation. On the basis of states' responses to questions about the extent of documentation required from applicants and information obtained from third parties, it is unclear whether some states obtain sufficient information to implement certain provisions of the Deficit Reduction Act of 2005 (DRA). For example, 31 states reported requiring less than 60 months of documentation from applicants and financial institutions. The results of GAO's survey raise questions about states' implementation of the DRA, but are not conclusive. CMS officials said that it is reasonable for states to only conduct reviews when there is reason to believe a transfer of assets occurred. GAO has additional work planned related to Medicaid long-term care financial eligibility. States must balance the costs of eligibility determination efforts with the need to ensure that those efforts provide sufficient information to implement federal requirements. Given the complexities involved, it may be reasonable for states to adhere to a risk-based approach and focus their eligibility determination efforts on applicants who appear to be more likely to have assets or to have transferred assets that would make them ineligible. It is too early to assess the effectiveness of the AVS; its utility will ultimately depend on the breadth of the financial institutions participating and the depth of the information obtained. The Department of Health and Human Services (HHS) concurred with GAO's findings and commented that GAO's comprehensive report will serve as a helpful resource for CMS and other interested parties.

The School Improvement Grants (SIG) program was created in 2002 and funds reforms in the country's lowest-performing schools with the goal of improving student outcomes, such as their standardized test scores and graduation rates. Congress greatly increased SIG program funding, from $125 million available in fiscal year 2007--the first year the program was funded--to $3.5 billion in fiscal year 2009, although funding for the last two fiscal years has been $506 million a year. Before awarding formula grants to states, Education reviews each state's application and approves the state's proposed process for competitively awarding SIG subgrants to eligible entities, including school districts. As a part of its application, each state is required to identify and prioritize eligible schools and ensure that school districts with the persistently lowest-achieving schools receive SIG funding. School districts must then apply to states to implement one of seven intervention models in each SIG school, each with specific requirements for reform interventions, during a grant period between 3 and 5 years. Two of these intervention models, which are being implemented in the large majority of current SIG schools, require schools to extend learning time as part of the required whole-school reform strategies. SIG requirements define increased learning time as using a longer school day, week, or year to significantly increase the total number of school hours. This additional time is to be used for (1) instruction in academic subjects, including English, reading or language arts, mathematics, science, foreign languages, civics and government, economics, arts, history, and geography; (2) instruction in other subjects and provision of enrichment activities that contribute to a well-rounded education, such as physical education, service learning, and experiential and work-based learning opportunities; and (3) teachers to collaborate, plan, and engage in professional development within and across grades and subjects. The 21st Century Community Learning Centers program (21st Century) is meant to support local communities in establishing or expanding community learning centers that provide opportunities for academic enrichment during non-school hours, such as before- and after-school and summer school programs, and related services to students' families. The program provides formula grants to state educational agencies (SEA), which subsequently offer competitive subgrants to eligible entities, including school districts, community-based organizations, and other public or private entities. SEAs must provide an assurance in their applications for 21st Century grants that they will make awards only to eligible entities that propose to serve students who primarily attend schools eligible to operate a schoolwide program under Title I of the Elementary and Secondary Education Act of 1965, as amended (ESEA), which are schools with at least 40 percent of students from low-income families. In addition to activities designed to help students meet state and local academic achievement standards, program funds may be used to provide activities that complement and reinforce a student's regular school-day program, such as art and music education activities, recreational activities, telecommunications and technology education programs, expanded library hours, literacy programs, and drug and violence prevention activities. In fiscal year 2012, Education began to invite SEAs to waive specific ESEA provisions, which require community learning centers to carry out their activities during non-school hours or periods when school is not in session. The waiver allows grantees to use 21st Century program funds to conduct authorized activities during an extended school day, week, or year in schools that provide extended learning time for all students in the school. Education's guidance for the 21st Century program defines "expanded learning time" as "additional instruction or educational programs for all students beyond the state-mandated requirements for the minimum number of hours in a school day, days in a school week, or days or weeks in a school year." According to Education guidance, these activities can include supplemental academic enrichment activities that support a well-rounded education for students and increase collaboration and planning time for teachers, or for partnering with outside organizations, such as nonprofit organizations, that have demonstrated experience in improving student achievement. The vast majority of funding for K-12 public schools nationwide comes from state and local sources. For example, in school year 2009-2010, U.S. public schools received about 87 percent of their funding from state and local sources--43 percent from state sources and 44 percent from local sources. Federal funding has generally comprised about 9 percent of public schools' funding from school year 2002-2003 through 2008- 2009. In school year 2009-2010, federal funding for public schools comprised about 13 percent, which was slightly higher than in previous years due in part to the American Recovery and Reinvestment Act of 2009. For public schools nationally, Education's Title I, Part A of ESEA, is among the programs providing the largest amounts of federal funding. The School Improvement Grants (SIG) program is the only program administered by Education that provides funds specifically to establish extended learning time in a school, according to Education officials. Between school year 2010-2011, when changes were made to SIG to require extended learning time in certain instances, and 2014-2015, the last year SIG data are available, nearly 1,800 schools or approximately 94 percent of SIG schools had chosen either of two school improvement models that require extended learning time, out of the four available models (see fig. 1). The schools implementing either of those two models had to extend learning time alongside other key reforms such as developing new teacher and principal evaluation systems. However, these 1,800 schools represent a small fraction of the nearly 90,000 K-12 public schools nationwide. Further, among the lowest-performing U.S. public schools, less than 7.5 percent are receiving SIG funds, according to a 2012 Institute of Education Sciences study. Although only about 1,800 schools have received assistance through SIG grants, this assistance can be vital to a school in helping to implement key reforms such as extended learning time. According to an Education report on the 2012-2013 school year, the average 3-year grant was $2.6 million as of that year. Education found that 68 percent of SIG schools in school year 2010-2011 (referred to as Cohort 1), 79 percent in school year 2011-2012 (referred to as Cohort 2), and 83 percent of SIG schools in school year 2012-2013 provided extended learning time. This is to be expected given that, as previously noted, most school districts have chosen a SIG model that requires extended learning time. On average, Cohorts 1 and 2 had 76 and 96 more hours, respectively, than all public schools in school year 2011-2012, according to Education's analysis of SIG grant reports. Additionally, a 2014 Institute of Education Sciences study found that 71 percent of SIG schools surveyed had extended learning time, while only 60 percent of non-grantee schools had taken steps to increase learning time. However, Education officials also told us some schools increased learning time by very little, some by as little as 10 minutes a day. In contrast to SIG, where most SIG schools are implementing extended learning time, as of July 2015, Education officials reported that only a fraction of the 21st Century learning centers it funds--about 69 out of 10,000 nationwide--are supplementing local extended learning time initiatives by taking advantage of waivers of ESEA requirements that allow them to provide 21st Century program activities and services during an extended school day. Therefore, as required by statute, more than 99 percent of the centers continue to use these subgrants to serve students outside school hours, which according to Education officials is typically in after-school programs where attendance is voluntary. The average subgrant per center was about $113,000 per school year. Regardless of whether subgrantees conduct activities during extended learning time or not, centers are to follow the same program rules about what types of activities can be funded. Further, Education said schools cannot use these funds to establish new programs to extend the school day. Rather, they can be used only to supplement other programs and activities for all students in schools that had extended the normal school day, week, or year. Education reported in its fiscal year 2015 budget justification that using 21st Century funds in this way could improve 21st Century program performance by minimizing or eliminating participation problems that many schools and other providers have experienced. For example, Education reported that nearly half of students attending 21st Century activities attended for fewer than 30 days in school year 2012-2013. Two extended learning time providers we interviewed said that changing from voluntary after-school activities to programs during the extended school day, which is generally mandatory for all students, helped reach underserved students who may not have chosen to attend if the activities were offered after school. Since 2012, 27 states have applied for ESEA waivers to allow 21st Century grantees to conduct authorized activities during the school day to support extended learning time, and all were approved by Education. However, as of July 2015, only 11 of those states have schools that have implemented extended learning time programs. With regard to states' limited use of these waivers, Education officials said that while the waivers have been available since mid-2012, extended learning time can be expensive to implement and it takes time for states to plan and collaborate with districts, schools, and community organizations. Additionally, Education officials said states are not required to report the number of eligible entities using this waiver flexibility, so these numbers may be low. Education is currently collecting data on conducting activities during the school day in schools with extended learning time for its 21st Century programs for the first time, and officials told us they plan to report detailed figures in February 2016 on the number of hours and locations of all 21st Century programs in schools with extended learning time. Education officials told us that most Education funding streams are designed for use during the school day-regardless of the length of the school day or year-and as such, schools may use these funds during extended learning time, consistent with other program requirements. For example, schools may use funds from Title I, Part A of ESEA to serve all students in schools that operate a schoolwide program in which they serve a high-concentration of students from low-income families. Education officials said that these funds could be used to supplement local funding to extend the school day for all students in those schools. Officials added that Charter School Grants may support eligible charter schools with or without extended learning time programs. Charter School Grants are primarily designed to assist in the planning, program design, and initial implementation of charter schools, either through the creation of new charter schools or the replication or the expansion of existing high- quality charter schools with demonstrated records of success. In another example, Education officials told us that Full-Service Community Schools grants, which support partnerships among schools, school districts, and community-based organizations for coordinated academic, social, and health services can be used to provide those services during extended learning time. Representatives from several organizations we interviewed also identified ways that Education programs can contribute to extended learning time. For example, a representative from a teachers' union we interviewed told us the union worked with a school that used Title I funds to hire a site coordinator who helped the school manage implementation of a longer school day. Representatives from extended learning time organizations also told us that Title II funding, which is used for teacher development, was helpful for schools with extended learning time because it allowed them to use the longer day for more professional development. A representative from an organization representing school superintendents said school districts may be using Title VI funds, which provide assistance to rural schools, to extend learning time. Education officials cautioned that schools that use federal funds during extended learning time must meet all applicable requirements for those funds, including requirements related to allowable costs and any statutory "supplement not supplant" requirement. In general, this requirement precludes a grantee from using federal funds for activities that it would conduct, in the absence of such federal funds, with state or local funds. On average, we estimate that K-12 public schools nationwide have a 6.7- hour school day and a 179-day school year, according to our analysis of Education's School and Staffing Survey (SASS) data for the 2011-2012 school year, the most recent data available (see fig. 2). Specifically, an estimated 65 percent of schools have school days that are from 6.5 to 7.5 hours. Further, K-12 public schools that have the most time in school have an estimated average of 1,341 hours in a school year, which is about 137 more hours (or about four more weeks) than the estimated national average of 1,204 hours, according to our analysis of Education's SASS data for the 2011-2012 school year. The schools with the most time are going well beyond the hours required per year by most states. Specifically, a 2015 Education Commission of the States study found that most states require between 900 and 1,080 hours per year for all grades. The 9,000 schools in the top 10 percent of schools with the most school hours tend to add time by lengthening the school day more so than adding days to the school year. Specifically, according to our analysis of SASS data, schools in the top 10 percent of schools with the most time typically have a school day that is estimated to be one hour longer than all other schools. Further, representatives from the three extended learning time organizations we spoke with told us that most schools extended the day as opposed to adding days in the year. One representative told us that the typical schools they partner with have about three additional hours per day and operate Monday through Friday until 6 p.m. Charter schools generally include more hours in a school year than traditional K-12 public schools (see fig. 3). Specifically, charter schools have an estimated average of 1,285 hours in a school year compared to an average of 1,209 hours for traditional public schools, according to our analysis of Education's SASS data for the 2011-2012 school year. Further, a larger proportion of charter schools fall into the category of schools with the most time (30 percent) as compared to 9 percent of traditional public schools. Specifically, of the estimated 2,754 charter schools nationwide, 867 are in the top 10 percent of schools with the most hours. As we have previously reported, charter schools typically operate with more autonomy than traditional public schools. Consequently, charter schools may have fewer barriers than traditional public schools to extending their hours. Similarly, the time that K-12 public schools spend on learning differs by region of the country and by school setting (e.g., urban or rural). Schools in the South have an estimated average of 1,253 learning hours per year, in the Northeast schools reported an estimated 1,197 hours, in the Midwest an estimated 1,192 hours, and the West an estimated 1,146 hours. The additional hours means that schools in the South provide, on average, approximately 3 weeks more learning time per year than schools in the West. The average number of school hours also differs according to a school's setting. An estimated 7 percent of suburban schools were in the top 10 percent of schools with the most learning time, compared to 10 to 12 percent of schools in urban, small town, and rural settings. Conversely, there is little difference in annual school hours by grade level--such as elementary, middle or high school (see fig. 5). For example, for 90 percent of all public K-12 schools nationwide, middle schools have the most learning time, with an estimated 1,213 hours in a school year. The difference is relatively small, however; middle schools have an estimated 38 more hours per year than elementary schools and an estimated 36 more hours than for high schools. For the 10 percent of schools with the most learning time, high schools have the most time, with an estimated 1,428 hours in a school year, but again, the difference is small. High schools have an estimated 17 hours more time than elementary schools and an estimated 10 hours more time than middle schools. One extended learning time provider we spoke with works to extend the learning day for low-income middle school students by providing academic support and project-based apprenticeships. Another extended learning time provider told us its extended learning time model is typically for kindergarten through eighth grades. Our analysis of SASS data for the 2011-2012 school year shows that K- 12 public schools with the most time have a larger proportion of students receiving free or reduced price lunch--an estimated 61 percent--than all other schools whose student body population comprises 51 percent of these students (see fig. 6). Further, public K-12 schools in the top 10 percent of schools with the most time have a larger proportion of African American and Hispanic students--an estimated 9 percent more African- American students and 7 percent more Hispanic students--than all other schools. One explanation for this could be that, according to our analysis, charter schools serve higher percentages of low income, African American, and Hispanic students than traditional public schools. African Americans account for approximately 27 percent and Hispanics for 28 percent of the charter school student body population nationwide compared to 13 and 21 percent in traditional public schools, respectively. Further, among public schools in the top 10 percent of schools with the most learning time, charters serve a higher percentage of African American and Hispanics students compared to traditional public schools. Specifically, African Americans account for approximately 37 percent of students in these schools and Hispanics account for 44 percent, compared with 19 and 25 percent in traditional public schools, respectively. Further, one of Education's largest grant programs can be used to supplement local initiatives during extended school days or years and targets schools with a high concentration of low-income students. Specifically, Title I, Part A of ESEA provides funds to school districts and schools that serve high concentrations of low-income students. Further, representatives of extended learning time organizations we interviewed told us that the schools they work with tend to extend the school day to improve achievement for students who are low-income and minority who may not have access to the same enrichment activities as their more socioeconomically advantaged peers. One representative from an extended learning time organization told us that its programs seek to close gaps in opportunity and educational achievement for disadvantaged communities. Public K-12 schools with the most hours in a school year use this additional time for different purposes, including more instruction in math and literacy, and more time for the arts and physical education. For example, during the 2011-2012 school year, eighth-grade students in schools with the most time (the top 10 percent) are estimated to have spent an additional 1.3 hours per week, on average, in English language arts, math, and science instruction compared to eighth-graders in all other schools. Further, third-grade students in schools with the most time spent an estimated additional 48 minutes per week, on average, in music, art, and physical education classes than third-graders in all other schools, according to our analysis of SASS data. Representatives from the three extended learning organizations we spoke with told us that their programs provide students more time for instruction in academic subjects and for enrichment activities, such as a debate club and project-based learning activities in science. Teachers in the schools with the most time spend more time providing instruction to students as compared to all other schools. Specifically, teachers in schools with the most time (the top 10 percent) teach an estimated 1.3 more hours per week compared to all other schools, with a weekly total of 31.2 hours compared to 29.8 hours. On the other hand, there was no significant difference in the hours spent in a school year on professional development between schools with the most time and all other schools. Further, according to a representative from one extended learning time organization with whom we spoke, schools often partner with external participants or providers of after-school programs to provide academic instruction or enrichment activities during the school day. We are not making recommendations in this report. We provided a draft of this report to the Department of Education for comment. Education provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Education, and other interested parties. In addition, the report will be available at no charge on GAO's web site at http://www.gao.gov. If you or your staff should have any questions about this report, please contact me at (617) 788-0580 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 I. In addition to the contact named above, Elizabeth Sirois (Assistant Director), Sheranda Campbell (Analyst-in-Charge), and Lucas Alvarez made significant contributions to this report. Assistance, expertise, and guidance were provided by Susan Aschoff, James Rebbe, Kirsten Lauber, John Mingus, Carl Barden, and James Bennett.

In recent years, a key strategy for improving student outcomes has been to extend learning time by lengthening the school day or year. In 2010, Education made significant changes to its SIG program, funded at about $506 million in fiscal year 2015, including requiring schools to extend learning time in certain instances. In 2012, Education began to invite waiver requests from states to use funds from its $1.2 billion 21st Century program to conduct authorized activities during extended learning time. Little is known about how much time public K-12 students spend in school. An explanatory statement accompanying Public Law 113-235 required GAO to report on learning time. In this report, GAO examines: (1) various Education programs that can be used to support extended learning time for K-12 students, and (2) learning time in public schools nationwide. In this report, GAO focuses on programs that require or may allow schools to lengthen the school day, week, or year. GAO analyzed the most recent available SIG and 21st Century grant data, as well as Education data on learning time from a nationally representative sample of schools. GAO also reviewed applicable federal laws, regulations, and agency documents; and interviewed Education officials and stakeholders selected to obtain diverse perspectives of school districts, states, service providers, and teachers. GAO makes no recommendations in this report. Education provided technical comments, which are incorporated as appropriate. The Department of Education (Education) primarily supports extended learning time for K-12 public schools through the School Improvement Grants program (SIG). The SIG program, with an average 3-year grant of $2.6 million, is the only Education program that provides funds specifically to establish extended learning time in schools, according to Education. Nearly 1,800 schools that received SIG funds (about 94 percent of SIG schools) were required to extend learning time under the SIG program for school years 2010-2011 through 2014-2015. In addition, under the 21st Century Community Learning Centers (21st Century) grant program a small number of grantee schools--about 69 of the 10,000--have used program funds to support extended learning time. However, to do so, states need to obtain a waiver from Education to permit schools to use funds to conduct authorized program activities during an extended school day, week, or year. Education officials said that the average annual 21st Century grant was about $113,000. Although Education supports extended learning time with the SIG and, in rare cases, the 21st Century program, Education officials also pointed out that most of its K-12 programs are designed to be used during the school day, regardless of the length of the day. Regarding learning time, GAO estimates that the average length of the school day for K-12 public schools nationwide is just under 7 hours and the average school year is almost 180 days, according to GAO's analysis of Education's 2011-2012 data, the most recent available. In terms of hours per year, schools with the most time average almost 1,350 hours compared to about 1,200 hours, nationally. In addition, among all public schools, charter schools represent a larger proportion of schools with more time (about one-third of all charter schools) compared to approximately 9 percent of traditional public schools. Charter schools also represented a larger proportion of students who are low income, African American, or Hispanic. Regarding how schools use extended learning time, we found that schools with the most hours in a school year use it for different purposes. For example, GAO estimates that eighth-grade students in these schools spend, on average, one more hour per week on academic subjects such as English, math, and science, while third-graders spent more time in music, art, and physical education classes.

The fiscal year 1997 DOD procurement appropriation is $43.8 billion, a reduction of over 67 percent from the $134.3 billion (in constant fiscal year 1997 dollars) appropriated in 1985. Many weapon acquisitions have been affected by this decline in the procurement budget. DOD's primary response to the reduced budget has been to reduce annual procurement quantities of weapons in full-rate production and extend their production schedules. DOD buys new weapons in two phases: low-rate initial production (LRIP) and full-rate production. When in LRIP, according to 10 U.S.C. 2400, DOD is to buy minimum quantities of a new weapon. This legislation resulted from concern in the Congress about the large quantities of weapons units bought before adequate testing. The purpose of LRIP is to (1) provide weapons for operational test and evaluation, (2) establish an initial production base for the weapon, and (3) permit an orderly increase in production before full-rate production begins. Operational test and evaluation is key to ensuring that a weapon's capabilities operate as designed before full-rate production begins. At this time, field tests are done to demonstrate the weapon's effectiveness and suitability for military use. After the weapon's design has stabilized and the weapon's capabilities are proven, the services enter full-rate production to begin buying proven weapons in economic quantities. In practice, DOD views low-rate production as any production prior to completion of initial operational tests and full-rate production as the production that follows these tests, with the terms low rate and full rate having little or no relevance to the annual quantity bought. We reviewed 6 weapons in LRIP and 22 weapons in full-rate production. (See app. I for a list of the weapons.) The 22 weapons in full-rate production represent those that in fiscal year 1996 had substantial ongoing production lines. The six low-rate production weapons were ones in production in fiscal year 1996 with substantial planned follow-on full-rate production quantities. For the six weapons in low-rate production, we looked for increases in production rates before operational tests were completed and decreases in the planned future full production rates. For the 22 weapons in full-rate production, we compared DOD's planned optimal production rates, costs, and schedules to that of actual full-rate production through fiscal year 1996 (see app. II). It is not uncommon for DOD to reduce the annual production quantities of proven weapons, stretching out full-rate production schedules for years. For 17 of the 22 proven weapons we reviewed, the actual production rates were 57 percent lower than originally planned. Decreased rates vary from 10 percent for the E-2C Hawkeye to 88 percent for the Standard missile system. For 12 of these weapons with reduced rates during full-rate production, program officials cited insufficient funding as a contributing reason for lower rates, and therefore stretching out production. As a result of reduced rates, production of the 17 weapons will take an average of over 8 years, or 170 percent, longer to complete than originally planned. The number of years the 17 weapons' production schedules have been stretched out ranges from 1 year for the Avenger to 43 years for the Black Hawk helicopter based on current production rates. (See app. III for the reduced production rates on each of these weapons.) Examples of proven weapons with reduced annual production rates follow: At the extreme for slowed production is the Army's Black Hawk helicopter. If the Army continues to buy the Black Hawk at the current rate, full-rate production will take almost 54 years to complete, about 43 years longer than originally planned. The Navy's production of the Tomahawk missile was to be completed in 9 years or by 1992, but instead it will take 15 years or until 1998, a 67-percent schedule increase. Originally, the Navy's planned procurement rate was 600 Tomahawks annually; instead, it has averaged 276 missiles a year, a decrease of over 50 percent from the planned production rate. Because of their reduced annual production rates and stretched out schedules, the acquisition of the 17 weapons we reviewed in full-rate production has cost nearly $10 billion more, through fiscal year 1996, than the program offices estimated based on their original planned production rates. Since 14 of the 17 weapons will still be in production beyond fiscal year 1996, the total increased cost at completion of these weapons could be significantly more than $10 billion. When the annual production quantity of a weapon is reduced, its unit cost generally increases because fixed costs are spread over a smaller quantity. This was the case for 14 of the 17 weapons we reviewed that had reduced production rates (see app. II). For example, the Navy planned to produce 48 T45 training aircraft annually at a unit cost of $8.7 million. Instead, an average of 12 T45s has been produced annually since full-rate production began in 1994, at a unit cost of $18.2 million. For the quantity produced in full-rate production through fiscal year 1996, T45 costs have increased from the original estimate by $345 million. When weapon systems are funded at their planned full production rates or higher, the unit cost of the weapon generally decreases, as illustrated in the following examples: The Army's program office increased the quantities of its Global Positioning System (with an original planned annual rate of 14,000) from 11,000 to 18,500 during 4 years of full-rate production. As a result, the unit cost of the system decreased from $1,400 to $1,076. If annual production were increased, the Army could save up to an estimated $491 million on the remaining 109 Kiowa Warrior helicopters it needs to finish full-rate production. For each of the last 3 years, the program office has procured an average of 16 units a year at a unit cost of $10.22 million. According to Kiowa program officials, the most efficient annual production rate of 72 helicopters would reduce unit cost to $5.72 million. The practice of allocating funds during low-rate production to increase annual production quantities before successful completion of initial operational test and evaluation has frequently been wasteful. As we reported in November 1994, the consequences of buying large quantities of untested weapons are increased acquisition costs, the accumulation of unsatisfactory weapons that require costly modifications to meet performance requirements and, in some cases, the deployment of substandard weapons to combat forces. That report contained 12 illustrative examples describing the problems experienced when the weapons were tested, the major fixes required after significant quantities were bought and, in many cases, the deployment of substandard weapons to combat forces. (Those 12 examples are included in appendix IV of this report.) In one case, before the Army did any operational test and evaluation, a multiyear production contract was awarded for up to 10,843 trucks. Operational testing was suspended 2 months after it began because the trucks were found to be unreliable and therefore not operationally effective. Production continued while the contractor modified the truck design to correct deficiencies. By the time the trucks passed operational testing, over 2,000 trucks were produced, the majority of which required extensive remanufacturing to correct the deficiencies. Most program offices developed an acquisition strategy for both low-rate and full-rate production based on optimistic projections of available funding. As a result, the offices tended to over program the number of weapons that can be bought with the dollars available in DOD's spending plan. As we have previously reported, the use of optimistic planning assumptions has led to program instability, costly program stretch-outs, and program terminations. Current DOD acquisition guidelines permit increasingly higher quantities of weapons in low-rate production to provide for the orderly transition to full-rate production. In addition, DOD's acquisition culture encourages this practice to solidify organizational commitment to keep weapon acquisition programs moving and to protect them from interruption. In this regard, within DOD's acquisition culture, a weapon's acquisition manager's success depends on getting results, and in acquisitions, results mean getting the weapon into production and into the field. The trend to reduce the full production rates from the original plans because of limited funds and to produce more quantities than are needed for testing during low-rate production increases procurement costs. For example, DOD increased the annual low-rate production of the Army's untested Longbow Hellfire Missile in fiscal years 1995, 1996, and 1997 from 0 to 352, and 1,040, respectively; while the Navy reduced full-rate production of the Standard missile system for those fiscal years from 202, to 64, and 127, respectively. Between fiscal years 1995 and 1997, low-rate production funding for the Longbow was increased from $41.2 million to $249.5 million while the full-rate funding for the Standard missile was reduced from $240.4 million to $197.5 million. The Navy originally planned to produce 2,160 Standard missiles a year during full-rate production over a period of 4 years. Instead, the Navy has averaged only 266 missiles a year and at that rate it will take 21 years to complete production, 17 years longer than planned, and at a cost of $286 million more than estimated at the originally planned rate. Many times, the services steadily increased the annual LRIP quantities, exceeding the number ultimately needed to complete operational tests and prove out the production line. The increase in annual quantities of weapons produced during low-rate production resulted in a substantial reduction of funds available for the production of proven weapons at planned rates. By minimizing the quantities of weapons procured during LRIP, DOD can reduce the risk associated with producing untested weapons and increase the funding available to produce other proven systems in full-rate production at planned rates, lowering their unit cost. For eight of the weapons we reviewed, the services' procurement rates during LRIP were equal to or more than they were during full-rate production. For example, the program office for the advanced medium range air-to-air missile increased the quantities produced during low-rate production to 900 units annually. However, since 1992, when it completed operational tests and entered full-rate production, the missile has been produced at an annual rate of 900 or more only twice. In fact, from fiscal years 1997 to 2007, the program office plans to procure an average of only 338 units a year. Table 1 shows the remaining seven weapons with low-rate production quantities equal to or higher than full-rate quantities. DOD continues to generate optimistic full-rate production plans that are rarely achieved. One example where this situation could occur and where planned increases in low-rate production quantities may be unnecessary is the Navy's F/A-18E/F system. The Navy plans to procure 72 F/A-18E/F aircraft over 3 years during LRIP--12 in 1997, 24 in 1998, and 36 in 1999 and then procure 72 each year during peak full-rate production years. However, the Congress has questioned the affordability of this full production rate and has directed DOD to calculate costs based on estimates of 18, 24, and 36 aircraft a year. In addition, the conferees on the Omnibus Consolidated Appropriations Act for Fiscal Year 1997 asked for calculations based on 48 aircraft a year. The increased quantities procured during low-rate production are not necessary to transition to full-rate production, especially if the number of aircraft procured during full-rate production drops significantly. Even if the Navy buys the aircraft at the rate originally planned, production rate increases to reach peak full rates could occur after the system has been operationally tested, rather than before. The same optimistic planning is reflected in the Air Force's F-22 program. The Air Force plans to contract for F-22 aircraft under four low-rate buys of 4, 12, 24, and 36 aircraft for a total of 76 aircraft at an estimated cost of nearly $11 billion prior to completing initial operational test and evaluation and entering full-rate production at 48 aircraft a year. During LRIP, DOD is supposed to restrict the number of weapons produced to the minimum quantity necessary to conduct operational testing, establish the initial production base, and allow for an orderly increase into full-rate production. However, because DOD often budgets available funding for unnecessary increases in low-rate production quantities of unproven weapons, it rarely is able to buy proven weapons at originally planned full-rates. When funding is insufficient to produce proven weapons in full-rate production at optimum levels and therefore to complete programs in a timely manner, it is not cost-effective to use limited funds to unnecessarily increase production of untested weapons whose designs are not yet stabilized. This wasteful practice could be minimized by shifting increases in annual production rates from the low-rate production phase to the beginning of full-rate production. We recommend that the Secretary of Defense revise DOD's weapon acquisition policies to require that (1) annual quantities of weapons bought during LRIP be limited to the minimum necessary to complete initial operational test and evaluation and prove the production line and (2) rates and quantities not be increased during low-rate production to ease the transition into full-rate production unless DOD clearly establishes that the increase is critical to achieving efficient, realistic, and affordable full production rates and can be accomplished without affecting the efficient production of proven systems. We also recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition and Technology and the Under Secretary of Defense (Comptroller and Chief Financial Officer) to submit future budgets that place priority on funding the efficient production of weapons in full-rate production. In commenting on a draft of this report, DOD agreed with the principle that premature commitment to LRIP is unwise and that LRIP should not be used to buy equipment that is known not to work. DOD believes the existing policy as set forth in the requirements of 10 U.S.C. 2400 (enacted in 1995) and DOD Directive 5000.2-R (issued in 1996) adequately provides an acquisition structure that allows DOD to focus on minimizing LRIP quantities, while providing the flexibility to maintain an adequate industrial base capability (e.g. ramp-up) to meet the interest of national security. DOD also stated that it makes every effort to fund full-rate production programs to the maximum extent possible within funding availability, changing priorities, and program realities. Concerning our recommendations, DOD commented that (1) its current acquisition policies fully comply with the intent of the policy proposal to minimize the quantities produced under LRIP, (2) increasing production rates (ramping-up) during LRIP allows the contractor to hire and train his production team and maintain a production workforce while operational testing is being conducted, and (3) it makes every effort to fund full-rate production programs but fiscal realities driven by a fluid environment is a serious challenge that will continue to impact the stability of major defense acquisition program production rates and quantities. Although efforts have been made in the last year to reduce the quantities bought under LRIP, our review indicates that DOD is still buying more than the minimum quantities needed. By allowing the ramp-up of quantities under LRIP to hire, train, and maintain a workforce to produce a still unproven product, funding is diverted from contractors producing proven products and their workforce by reducing their production rates and quantities. DOD's comments have not addressed (1) the negative effect of the current approach on the industrial base, (2) the cost implications, and (3) the delayed deployment of proven weapons. Cost implications include the added funding that will be needed to correct the problems in products produced before operational testing is completed and the increased costs from stretching out the production run of proven products. Stretched production schedules can also undermine national security interests by delaying deployment of needed proven systems to field units. If the LRIP rate "ramp-up" was delayed until after the completion of operational test, initial quantities of unproven systems would be reduced and additional funding would become available to buy the proven systems at more efficient rates. Although there are many reasons why weapon quantities and funding for full-rate production should be changed (such as changes in threats and technology), as long as the existing requirement remains valid, we believe priority should be given to funding the already tested, less risky full-rate systems at the most efficient rate possible. DOD's comments are presented in their entirety in appendix V. To quantify the number of weapons being bought below their planned full production rates, we screened the line items contained in the February 1995 Procurement Programs document. We determined that 88 percent of the budget for fiscal year 1996 was concentrated into 300 line items. We then reviewed the 300 line items, primarily using budget back-up books' documentation, to determine which of those items were being bought on an annual repetitive production basis, which is more conducive to increased rate production. We narrowed our universe to 83 line items, or 80 weapons, by excluding line items that were multiple procurement items such as spares, modification programs if the work was being done at a depot, advance procurements, commercial products, and items that did not have a repetitive annual production profile, such as a single one-time procurement. As we obtained additional program-specific data on the 80 weapons, we determined that an additional 52 weapons should be excluded based on the original criteria. Thus, our final universe was 22 weapons in full-rate production and 6 weapons in LRIP with a total cost of about $6.5 billion in fiscal year 1996 procurement funds. We collected cost and schedule data for all 28 weapons through interviews and documents from program officials for each weapon, service- and DOD-level acquisition officials, a DOD Comptroller office official, and a defense contractor. We did our review primarily at the individual program offices responsible for procuring the weapons. We performed our review from August 1995 through November 1996 in accordance with generally accepted government auditing standards. This report contains recommendations to you. The head of a federal agency is required under 31 U.S.C. 720 to submit a written statement on actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight no later than 60 days after the date of the report. A written statement must also be submitted to the Senate and House Committees on Appropriations with an 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 appropriate congressional committees and the Secretaries of the Army, the Navy, and the Air Force. We will also make copies available to others on request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix VI. Standard missile Rolling airframe missile (RAM) RAM Guided Missile Launch System (GMLS) The C-17's reliability is significantly less than expected, and the system cannot meet current payload/range specifications. Also, while known problems with the wings, flaps, and slats are being fixed, other problems continue to emerge. (GAO/T-NSIAD-94-166, Apr. 19, 1994). Despite the poor operational, test, and evaluation (OT&E) results, the Air Force continued full-rate production and had acquired about 750 systems at a cost of over $570 million, as discussed in a classified GAO report. All 65 systems were produced under LRIP at a cost of $256 million, before any OT&E was conducted. Because of performance problems, most of the jammers were placed in storage and only 24 were installed on aircraft. One year later, the 24 jammers were deactivated because of poor performance. (GAO/NSIAD-90-168, July 11, 1990). Through 1993, 331 of the 514 planned units were acquired under LRIP. However, the system has encountered significant software problems, which have delayed completion of development testing by about 2 years. OT&E has not yet started. After the Air Force bought most of the total quantity of units under LRIP, tests found serious performance problems. As a result, the system was deployed with the receiver/processor inoperative due to a lack of software. Other deficiencies were also present. (GAO/NSIAD-90-168, July 11, 1990). Before the Air Force conducted OT&E, 72 test sets were procured under LRIP at a cost of $272 million. Later testing showed that the equipment would not meet requirements, and the units were put in storage. Developmental, operational, test, and evaluation (DOT&E) recommended that jammers production be stopped because of poor OT&E results. However, the system had already entered and continued full-rate production anyway. We later found that most of the 24 jammers deployed to a tactical fighter wing had been placed in storage. (GAO/NSIAD-90-168, July 11, 1990). OT&E showed that the F-14D was not sufficiently developed and lacked critical hardware and software capabilities. The program was terminated after 55 units were produced. (GAO/IMTEC-92-21, Apr. 2, 1992). (continued) One year into LRIP, OT&E found that the T-45A was not effective in a carrier environment and was not operationally suitable because of safety deficiencies. Subsequent major design changes have included a new engine, new wings, and a modified rudder. (GAO/NSIAD-91-46, Dec. 14, 1990). The Navy procured and deployed Pioneer as a nondevelopmental item and without testing it. Numerous problems ensued, including engine failures, landing difficulties, and a cumbersome recovery system. Many modifications were required to bring Pioneer up to a minimum essential level of performance. Before the Army did any OT&E, a multiyear production contract was awarded for up to 10,843 trucks. Subsequent OT&E was suspended because the vehicles were found to be unreliable and not operationally effective. However, production continues. (GAO/NSIAD-93-232, Aug. 5, 1993). OT&E showed the system to be not operationally suitable. Despite the need for design modifications to correct reliability and maintainability problems, full-rate production was approved. The following is GAO's comment on the Department of Defense's letter dated December 26, 1996. 1. Appendix IV provides examples that illustrate how buying large quantities of unproven systems during LRIP has been costly. All costs are reported in fiscal year 1996 constant dollars unless otherwise indicated. We have modified the report to recognize the fact that there may be a number of valid reasons for changing the quantities and funding for full-rate production, but if the existing requirement is still valid and everything else is equal, we believe priority should be given to buying the proven systems over the unproven. Arthur Cobb Daniel Hauser 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 Defense's (DOD) weapons acquisition procedures, focusing on: (1) DOD's practice of reducing the annual production of weapons below planned optimum rates during full-rate production; (2) the reasons for this practice; and (3) the effect of this practice on the costs and availability of weapons. GAO found that: (1) DOD has inappropriately placed a high priority on buying large numbers of untested weapons during low-rate initial production to ensure commitment to new programs and thus has had to cut by more than half its planned full production rates for many weapons that have already been tested; (2) this practice is wasteful because DOD must often modify, at high cost, the large numbers of untested weapons it has bought before they are usable and must lower annual buys of tested, proven weapons, stretching out full-rate production for years due to a lack of funds; (3) GAO has repeatedly reported on DOD's practice of procuring substantial inventories of unsatisfactory weapons requiring costly modifications to achieve satisfactory performance and, in some cases, deployment of substandard weapons to combat forces; (4) GAO found the practice of reducing planned full production rates to be widespread; (5) primarily because of funding limitations, DOD has reduced the annual full-rate production for 17 of the 22 proven weapons reviewed, stretching out the completion of the weapons' production an average of 8 years longer than planned; (6) according to DOD's records, if these weapons were produced at their originally planned rates and respective cost estimates, the quantities produced as of the end of fiscal year 1996 would have cost nearly $10 billion less; (7) at the same time, DOD is funding increased annual quantities of weapons in low-rate production that often are in excess of what is needed to perform operational tests and establish the production base; (8) if DOD bought untested weapons during low-rate initial production at minimum rates, more funds would be available to buy other proven weapons in full-rate production at more efficient rates and at lower costs; and (9) this would reduce costly modifications to fix substandard weapons bought in low-rate production and allow full-rate production of weapons with demonstrated performance to be completed and deployed to combat forces earlier.

The FBF, which is administered by GSA, is an intragovernmental revolving fund authorized and established by the Public Buildings Amendments of 1972. Beginning in 1975, the FBF replaced appropriations to GSA as the primary means of financing the operating and capital costs associated with federal space owned or managed by GSA. GSA charges federal agencies rent, and the receipts from the rent are deposited in the FBF. Congress exercises control over the FBF through the appropriations process that sets annual limits on how much of the fund can be expended for various activities. In addition, Congress may appropriate additional amounts for the FBF. The FBF operates as follows. Initially, as part of the President's budget preparation process, GSA estimates the rental revenue the FBF is expected to receive. The rent estimate is prepared about 18 months in advance of the fiscal year. Through the appropriation process, Congress establishes annual limits on how much of the fund can be expended for various activities. As revenues are received, they are deposited into the FBF, and, subsequently, GSA is to fund various projects and programs within the limits set by Congress. Descriptions for some of these budget activities are shown in table 1. Our first objective was to verify, to the extent practical, the amounts GSA attributed to the individual reasons for overestimation of the FBF rental revenue projections for fiscal years 1996, 1997, and 1998. To do this, we developed an understanding of the rental revenue estimation process that PBS used. We (l) discussed with PBS program officials and staff the basic steps involved in the process used for fiscal years 1996 through 1999; and (2) reviewed studies of the process done by an internal PBS review team, two consulting firms, and GSA's Inspector General. Further, we examined documents that supplied supporting details, such as a PBS listing of buildings associated with a particular reason, and we discussed each reason for the overestimation and the amount attributed to it with PBS program officials and staff. Our second objective was to determine whether PBS' corrective actions appeared to address GSA's identified reasons for the overestimation. We also determined if the corrective actions addressed the weaknesses in the estimation process that we and others identified. To do this, we interviewed PBS officials and staff, reviewed documentation associated with the actions, and observed the operation of a new management information system PBS is developing to help it estimate rental revenues, among other things. On the basis of our knowledge of the estimation system and the proposed or actual corrective actions to the system, we determined whether the corrective actions appeared to address GSA's identified reasons for the overestimation and other identified weaknesses. Our third objective was to determine the budgetary impact of the overestimation on projects and programs in the FBF. To accomplish this, we developed an understanding of the process by which PBS identified sources of obligational authority that had the potential for inclusion in the fiscal year 1997 obligational reserve. Specifically, through interviews with PBS officials and review of documentation they maintained about the process, we developed an understanding of how PBS became aware of the magnitude of the overestimation problem--$680.5 million--and the action those officials took to identify specific sources of obligational authority. We reviewed the process that PBS used to identify unobligated balances that could be included in the reserve. Both new construction and modernization projects potentially could be included because such projects were experiencing delays that made it unlikely that they would need the obligational authority available in fiscal year 1997. We further developed information on how PBS officials narrowed the pool of potential new construction and repair and alteration projects to the final 11 new construction projects included in the reserve. Concerning the sources of the unobligated fiscal year 1996 balances included in the reserve, we obtained both the regional and headquarters final fiscal year 1996 allowances and the end-of-year obligated balances. However, we did not verify the data on allowances and the end-of-year obligated balances with regional officials or regional records. Finally, PBS headquarters officials provided us with the reasons they believed the unobligated balances existed. In reviewing the budgetary impact of the overestimation on projects and programs, we determined if PBS' claim that none of the new construction projects included in the reserve were delayed from awarding a construction contract because they were included in the reserve. We did so by discussing the projects with PBS headquarters and regional officials as well as staff of the Administrative Office of the United States Courts (AOUSC) to obtain general background information on the projects and the dates and reasons given for schedule delays. We did not do a detailed review of the project files or the history of the projects before they were included in the reserve. Also, we reviewed the GSA and OMB statements that the impact of the funding problem on the FBF would be eliminated by the end of fiscal year 1998. We verified that GSA had proposed a fiscal year 1998 program of new construction and modernization projects and that GSA's fiscal year 1998 appropriation did not provide obligational authority for that program. We discussed the impact of the deletion of funding for new construction projects with AOUSC officials to identify the impact on the courts' immediate and long-range construction programs because the courts' projects constituted the bulk of PBS' proposed $594.5 million in fiscal year 1998 funding for new construction. We did not attempt to estimate the dollar impact on specific projects as a result of lack of fiscal year 1998 funding because GSA's proposed program of projects may have been altered by OMB and congressional reviews prior to obligational authority being provided in GSA's appropriation law. We did our work primarily at GSA headquarters in Washington, D.C., between July 1997 and June 1998, in accordance with generally accepted government auditing standards. On July 30, 1998, we requested comments on a draft of this report from GSA's Administrator. GSA's comments are discussed at the end of this report. Beginning with fiscal year 1994 and continuing through fiscal year 1997, PBS' actual annual rental revenues were less than the estimated rent revenue PBS projected for budget and appropriation purposes. PBS, in fiscal year 1997 and 1998, took two actions to deal with the overestimation. First, PBS refrained from using about $680.5 million in obligational authority that Congress had previously provided. Second, PBS reduced operating expenses by deferring planned expenditures until later years. It also took steps to address the weaknesses that were identified in the process used to estimate rental revenues for the budget. Figure 1 shows FBF's estimated and actual income for fiscal years 1990 through 1997. The FBF's actual rent revenue has grown from about $2.5 billion in fiscal year 1987 to about $4.8 billion in fiscal year 1997. GSA's historical trends of estimated rental revenue versus actual rental revenue show that actual rental revenues were less than estimated rental revenues for each of fiscal years 1994 through 1997, by amounts ranging from about $110.7 million, or 2.4 percent of the estimate in fiscal year 1995, to about $422.1 million, or 8.2 percent of the estimate in fiscal year 1996. For fiscal years 1994 and 1995, PBS' overestimation of rental revenue was a combined total of $308.1 million. According to its Chief Financial Officer in fiscal years 1994 and 1995, PBS absorbed the overestimation by reducing planned expenditures and using unobligated carryover balances without the need for congressional action. In January 1997, PBS informed Congress that it expected its total overestimation of rental revenue for fiscal years 1996 and 1997 to be $847 million. As shown in table 2, PBS identified seven reasons for the overestimation and linked specific dollar amounts to each reason. In July 1997, PBS increased the overestimation figure for fiscal year 1997 by $86.8 million and reported a potential overestimation in fiscal year 1998 of about $109.2 million. As a result, the total anticipated overestimation for fiscal years 1996 through 1998 was about $1.04 billion. However, after it closed its fiscal year 1997 books, PBS reported the actual budget impact of its overestimation to be $634.4 million for fiscal years 1996 and 1997 and reduced its fiscal year 1998 overestimation to $28.3 million. In our March 1998 testimony on PBS' overestimation of the FBF rental revenue projections, we reported that PBS provided documentation supporting the amount of the overestimation for six of the seven reasons shown in table 2. Although we examined the documentation PBS provided to explain its overestimation, we did not trace all the data compiled by PBS back to the original source documents. PBS could not provide documentation showing how it developed the $86 million attributed to the reason that the original fiscal year 1995 rent revenue estimate was higher than actual fiscal year 1995 revenues. We also reported in our testimony that during the course of our work, we determined that weaknesses in PBS' estimation process contributed to the rental income overestimation. Through discussions with PBS staff and review of studies done by (l) the firms of Ernst and Young and Arthur Andersen--consultants hired by PBS, (2) the GSA Inspector General, and (3) the Rent Revenue Forecasting GO Team--an internal GSA review team established to look at PBS' rental revenue estimation process--we identified several weaknesses in the process for estimating rental revenues. These weaknesses included the following: lack of documented policy and procedures for the estimating process; unclear lines of responsibility and accountability for revenue estimates below the level of the PBS Commissioner; lack of supporting documentation necessary to verify forecast information and assumptions; and use of national averages, rather than project-specific data, to forecast occupancy schedules and rental rates. Finally, we reported that GSA was aware of the identified weaknesses in its revenue estimation process and had corrective actions to improve this process either already under way or planned. These corrective actions included the following: Documentation is to be required for all decisions, assumptions, and steps involved in the rental revenue estimation process. The Office of Financial and Information Systems, with overall responsibility for the rental revenue forecasting process, was established. Project-specific data is to be used in occupancy schedules and rental rates instead of national averages. A new information system is being implemented to manage, track, and access data, with plans for a revenue forecasting module to be added to the system. We concluded that it appeared that the actions PBS had under way and planned to improve the process it uses to estimate rental revenue address the weaknesses that we and others had identified. If effectively implemented, these actions should help improve future revenue estimates. However, as PBS points out, because its rental revenue estimate is a forecast, it is unlikely to produce a figure that is identical to actual rental revenue. Although some variance is to be expected in any estimating process, variances that go beyond a certain level can be indicative of estimating problems that need to be addressed. In this regard we stated in our testimony that PBS had not established an acceptable margin of error against which it could measure the success of its estimation process. We said that having such a benchmark would put PBS in a better position to identify variances that need to be investigated so that it can explore and fix the causes of excessive variances, improve its estimation process, and determine its effectiveness over time. We recommended that the PBS Commissioner establish an acceptable margin of error for its rental revenue estimates, as well as a process for exploring and resolving causes of variances outside the margin adopted. In a letter dated June 11, 1998, the GSA Administrator notified us that PBS had established 2 percent as a reasonable margin of error and is developing a reconciliation process. Considering the need to prepare estimates 18 months in advance and the steps involved in the estimating process, such as identifying revenue changes for each building, 2 percent does not seem to be an unreasonable margin of error. In late spring 1996, PBS identified a potential revenue gap for fiscal years 1996 and 1997. During fiscal year 1997, PBS officials acted to address the FBF overestimation problem by preventing the use of the FBF obligational authority that could not be met from the FBF resources. PBS determined the size of the obligational authority that was in excess of the FBF resources using both actual fiscal year 1996 operating data and estimates for fiscal year 1997 (see table 3). To address the $680.5 million in obligational authority in excess of available resources, PBS officials created an obligational reserve at the beginning of fiscal year 1997. The intent of the reserve was to ensure that available obligational authority would not be used until revenue was available to cover those obligations. The reserve was composed of funds from the four FBF budget activities, as shown in table 4. To identify sources of obligational authority that could potentially be included in the reserve, PBS officials told us that they initially identified the FBF activities that had unobligated balances at the close of fiscal year 1996. As a result of those efforts, PBS officials identified and included in the reserve $176 million. To identify the additional $504.5 million needed for the reserve, in October and November 1996, PBS officials analyzed the FBF new construction and acquisition, and repair and alteration budget activities. They identified 11 new construction projects, with $591.6 million in unobligated funds, for inclusion in the reserve. Details of the sources of the funds included in the reserve are discussed below. To fund development of some facilities, PBS initially borrows the required funds and subsequently makes regular payments to the lender. The FBF spending authority that funds these annual payments is the installment acquisition payment budget activity. In fiscal years 1996 and 1997, the new obligation authority appropriated for this budget activity amounted to about $182 million and $173 million, respectively. PBS officials told us that when they initially reviewed the various FBF budget activities for available fiscal year 1996 unobligated balances, the installment acquisition payment budget activity had an unobligated balance of about $12 million. We discussed the reasons for this unobligated balance with PBS officials who told us that it was partially a result of lower interest rates for short-term construction loans on projects and for the long-term 30-year notes on the facilities. In addition, they told us that total interest needs were lower than they had budgeted for because the projects had been slower to use borrowed funds. They said that their estimates of both interest rates and the rate at which funds would be needed by projects had projected higher interest costs than actually were incurred. Therefore, the budget activity had closed the fiscal year with an unobligated balance. The PBS officials told us that the $12 million pertained to transactions involving the following nine lease-purchase projects. Foley Square, New York; Woodlawn, Maryland, Health Care Financing Administration; Chamblee, Georgia, Centers for Disease Control Offices; Memphis, Tennessee, Internal Revenue Service; Atlanta, Georgia, Centers for Disease Control; Miami, Florida, Federal Building; Chicago, Illinois, Federal Building; Oakland, California, Federal Building; and District of Columbia, Ronald Reagan Federal Building and International Trade Center. They told us that without a detailed funding analysis of each project, including the funding used versus what was budgeted and the interest rate incurred versus what was budgeted, they could not assign portions of the unobligated balance to each project. PBS officials told us that when they initially reviewed the various FBF budget activities for unobligated balances at the end of fiscal year 1996, the rental of space budget activity had an unobligated balance of about $71 million, an accumulation of fiscal years 1995 and 1996 unobligated balances. They said $68 million of the $71 million would be used as part of the reserve. PBS officials told us that having an unobligated balance in a budget activity is not unusual because regional offices do not have to obligate the entire allowance they receive. Regarding the specific reasons why the rental of space budget activity had an unobligated balance at the close of fiscal year 1996, PBS officials cited incorrect estimates of when leases would start to incur obligations so that lease payments were lower than anticipated. Another reason provided by PBS officials involved the number of lease cancellations. They said there were more cancellations than PBS had budgeted, which resulted in lower obligations. However, they were not able to provide specific dollar amounts by lease. Rather, PBS officials provided us with a breakdown of the fiscal year 1996 regional allowances and unobligated balances (see table 5). PBS staff advised us that although the actual figure, about $71 million, was a little higher than the $68 million included in the reserve, their plan at the time the reserve was established was to include only $68 million in the reserve. However, events during fiscal year 1997 precluded using most of the $68 million for funding of the reserve. In particular, in August 1997, PBS sought congressional approval to transfer about $110 million in funds within the FBF budget activities to meet needs it considered crucial for rental of space. In September 1997, congressional committees approved the transfer request but directed that PBS use $54 million in fiscal year 1996 unobligated balances, which was part of the reserve, to fund part of the transfer. PBS officials told us that the $54 million was used in fiscal year 1997, and additional unobligated construction and acquisition of facilities budget activity funds were used to replace the $54 million in the reserve to maintain full funding of the $680.5 million reserve. PBS funds the operations of government-owned and -leased facilities and pays other government agencies for building operations performed by them in GSA-controlled facilities through the building operations budget activity. Functions budgeted from this activity include cleaning services, utilities, and protection services for facilities. PBS officials told us that when they reviewed the budget activities at the close of fiscal year 1996, the building operations activity had an unobligated balance of about $51 million. This was combined with $45 million in unapportioned fiscal year 1997 funds for a total unobligated balance in the building operations budget activity of $96 million. The officials explained that on a fiscal year basis, a portion of the overall appropriation available for regional building operations is divided into initial allowances against which regions plan and operate their programs. During a fiscal year, according to PBS officials, the initial allowance may be revised to reflect unforeseen needs. These adjustments are funded from money held back by PBS headquarters when the initial allowances are given to the regions. PBS officials told us that the existence of an unobligated balance in a budget activity at the close of a fiscal year is not unusual because regional offices do not have to obligate the entire allowance they receive. At the end of fiscal year 1996, building operations' unobligated balance was about $51 million. According to a PBS document, the balances were associated with delays in moves, deferred equipment purchases, delays in contract awards, delays in new workload coming on line, and savings achieved through cost-containment measures. This amount, along with $45 million in unapportioned fiscal year 1997 funds, created an unobligated balance of $96 million in the building operations budget activity. Table 6 presents the unobligated balance on a region-by-region basis. According to PBS staff, the FBF's construction and acquisition of facilities budget activity involves large unobligated balances from year to year; and thus, this budget activity became the focus of planners for funding the balance of the $680.5 million obligational reserve. According to PBS officials, early in fiscal year 1997 they were looking to identify about $504.5 million in obligational authority to complete the reserve. Initially, PBS officials considered both the construction and the modernization programs in developing a list of potential projects for funding the reserve. They evaluated individual projects using the following three criteria. Project had not proceeded to construction contract award. Obligational authority for the project had not been allotted to a regional office for obligation. Both regional and headquarters officials believed the project would not meet a planned fiscal year 1997 construction contract award schedule. As a result of their analysis, PBS officials developed a list of new construction and modernization projects with obligational authority totaling about $1.5 billion. Recognizing that the list of potential projects resulted in obligational authority in excess of the $504.5 million required, PBS officials told us that the decision was made to exclude modernization projects from the reserve and to focus solely on new construction projects. PBS officials pointed out that this decision provided enough funding for PBS' priority of maintaining the buildings already in the inventory. Table 7 lists the new construction projects from which obligational authority was reserved, showing the project location, the amount of the full appropriation, and the amount available for reserve. PBS officials told us that the obligational authority reserved, $591.63 million, represented their thinking of the funding necessary to meet the $680.5 million before they knew how much would be available in end of the fiscal year unobligated carryover funds from other budget activities. PBS officials told us that, as of November 1996, it was their opinion that each of the 11 projects listed above had a probability of experiencing a schedule slippage that would move the planned construction contract award date beyond fiscal year 1997. Therefore, they felt that reserving the obligational authority of these projects would not delay their overall progress. Our discussions with PBS officials, both in headquarters and the regional offices, and with officials of AOUSC confirmed that with one exception, discussed below, the schedule slippage on each project was sufficient to delay the construction contract award past the close of fiscal year 1997. In the one instance where the delay was solely because the project's funding was moved to the reserve--the Las Vegas, Nevada, courthouse--the delay of the construction contract award was about 3 weeks, from September 26 to October 16, 1997. The GSA Project Manager told us that the delay did not affect the construction award amount because the contractor agreed to a contract at the price he bid in September 1997. The scheduled construction contract award dates at the time each project was identified for possible inclusion in the reserve, the current construction contract award dates as of the spring of 1998, and reasons for the delays are presented in table 8. Congress provided new obligational authority for the projects and programs in the $680.5 million reserve for fiscal year 1998. Therefore, the FBF revenues received in fiscal year 1998 are now available to be obligated for the budget activities used to create the $680.5 million reserve in fiscal year 1997. OMB and PBS officials have stated that the actions taken through the fiscal year 1998 budget will eliminate the impact of the rent estimating problem on the FBF. However, as noted below, elimination of funding for new construction and modernization and reduced funding for building operations and basic building repair and alteration for fiscal year 1998 could have adverse effects on the FBF. In September 1996, GSA submitted proposed new construction and modernization programs for fiscal year 1998 to OMB totaling about $1.4 billion. However, according to GSA officials, OMB budget decisions required that $680.5 million of fiscal year 1998 budget authority be used to offset the funds reserved in fiscal year 1997 so that previously funded projects could proceed. Congress appropriated no fiscal year 1998 funding for new construction or modernization. In addition, in discussing the impact of the fiscal year 1998 budget decision, a GSA official, in responding to a question during an April 24, 1997, congressional hearing, stated "Absent direct appropriations and with the requirement to earmark $680 million in FY 98 Federal Building Fund budget authority to prior year capital projects, GSA will operate below prudent funding levels for building operations and repair and alterations for FY 98." It is not clear how many, if any, of the proposed new construction or modernization projects would have been included in the President's budget or funded by Congress in fiscal year 1998 had it not been for the overestimation problem. However, to the extent the overestimation problem resulted in lack of funding for new projects and these proposed projects are funded in the future, the government could experience cost changes. For example, additional costs could occur from price changes in the future, which could, of course, vary depending upon general and local economic and construction industry conditions. In addition, delays in basic repair and alteration work could also result in additional future cost to the extent prices for these services increase in the future and to the extent delays cause further deterioration. The maintenance of government-owned assets has been a long-standing concern. In 1993, the U.S. Advisory Commission on Intergovernmental Relations reported that maintenance often does not receive adequate attention, especially in times of tight budgets, and that deferring maintenance can result in poor-quality facilities, reduced public safety, higher subsequent repair cost, and poor service to the public. As we stated in our testimony on March 5, 1998, the actions PBS has under way and planned to improve its rental revenue estimation process address the weaknesses that we and others have identified and, if effectively implemented, these actions should help improve future revenue estimates. The actions taken by PBS to establish an obligational reserve to prevent the overobligation of the FBF revenue did not delay 10 of the 11 new construction projects included in the reserve. The construction contract award amount for one project, which was delayed for about 3 weeks, was not affected by the delay. Finally, although both OMB and PBS have stated that the impact of the FBF funding problem will be resolved by the end of fiscal year 1998, we believe that it could affect the FBF obligational authority beyond fiscal year 1998. We did not quantify the possible obligational impact; however, the delay in construction and modernization projects could result in price changes in the future, which could vary depending upon general and local economic and construction industry conditions. In addition, deferred maintenance could result in increased future cost. On July 30, 1998, we requested comments on a draft of this report from the Administrator, GSA. On August 6, 1998, we received oral comments from the Chief Financial Officer, Public Buildings Service, and other PBS staff. These officials generally agreed with the information in the report. We are sending copies of this report to the Ranking Minority Member of your Subcommittee; the Chairmen and the Ranking Minority Members of the Senate Committee on Environment and Public Works and the House Committee on Transportation and Infrastructure; and the Administrator of GSA. Copies will be made available to others upon request. Major contributors to this report are Ronald King, Assistant Director; Thomas Johnson Evaluator-in-Charge; Thomas Keightley, Evaluator-in-Charge; and Hazel Bailey, Communications Analyst. If you have any questions about the report, please call me on (202) 512-8387. Bernard L. Ungar Director, Government Business Operations 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. 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Pursuant to a congressional request, GAO reviewed the General Services Administration's (GSA) actions in responding to and managing the recent funding problems experienced by its Federal Buildings Fund (FBF), focusing on: (1) verifying, to the extent practical, the amounts GSA attributed to each reason for overstimation of the FBF rental revenue projections for fiscal years 1996, 1997, and 1998; (2) whether the Public Buildings Service's corrective actions appeared to address GSA's identified reasons for the overestimation; and (3) budgetary impact of the overestimation on projects and programs in the FBF. GAO noted that: (1) GSA informed Congress that it expected the total overestimation of rental revenue for fiscal years 1996 and 1997 to be $847 million; (2) GAO verified, to the extent practical given available support, six of GSA's identified seven reasons for the overestimation and the linkage of specific dollar amounts of the overestimation to each of the six reasons; (3) GSA was unable to provide documentation showing how it developed the $86 million it attributed to the remaining reason--the fiscal year (FY) 1995 rent revenue estimate being higher than actual revenues; (4) GAO and others identified several weaknesses in GSA's rental revenue estimation process, such as the lack of documented policy and procedures for the rental revenue estimation process and the lack of supporting documentation necessary to verify forecast information and assumptions; (5) GSA has taken or plans to take corrective actions that, if effectively implemented, should help improve future rental revenue estimates; (6) for FY 1997, GSA took action to prevent the overobligation of FBF revenue by creating a reserve to ensure that obligational authority totalling $680.5 million would not be used until revenue was available to cover those obligations; (7) this action had the potential to affect the projects and programs from which obligational authority was withheld; (8) recent statements by GSA and Office of Management and Budget officials indicated that the impact of the rent estimating problem on the FBF will be resolved by actions taken through the FY 1998 budget; (9) although the $680.5 million appropriated in FY 1998 replenishes the $680.5 million to prior projects, GAO does not believe it necessarily mitigates the effects of not funding GSA's proposed FY 1998 program of new construction and modernization work; (10) GSA has stated that the overestimation problem contributed to a reduction in funding for building operations and basic building repair and alteration; and (11) this reduction could also result in changes in future costs for the same reasons previously mentioned as well as increased repair costs due to more extensive deterioration over time.

We identified 34 areas where agencies, offices, or initiatives may have similar or overlapping objectives or may provide similar services to the same populations; or where government missions are fragmented across multiple agencies or programs (see table 1). Overlap and fragmentation among government programs or activities can be harbingers of unnecessary duplication. The areas identified below are not intended to represent the full universe of duplication, overlap, or fragmentation within the federal government. Our future work will examine other areas of government for potential duplication, overlap, and fragmentation. As table 1 shows, many of the issues we identified are focused on activities that are contained within single departments or agencies. In those cases, agency officials can generally achieve cost savings or other benefits by implementing existing GAO recommendations or by undertaking new actions suggested in our March 1 report. However, a number of issues we have identified span multiple organizations and therefore may require higher-level attention by the executive branch or enhanced congressional oversight or legislative action. For example: Teacher quality programs: In fiscal year 2009, the federal government spent over $4 billion specifically to improve the quality of our nation's 3 million teachers through numerous programs across the government. We identified 82 distinct programs designed to help improve teacher quality, either as a primary purpose or as an allowable activity, administered across 10 federal agencies. The proliferation of programs has resulted in fragmentation that can frustrate agency efforts to administer programs in a comprehensive manner, limit the ability to determine which programs are most cost effective, and ultimately increase program costs. In 2009, we recommended that the Secretary of Education work with other agencies as appropriate to develop a coordinated approach for routinely and systematically sharing information that can assist federal programs, states, and local providers in achieving efficient service delivery. The Department of Education has established working groups to help develop more effective collaboration across Education offices, and has reached out to other agencies to develop a framework for sharing information on some teacher quality activities, but it has noted that coordination efforts do not always prove useful and cannot fully eliminate barriers to program alignment, such as programs with differing definitions for similar populations of grantees, which create an impediment to coordination. Congress could help eliminate some barriers through legislation, particularly through the pending reauthorization of the Elementary and Secondary Education Act of 1965 and other key education bills. Specifically, to minimize any wasteful fragmentation and overlap among teacher quality programs, Congress may choose either to eliminate programs that are too small to evaluate cost effectively or to combine programs serving similar target groups into a larger program. Education has already proposed combining 38 programs into 11 programs in its reauthorization proposal, which could allow the agency to dedicate a higher portion of its administrative resources to monitoring programs for results and providing technical assistance. Military health system: The responsibilities and authorities for the Department of Defense's (DOD) military health system are distributed among several organizations within DOD with no central command authority or single entity accountable for minimizing costs and achieving efficiencies. Under the military health system's current command structure, the Office of the Assistant Secretary of Defense for Health Affairs, the Army, the Navy, and the Air Force each has its own headquarters and associated support functions. Annual military health system costs have more than doubled from $19 billion in fiscal year 2001 to $49 billion in 2010 and are expected to increase to over $62 billion by 2015. DOD has made varying levels of progress in implementing limited actions to consolidate certain common administrative, management, and clinical functions. However, to reduce duplication in its command structure and eliminate redundant processes that add to growing defense health care costs, DOD could take action to further assess alternatives for restructuring the governance structure of the military health system. A May 2006 report by the Center for Naval Analyses showed that if DOD and the services had chosen to implement one of the three larger-scale alternative concepts studied by DOD, the department could have achieved significant savings. Our adjustment of those projected savings into 2010 dollars indicates those savings could range from $281 million to $460 million annually depending on the alternative chosen and numbers of military, civilian, and contractor positions eliminated. DOD officials said that they generally agreed with the facts and findings in our analysis. Federal data centers: According to the Office of Management and Budget (OMB), the number of federal data centers grew from 432 in 1998 to more than 2,000 in 2010. These data centers often house similar types of equipment and provide similar processing and storage capabilities, raising concerns about the provision of redundant capabilities, the underutilization of resources, and the significant consumption of energy. While the total annual federal spending associated with data centers has not yet been determined, the Federal Chief Information Officer has found that operating data centers is a significant cost to the federal government, including hardware, software, real estate, and cooling costs. For example, according to the Environmental Protection Agency, the electricity cost to operate federal servers and data centers across the government is about $450 million annually. In February 2010, OMB launched the Federal Data Center Consolidation Initiative to guide federal agencies in developing and implementing data center consolidation plans. As part of this initiative, OMB directed federal agencies to prepare an inventory of their data center assets and a plan for consolidating these assets by August 30, 2010, and to begin implementing them in fiscal year 2011. Moving forward, it will be important for individual agencies to move quickly to correct any missing items in their data center consolidation plans, establish sound baselines so that progress and efficiencies can be measured, begin their consolidation efforts, track their progress, and report to OMB on their progress over time. Sustained monitoring by Congress could help ensure progress is realized. DOD and VA electronic heath record systems: Although DOD and the Department of Veterans Affairs (VA) have many common health care business needs, the departments have separate efforts to modernize their electronic health record systems. Specifically, DOD has obligated approximately $2 billion over the 13-year life of its Armed Forces Health Longitudinal Technology Application and requested $302 million in fiscal 2011 year funds for a new system. For its part, VA reported spending almost $600 million from 2001 to 2007 on eight projects as part of its Veterans Health Information Systems and Technology Architecture modernization. In April 2008, VA estimated an $11 billion total cost to complete the modernization by 2018. Efforts by the departments to jointly identify and develop common information technology solutions to address their mutual health care needs could result in system development and operation cost savings while supporting higher-quality health care for service members and veterans. We identified several actions that DOD and VA could take to overcome barriers they face in modernizing their electronic health record systems, including revising the departments' joint strategic plans and defining and implementing a process for identifying and selecting joint information technology investments. Officials from both DOD and VA agreed with these recommendations. Domestic ethanol production: Congress supported domestic ethanol production through a $5.4 billion tax credit program in 2010 and through a renewable fuel standard that applies to transportation fuels used in the United States. The ethanol tax credit and the renewable fuel standard can be duplicative in stimulating domestic production and use of ethanol, and can result in substantial loss of revenue to the Treasury. The ethanol tax credit was recently extended at 45 cents per gallon through December 31, 2011. The tax credit will cost $5.7 billion in forgone revenues in 2011. Because the fuel standard allows increasing annual amounts of conventional biofuels through 2015, which ensures a market for a conventional corn starch ethanol industry that is already mature, Congress may wish to consider whether revisions to the ethanol tax credit are needed, such as reducing, modifying, or phasing out the tax credit. Interagency and agencywide contracts: Agencies have created numerous interagency and agencywide contracts using existing statutes, the Federal Acquisition Regulation, and agency-specific policies. With the proliferation of these contracts, however, there is a risk of unintended duplication and inefficiency. Interagency and agencywide contracting was responsible for at least $54 billion of the approximately $540 billion that was obligated governmentwide for goods and services in fiscal year 2009. However, the federal government does not have a clear, comprehensive view of whether these contracts are being utilized in an efficient and effective manner. In addition, agencies may be unaware of existing contract options that could meet their needs and may be awarding new contracts when use of an existing contract would suffice. Government contracting officials and representatives of vendors have expressed concerns about potential duplication among the interagency and agencywide contracts across government. Some vendors stated they offer similar products and services on multiple contracts and that the effort required to be on multiple contracts results in extra costs to the vendor, which they pass to the government through increased prices. Some vendors stated that the additional cost of being on multiple contracts ranged from $10,000 to $1,000,000 per contract due to increased bid and proposal and administrative costs. Requiring business case analyses for new multiagency and agencywide contracts and ensuring agencies have access to up-to-date and accurate data on the available contracts will promote the efficient use of interagency and agencywide contracting and, by reducing the costs associated with duplicate contracts, help the government better leverage its purchasing power when buying commercial goods and services. OMB reported in August 2010 that it planned to issue overarching guidance that would address the need for agencies to prepare business cases describing the need for a new multiagency or agencywide contract, the value added by its creation, and the agency's suitability to serve as an executive agent. Additionally, improvements are still needed regarding the accuracy of the federal contracts database in order to determine whether the contracts are being used in an efficient and effective manner. Continued congressional oversight of this issue is warranted. Domestic food assistance: The federal government spent more than $62.5 billion on 18 domestic food and nutrition assistance programs in fiscal year 2008. Programs' spending ranged from $4 million for the smallest program to more than $37 billion for the largest. The Department of Agriculture's (USDA) Food and Nutrition Service oversees most of these programs--including the five largest. These programs help ensure that millions of low-income individuals have consistent, dependable access to enough food for an active, healthy life. However, we have found that some of these programs provide comparable benefits to similar or overlapping populations which can lead to inefficient use of federal funds, duplication of effort, and confusion among those seeking services. For example, individuals eligible for groceries through the Commodity Supplemental Food Program are also generally eligible for groceries through the Emergency Food Assistance Program and for targeted benefits that are redeemed in authorized stores through the largest program, the Supplemental Nutrition Assistance Program (formerly the Food Stamp Program). In addition, most of the 18 programs have specific and often complex legal requirements and administrative procedures that often require applicants who seek assistance from multiple programs to submit separate applications for each program and provide similar information which can create unnecessary work for both providers and applicants and may result in the use of more administrative resources than needed. Additionally, little is known about the effectiveness of 11 of the 18 programs because they have not been well studied. In April 2010, we recommended that USDA identify and develop methods for addressing potential inefficiencies and reducing unnecessary overlap among its smaller food assistance programs while ensuring that those who are eligible receive the assistance they need. To date, USDA has not taken action on this recommendation. One of the possible methods for reducing program inefficiencies would entail USDA broadening its efforts to simplify, streamline, or better align eligibility procedures and criteria across programs to the extent that it is permitted by law. Such efforts could result in sizable administrative cost savings since they are a large part of program costs. In addition, options such as consolidating or eliminating overlapping programs have the potential to reduce administrative costs but may not reduce spending on benefits unless fewer individuals are served as a result Employment and training programs: In fiscal year 2009, 47 federal employment and training programs spent about $18 billion to provide services, such as job search and job counseling, to program participants. Most of these programs are administered by the Departments of Labor, Education, and Health and Human Services (HHS). We found that 44 of the 47 programs overlap with at least one other program in that they provide at least one similar service to a similar population. Our review of three programs among the largest--Temporary Assistance for Needy Families (TANF), Employment Service, and Workforce Investment Act (WIA) Adult programs--found that they provide some of the same services to the same population through separate administrative structures. Although the extent to which individuals receive the same services from these programs is unknown due to limited data, these programs maintain parallel administrative structures to provide some of the same services such as job search assistance to low-income individuals. At the state level, the TANF program (which also provides a wide range of other services) is typically administered by the state human services or welfare agency, while the Employment Service and WIA Adult programs are typically administered by the state workforce agency and provided through one-stop centers. Agency officials acknowledged that greater efficiencies could be achieved in delivering services through these programs but said factors such as the number of clients that any one-stop center can serve and one-stop centers' proximity to clients, particularly in rural areas, could warrant having multiple entities provide the same services. Colocating services and consolidating administrative structures may increase efficiencies and reduce costs, but implementation can be challenging. Some states have colocated TANF employment and training services in one-stop centers where Employment Service and WIA Adult services are provided. Three states--Florida, Texas, and Utah--have gone a step further by consolidating the agencies that administer these programs, and state officials said this reduced costs and improved services, but they could not provide a dollar figure for cost savings. States and localities may face challenges to colocating services, such as limited office space. In addition, consolidating administrative structures may be time consuming and any cost savings may not be immediately realized. To facilitate further progress by states and localities in increasing administrative efficiencies in employment and training programs, we recommended in 2011 that the Secretaries of Labor and HHS work together to develop and disseminate information that could inform such efforts. As part of this effort, Labor and HHS should examine the incentives for states and localities to undertake such initiatives, and, as warranted, identify options for increasing such incentives. Labor and HHS agreed they should develop and disseminate this information. HHS noted that it lacks legal authority to mandate increased TANF-WIA coordination or create incentives for such efforts. Sustained oversight by Congress could help ensure progress is realized. Given today's fiscal environment, our work summarizes 47 additional areas--beyond those directly related to duplication, overlap, or fragmentation--describing other opportunities for agencies or Congress to consider taking action that could either reduce the cost of government operations or enhance revenue collections for the Treasury. These cost- saving and revenue-enhancing opportunities also span a wide range of federal government agencies and mission areas (see table 2). Examples of opportunities for agencies or Congress to consider taking action that could either reduce the cost of government operations or enhance revenue collections include: DOD spare parts: We have identified weaknesses in DOD's inventory management practices, including problems in accurately forecasting demand for spare parts. Most recently, we reviewed the Defense Logistics Agency inventory levels and reported in 2010 that the Agency, over a period of 3 fiscal years, averaged $1 billion of inventory annually that has been identified as excess. Since our work has consistently shown that the greatest opportunities to minimize investment in unneeded inventory are at the initial stages of the inventory management process when acquisition decisions are being made, DOD could limit future costs by focusing its efforts on better managing on-order inventory, with a view toward reducing on-order inventory levels that are not needed for current needs or projected demand. Recently, Congress required DOD to submit a comprehensive plan for improving the inventory management systems of the military departments and the Defense Logistics Agency, with the objective of reducing the acquisition and storage of inventory that is excess to requirements. In November 2010, DOD submitted its plan to Congress and stated in its plan that it has already reduced unneeded inventory and that further reductions are possible. For example, DOD reported that $10.3 billion (11 percent) of its secondary inventory has been designated as excess and categorized for potential reuse or disposal. While DOD's plan is an important step in improving inventory management practices, successful implementation will be challenging and will require sustained oversight by DOD as well as collaboration among the services and the Defense Logistics Agency. Continued congressional attention is warranted. Corrosion: DOD estimates that corrosion costs the department over $23 billion each year. Corrosion--which can take such varied forms as rusting; pitting; calcium or other mineral buildup; degradation from exposure to ultraviolet light; and mold, mildew, and other organic decay--if left unchecked, can degrade the readiness and safety of equipment and facilities and can result in substantial, sometimes avoidable costs. The Defense Science Board Task Force estimated in a 2004 report that 30 percent of corrosion costs could be avoided through proper investment in prevention and mitigation of corrosion during design, manufacture, and sustainment. According to DOD, increased corrosion prevention and control efforts are needed to adequately address the wide-ranging and expensive effects of corrosion on equipment and infrastructure. However, DOD did not fund about one-third of acceptable corrosion projects for fiscal years 2005 through 2010. If the projects accepted by DOD's Office of Corrosion Policy and Oversight from fiscal years 2005 through 2010 had been fully funded, DOD potentially could have avoided $3.6 billion in corrosion-related costs-- assuming those projects achieved the same level of cost-effectiveness as was estimated for all accepted projects in those years. If the Corrosion Office wishes to convince DOD and congressional decision makers that more fully funding its corrosion prevention programs could provide such a significant return on investment, the Corrosion Office needs to complete the validation of return on investment estimates in order to demonstrate the costs and benefits of its corrosion prevention and control projects. Noncompetitive contracts: Federal agencies generally are required to award contracts competitively, but a substantial amount of federal money is being obligated on noncompetitive contracts annually. Federal agencies obligated approximately $170 billion on noncompetitive contracts in fiscal year 2009 alone. While there has been some fluctuation over the years, the percentage of obligations under noncompetitive contracts recently has been in the range of 31 percent to over 35 percent. Although some agency decisions to forego competition may be justified, we found that when federal agencies decide to open their contracts to competition, they frequently realize savings. For example, the Department of State (State) awarded a noncompetitive contract for installation and maintenance of technical security equipment at U.S. embassies in 2003. In response to our recommendation, State subsequently competed this requirement, and in 2007 it awarded contracts to four small businesses for a total savings of over $218 million. In another case, we found in 2006 that the Army had awarded noncompetitive contracts for security guards, but later spent 25 percent less for the same services when the contracts were competed. In July 2009, OMB called for agencies to reduce obligations under new contract actions that are awarded using high-risk contracting authorities by 10 percent in fiscal year 2010. These high-risk contracts include those that are awarded noncompetitively and those that are structured as competitive but for which only one offer is received. While sufficient data are not yet available to determine whether OMB's goal was met, we are currently reviewing the agencies' savings plans to identify steps taken toward that goal, and will continue to monitor the progress agencies make toward achieving this and any subsequent goals set by OMB. Undisbursed grant balances: Past audits of federal agencies by GAO and Inspectors General, as well as agencies' annual performance reports, have suggested grant management challenges, including failure to conduct grant closeouts and undisbursed balances, are a long-standing problem. In August 2008, we reported that during calendar year 2006, about $1 billion in undisbursed funding remained in expired grant accounts in HHS's Payment Management System--the largest civilian grant payment system, which multiple agencies use. In August 2008, we recommended that OMB instruct all executive departments and independent agencies to track undisbursed balances in expired grant accounts and report on the resolution of this funding in their annual performance plan and Performance and Accountability Reports. As of January 13, 2011, OMB had not issued governmentwide guidance regarding undisbursed balances in expired grant accounts. Social Security offsets: Social Security covers about 96 percent of all U.S. workers; the vast majority of the remaining 4 percent are public employees who work for federal, state, and local government. Although these workers do not pay Social Security taxes on their noncovered government earnings, they may still be eligible for Social Security benefits through their spouses' or their own earnings from other jobs that Social Security does cover. Two Social Security provisions--the Government Pension Offset, which generally applies to spouse and survivor benefits, and the Windfall Elimination Provision, which applies to retired worker benefits-- attempt to take noncovered employment into account when calculating the Social Security benefits. However, these provisions have been difficult to administer because the Social Security Administration (SSA) does not have the pension data it needs to perform these calculations accurately. In April 1998, we recommended that SSA work with the Internal Revenue Service (IRS) to revise the reporting of pension information on IRS Form 1099R, so that SSA would be able to identify people receiving a pension from noncovered employment, especially in state and local governments. However, IRS did not believe it could make the recommended change without new legislative authority. Extending mandatory Social Security coverage for all state and local workers has been proposed among other options for addressing Social Security's long-term financial deficit. While this would eventually make the Government Pension Offset and Windfall Elimination Provision offsets obsolete, they would still be needed for many years to come for existing employees and beneficiaries, and we continue to believe that it is important to apply these laws consistently and equitably. Hence, we have suggested that Congress consider giving IRS the authority to collect the information that SSA needs on government pension income to administer the Government Pension Offset and Windfall Elimination Provision requirements accurately and fairly. The President's 2011 budget proposal contains a provision that would address the need for more complete and accurate information on noncovered state and local pensions, and it estimates savings of $2.9 billion over 10 years. The Congressional Budget Office's 2009 Budget Options, Volume 2, has a similar provision and estimates savings of $2.4 billion over 10 years. Customs fee collections: The U.S. Customs and Border Protection (CBP) collects user fees to recover certain costs incurred for processing, among other things, air and sea passengers, and various private and commercial land, sea, air, and rail carriers and shipments. These fees are deposited into the Customs User Fee Account. We discovered that CBP has a $639.4 million unobligated balance in its Customs User Fee Account as a result of excess collections from a temporary fee increase and elimination of North American Free Trade Agreement country exemptions from January 1, 1994, to September 30, 1997. Clarifying the availability of unobligated balances in CBP's Customs User Fee Account could enable Congress to revise the agency's future appropriations, thereby producing a one-time savings of up to $640 million. We first identified these unobligated balances in 2008. CBP officials stated at that time that although they formerly believed they needed additional authorization to spend these balances, it later appeared that the funds may be used as authorized by law. However, when we discussed these unobligated balances again in 2009 and 2010, CBP officials said they requested assistance from OMB to clarify the availability of these funds but OMB has not responded to their request. We believe this is an issue that Congress may wish to address since these unobligated balances have remained in CBP's Customs User Fee account for more than 10 years. Congress could clarify the purposes for which the $640 million in unobligated balances is available and take action as appropriate. Addressing the gap between taxes owed and paid: The net tax gap, which is the difference between the amount of taxes owed and the amount paid voluntarily and timely less late payments and IRS collection results, was last estimated by IRS to be $290 billion for tax year 2001. Experts believe it may be larger. Our work has identified a number of areas where IRS or Congress could take action to better collect owed revenue, including: Business nonfilers: Historically, the IRS has identified several million businesses each year that may have failed to file tax returns--more than it can thoroughly investigate. IRS has had difficulty determining if these businesses are still active and thus required to file a tax return. As a result, IRS has pursued many inactive businesses, which has not been a productive use of its resources. Recently, IRS has begun to use some third-party data such as information required about certain payments as indicators of business activity. However IRS has not used private sector data that it could obtain to verify taxpayer statements about whether a business is active and a tax return should have been filed. A number of private companies maintain business activity data, such as data on a business's gross sales and number of employees. Our analysis of Dun and Bradstreet data showed they could be used to identify business activity that IRS was not aware of. For two states, we analyzed 2007 data on the businesses that IRS initially identified as potential nonfilers but later determined were not liable to file returns. Of these, we found 7,688 businesses where IRS data indicated little or no business activity, but Dun and Bradstreet data showed business activity as measured by sales totaling $4.1 billion. In addition to other improvements in its business nonfiler program, we recommended that IRS study the feasibility and cost- effectiveness of using non-IRS, private data to verify taxpayer statements. IRS agreed with the recommendation. Electronic filing: The percentage of tax returns filed electronically has increased from 52 percent in 2005 to 71 percent in 2010. However, in 2010, IRS still processed 40 million tax returns filed on paper. Electronic filing benefits taxpayers by reducing processing errors and expediting their refunds. Increasing electronic filing would also reduce IRS's return processing costs and increase revenue by facilitating enforcement. As noted in a December 2010 GAO report, IRS estimated savings of $3.10 per return for returns filed electronically versus paper in fiscal year 2009. Our prior work has shown that IRS has three opportunities to increase electronic filing of individual income tax returns: (1) requiring tax software identification numbers would help inform research into how the pricing and attributes of different software products affect taxpayers' willingness to use software and file electronically, allowing IRS to better promote electronic filing; (2) working with taxpayers and their representatives to reduce the number of rejected electronic returns could reduce the number of frustrated taxpayers who opt to print and mail in their rejected electronic returns, leaving IRS to identify and correct any errors and process the paper returns, thereby losing the benefits of electronic filing; and (3) requiring software vendors to encode relevant information in a bar code that would be embedded on all paper returns printed from tax software and mailed would enable IRS to obtain electronic information, such as a taxpayer's Social Security number and address, from the return. While not as beneficial as electronic filing, bar coding would still provide efficiencies over data transcription and enable more information to be available electronically. Having more or all tax return information available electronically could help IRS target audits on noncompliant taxpayers, avoid burdening compliant taxpayers with unnecessary audits, make more productive use of IRS's audit resources, and--according to IRS officials--increase annual tax revenue by $175 million. Adjusting civil tax penalties: The Internal Revenue Code has over 150 civil penalties that potentially deter taxpayer noncompliance. A number of civil tax penalties have fixed dollar amounts--either a specific dollar amount, or a minimum or maximum amount--that are not indexed for inflation. Over time, the lack of indexing can decrease the real value of IRS assessments and collections significantly. We found in August 2007 that adjusting civil tax penalty fixed-dollar amounts for inflation from 2000 to 2005 would have increased IRS collections by an estimated $38 million to $61 million per year based on a limited number of penalties we reviewed. We reported that Congress may want to consider requiring IRS to periodically adjust for inflation, and round appropriately, the fixed- dollar amounts of the civil penalties to account for the decrease in real value over time and so that penalties for the same infraction are consistent over time. Although Congress has increased the amount of some fixed penalties since our report, only two penalties are to be adjusted for inflation on a periodic basis. Consequently, we continue to believe Congress should consider requiring IRS to periodically adjust all fixed penalties for inflation. Unneeded real property: Many federal agencies hold real property they do not need, including property that is excess or underutilized. Excess and underutilized properties present significant potential risks to federal agencies because they are costly to maintain. For example, in fiscal year 2009, agencies reported underutilized buildings accounted for over $1.6 billion in annual operating costs. In a June 2010 Presidential Memorandum to federal agencies, the administration established a new target of saving $3 billion through disposals and other methods by the end of fiscal year 2012; the President reiterated this goal in his 2012 budget. However, federal agencies continue to face obstacles to disposing of unneeded property, such as requirements to offer the property to other federal agencies, then to state and local governments and certain non profits at no cost. If these entities cannot use the property, agencies may also need to comply with costly historic preservation or environmental cleanup requirements before disposing of the property. Finally, community stakeholders may oppose agencies' plans for property disposal. OMB could assist agencies in meeting their property disposal target by implementing our April 2007 recommendation of developing an action plan to address key problems associated with disposing of unneeded real property, including reducing the effect of competing stakeholder interests on real property decisions. In conclusion Mr. Chairman, Ranking Member Cummings, and Members of the Committee, given the challenges noted above, careful, thoughtful actions will be needed to address many of the issues discussed in our March 1 report, particularly those involving potential duplication, overlap, and fragmentation among federal programs and activities. These are difficult issues to address because they may require agencies and Congress to re-examine within and across various mission areas the fundamental structure, operation, funding, and performance of a number of long- standing federal programs or activities with entrenched constituencies. Some of these areas are also included in our 2011 High-Risk Series update on which we testified before your committee in February 2011. Further, in January 2011, the President signed the GPRA Modernization Act of 2010, updating the almost two-decades-old Government Performance and Results Act (GPRA). Implementing provisions of the new act--such as its emphasis on establishing outcome-oriented goals covering a limited number of crosscutting policy areas--could play an important role in clarifying desired outcomes, addressing program performance spanning multiple organizations, and facilitating future actions to reduce unnecessary duplication, overlap, and fragmentation. Continued oversight by OMB and Congress will be critical to ensuring that unnecessary duplication, overlap, and fragmentation are addressed. As the nation rises to meet the current fiscal challenges, GAO will continue to assist Congress and federal agencies in identifying actions needed to reduce duplication, overlap, and fragmentation; achieve cost savings; and enhance revenues. In our future annual reports, we will look at additional federal programs and activities to identify further instances of duplication, overlap, and fragmentation as well as other opportunities to reduce the cost of government operations and increase revenues to the government. We plan to expand our work to more comprehensively examine areas where a mix of federal approaches is used, such as tax expenditures and direct spending. Likewise, we will continue to monitor developments in the areas we have already identified. Issues of duplication, overlap, and fragmentation will also be addressed in our routine audit work during the year as appropriate and summarized in our annual reports. Thank you, Mr. Chairman, Ranking Member Cummings, and Members of the Committee. This concludes my prepared statement. I would be pleased to answer any questions you may have. For further information on this testimony or our March 1 report, please contact Patricia Dalton, Chief Operating Officer, who may be reached at (202) 512-5600, or [email protected]; and Janet St. Laurent, Managing Director, Defense Capabilities and Management, who may be reached at (202) 512-4300, or [email protected]. Specific questions about individual issues may be directed to the area contact listed at the end of each area summary in the report. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. 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This testimony discusses our first annual report to Congress responding to a new statutory requirement that GAO identify federal programs, agencies, offices, and initiatives--either within departments or governmentwide--that have duplicative goals or activities. This work will inform government policymakers as they address the rapidly building fiscal pressures facing our national government. Our annual simulations of the federal government's fiscal outlook show continually increasing levels of debt that are unsustainable over time, absent changes in the federal government's current fiscal policies. Since the end of the recent recession, the gross domestic product has grown slowly and unemployment has remained at a high leveWhile the economy is still recovering and in need of careful attenwidespread agreement exists on the need to look not only at the near term but also at steps that begin to change the long-term fiscal path as soon as possible without slowing the recovery. With the passage of time, the window to address the fiscal challenge narrows and the magnitude of the required changes grows. This testimony is based on our March 1, 2011, report and addresses two key issues: (1) federal programs or functional areas where unnecessary duplication, overlap, or fragmentation exists, the actions needed to address such conditions, and the potential financial and other benefits of doing so; and (2) other opportunities for potential cost savings or enhanced revenues. The issues raised in the report were drawn from our prior and ongoing work. We identified 81 areas for consideration--34 areas of potential duplication, overlap, or fragmentation as well as 47 additional cost-saving and revenue-enhancing areas. The 81 areas span a range of federal government missions such as agriculture, defense, economic development, energy, general government, health, homeland security, international affairs, and social services. Within and across these missions, our report touches on hundreds of federal programs, affecting virtually all major federal departments and agencies. By reducing or eliminating unnecessary duplication, overlap, or fragmentation and by addressing the other cost-saving and revenue-enhancing opportunities contained in the report, the federal government could yield tens of billions of tax dollars annually and help agencies provide more efficient and effective services. However, these actions will require some difficult decisions, and sustained attention by the administration and the Congress. In some cases, there is sufficient information to estimate potential savings or other benefits if actions are taken to address individual issues. In other cases, estimates of cost savings or other benefits would depend upon what congressional and executive branch decisions were made, including how certain of our recommendations are implemented. Nevertheless, considering the amount of program dollars involved in the issues we have identified, even limited adjustments could result in significant savings. Additionally, information on program performance, the level of funding in agency budgets devoted to overlapping or fragmented programs, and the implementation costs that might be associated with program consolidations or terminations, are factors that could impact actions to be taken as well as potential savings. We identified 34 areas where agencies, offices, or initiatives may have similar or overlapping objectives or may provide similar services to the same populations; or where government missions are fragmented across multiple agencies or programs. Overlap and fragmentation among government programs or activities can be harbingers of unnecessary duplication. The areas identified below are not intended to represent the full universe of duplication, overlap, or fragmentation within the federal government. Our future work will examine other areas of government for potential duplication, overlap, and fragmentation. Given today's fiscal environment, our work summarizes 47 additional areas--beyond those directly related to duplication, overlap, or fragmentation--describing other opportunities for agencies or Congress to consider taking action that could either reduce the cost of government operations or enhance revenue collections for the Treasury. These cost-saving and revenue-enhancing opportunities also span a wide range of federal government agencies and mission areas.

The Coast Guard, which became a part of DHS on March 1, 2003, has a wide variety of both security and nonsecurity missions. (See table 1.) The Coast Guard's equipment includes 141 cutters, approximately 1,400 small patrol and rescue boats, and about 200 aircraft. Coast Guard services are provided in a variety of locations, including ports, coastal areas, the open sea, and in other waterways like the Great Lakes and the Mississippi River. The Coast Guard's installations range from small boat stations providing search and rescue and other services to marine safety offices that coordinate security and other activities in the nation's largest ports. As an organization that is also part of the armed services, the Coast Guard has both military and civilian positions. At the end of fiscal year 2002, the agency had over 42,000 full-time positions--about 36,000 military and about 6,600 civilians. The Coast Guard also has about 7,200 reservists who support the national military strategy and provide additional operational support and surge capacity during emergencies, such as natural disasters. In addition, about 36,000 volunteer auxiliary personnel assist in a wide range of activities from search and rescue to boating safety education. The events of September 11th caused the Coast Guard to direct its efforts increasingly into maritime homeland security activities, highlighted by the Coast Guard's establishing a new program area: Ports, Waterways, and Coastal Security (coastal security). Prior to September 11th, activities related to this area represented less than 10 percent of the Coast Guard's operating budget, according to Coast Guard officials. In the fiscal year 2004 budget request, coastal security represents about one-quarter of the Coast Guard's planned operating budget. Other mission areas, most notably drug interdiction, have declined substantially as a percentage of the operating budget. The emphasis the Coast Guard placed on security after September 11th has had varying effects on its level of effort among all of its missions, as measured by the extent to which multiple-mission resources (cutters, other boats, and aircraft) are used for a particular mission. The most current available data show that some security-related missions, such as migrant interdiction and coastal security, have grown significantly since September 11th. Other missions, such as search and rescue and aids to navigation remained at essentially the same levels as they were before September 11th. However, the level of effort for other missions, most notably the interdiction of illegal drugs and fisheries enforcement, is substantially below pre-September 11th levels. Missions such as coastal security, and migrant interdiction have experienced increased levels of effort. Coastal security has seen the most dramatic increase from pre-September 11th levels. (See fig. 1.) For example, it went from 2,400 resource hours during the first quarter of 1999, peaked at 91,000 hours during the first quarter of fiscal year 2002 (immediately after September 11, 2001), and most recently stood at nearly 37,000 hours for the first quarter of fiscal year 2003. In figure 1, as well as the other resource figures that follow, we have added a line developed by using linear regression techniques to show the general trend for the period. It is important to note that while such lines depict the trend in resource hours to date, they should not be taken as a prediction of future values. Other activity indicators, such as sea marshal boardings, also demonstrate an increased level of emphasis. Before September 11th, such boardings were not done; but there were over 550 boardings during the first quarter of 2003. Similarly, vessel operational control actions have risen by 85 percent since the fourth quarter of fiscal year 2001. Given the emphasis on homeland security, it is not surprising that efforts to interdict illegal immigrants have also increased. For example, during the first quarter of 2003, the level of effort in this area was 28 percent higher than it was for the comparable period in 1998. Some of the Coast Guard's traditional missions, such as providing aids to navigation and search and rescue, have been the least affected by the increased emphasis on security. (See fig. 2.) While resource hours for both of these missions have declined somewhat since the first quarter of fiscal year 1998, the overall pattern of resource use over the past 5 years has remained consistent. Although search and rescue boats and buoy tenders were used to perform homeland security functions immediately after September 11th, these activities did not materially affect the Coast Guard's ability to carry out its search and rescue or aids to navigation missions. Search and rescue boats were initially redeployed for harbor patrols after the September 11th terrorist attacks; but the impact on the mission was minimal because the deployments occurred during the off-season, with respect to recreational boating. Similarly, some boats that normally serve as buoy tenders--an aids to navigation function--were used for security purposes instead; but they were among the first to be returned to their former missions. For the first quarter of fiscal year 2003, the number of resource hours spent on these missions was very close to the number spent during the comparable quarter of fiscal year 1998. Performance measurement data further demonstrates the relatively minimal impact on these missions resulting from the Coast Guard's emphasis on homeland security. For example, for search and rescue, the Coast Guard was within about half a percentage point of meeting its target for saving mariners in distress in 2002. Likewise, data show that with respect to its aid to navigation mission, in 2002 the Coast Guard was about 1 percent from its goal of navigational aid availability. A number of missions have experienced declines in resource hours from pre-September 11th levels, including drug interdiction, fisheries enforcement (domestic and foreign), marine environmental protection, and marine safety. In particular, drug enforcement and fisheries enforcement have experienced significant declines. Compared with the first quarter of 1998, resource hours for the first quarter of fiscal year 2003 represent declines of 60 percent for drug interdiction and 38 percent for fisheries enforcement. (See fig. 3.) In fact, resource hours for these areas were declining even before the events of September 11th; and while they briefly rebounded in early 2002, they have since continued to decline. A Coast Guard official said the recent decline in both drug enforcement and fisheries can be attributed to the heightened security around July 4, 2002, and the anniversary of the September 11th terrorist attacks, as well as the deployment of resources for military operations. They said the decline will likely not be reversed during the second quarter of 2003 because of the diversion of Coast Guard cutters to the Middle East and the heightened security alert that occurred in February and March 2003. The reduction in resource hours over the last several years in drug enforcement is particularly telling. In the first quarter of 1998, the Coast Guard was expending nearly 34,000 resource hours on drug enforcement, and as of first quarter of 2003, the resource hours had declined to almost 14,000 hours--a reduction of nearly two-thirds. Also, both the number of boardings to identify illegal drugs and the amount of illegal drugs seized declined from the first quarter of fiscal year 2000. The Coast Guard's goal of reducing the flow of illegal drugs based on the seizure rate for cocaine has not been met since 1999. During our conversations with Coast Guard officials, they explained that the Office of National Drug Control Policy set this performance goal in 1997, and although they recognize that they are obligated to meet these goals, they believe the goals should be revised. Our review of the Coast Guard's activity levels in domestic fishing shows U.S. fishing vessel boardings and significant violations identified are both down since 2000. Similarly, the Coast Guard interdicted only 19 percent as many foreign vessels as it did in 2000. The reduced level of effort dedicated to these two missions is likely linked to the Coast Guard's inability to meet its performance goals in these two areas. For instance, in 2002 the Coast Guard did not meet its goal of detecting foreign fishing vessel incursions, and while there is no target for domestic fishing violations, there were fewer boardings and fewer violations detected in 2002 than in 2000. Recently, the Coast Guard Commandant stated that the Coast Guard intends to return the level of resources directed to law enforcement missions (drug interdiction, migrant interdiction, and fisheries enforcement) to 93 percent of pre-September 11th levels (using a baseline of the 8 quarters prior to September 11, 2001) by the end of 2003 and 95 percent by the end of 2004. However, in the environment of heightened security and the continued deployment of resources to the Middle East, these goals will likely not be achieved, especially for drug interdiction and fisheries enforcement, which are currently far below previous activity levels. The Coast Guard's budget request for fiscal year 2004 does not contain initiatives or proposals that would substantially alter the current levels of effort among missions. The request for $6.8 billion represents an increase of about $592 million, or about 9.6 percent in nominal dollars, over the enacted budget for fiscal year 2003. The majority of this increase covers pay increases for current or retired employees or continues certain programs already under way, such as upgrades to information technology. About $168.5 million of the increase would fund new initiatives, most of which relate either to homeland security or to search and rescue. As such, these initiatives do not represent substantial shifts in current levels of effort among missions. However, the 2004 budget request does address a long-standing congressional concern about the Coast Guard's search and rescue mission. The search and rescue initiative is part of a multiyear effort to address shortcomings in search and rescue stations and command centers. In September 2001, the Department of Transportation Office of the Inspector General reported that readiness at search and rescue stations was deteriorating. For example, staff shortages at most stations required crews to work an average of 84 hours per week, well above the standard (68 hours) established to limit fatigue and stress among personnel. The initiative seeks to provide appropriate staffing and training to meet the standards of a 12-hour watch and a 68-hour work week. The Congress appropriated $14.5 million in fiscal year 2002 and $21.7 million in fiscal year 2003 for this initiative. The increased amount requested for fiscal year 2004 ($26.3 million) for search and rescue would pay for an additional 390 full-time search and rescue station personnel and for 28 additional instructors at the Coast Guard's motor lifeboat and boatswain's mate schools. The Coast Guard faces fundamental challenges in balancing resource use among its missions and accomplishing everything that has come to be expected of it. We have already described how the Coast Guard has not been able, in its current environment, to both assimilate its new homeland security responsibilities and restore levels of effort for all other missions. Several other challenges further threaten the Coast Guard's ability to balance these diverse missions. For example, the Coast Guard's Deepwater Project has already experienced delays in delivery of key assets and could face additional delays if future funding falls behind what the Coast Guard had planned. Such delays could also seriously jeopardize the Coast Guard's ability to carry out a number of security and nonsecurity missions. Similarly, for the foreseeable future, the Coast Guard must absorb the cost of implementing a variety of newly mandated homeland security tasks by taking resources from ongoing activities. Funding for these tasks are not provided in the fiscal year 2004 budget request. The Coast Guard also faces the constant possibility that future terror alerts, terrorist attacks, or military actions will likely require it to shift additional resources to homeland security missions. Finally, the Coast Guard's transition to DHS brings additional challenges, particularly with respect to establishing effective communication links and building partnerships both within DHS and with external agencies. Such challenges raise serious concerns about the Coast Guard's ability to accomplish all of its responsibilities and balance the level of effort among all missions in an environment where it strives to be "all things to all people," and attempts to do so as one of many agencies in a cabinet department whose primary mission is homeland security. In past work, we have pointed to several steps that the Coast Guard needs to take in such an environment. These include continuing to address opportunities for operational efficiency, especially through more partnering and developing a comprehensive blueprint or strategy for balancing and monitoring resource use across all of its missions. Under current funding plans, the Coast Guard faces significant potential delays and cost increases in its $17 billion Integrated Deepwater Project. This project is designed to modernize the Coast Guard's entire fleet of cutters, patrol boats, and aircraft over a 20-year period. Given the way the Coast Guard elected to carry out this project, its success is heavily dependent on receiving full funding every year. So far, that funding has not materialized as planned. Delays in the project, which have already occurred, could jeopardize the Coast Guard's future ability to effectively and efficiently carry out its missions, and its law enforcement activities-- that is, drug and migrant interdiction and fisheries enforcement--would likely be affected the most, since they involve extensive use of deepwater cutters and aircraft. Under the project's contracting approach, the responsibility for Deepwater's success lies with a single systems integrator and its contractors for a period of 20 years or more. Under this approach, the Coast Guard has started on a course potentially expensive to alter. It is based on having a steady, predictable, annual funding stream of $500 million in 1998 dollars over the next 2 to 3 decades. Already the funding provided for the project is less than the amount the Coast Guard planned for. The fiscal year 2002 appropriation for the project was about $28 million below the planned level, and the fiscal year 2003 appropriated level was about $90 million below the planning estimate. Further, the President's fiscal year 2004 budget request for the Coast Guard is not consistent with the Coast Guard's deepwater funding plan. If the requested amount of $500 million for fiscal year 2004 is appropriated, it would represent another shortfall of $83 million, making the cumulative shortfall about $202 million in the project's first 3 years, according to Coast Guard data. If appropriations hold steady at $500 million (in nominal dollars) through fiscal year 2008, the Coast Guard estimates that the cumulative shortfall will reach $626 million. The shortfalls in the last 2 fiscal years (2002 and 2003) and their potential persistence could have serious consequences. The main impact is that it would take longer and cost more in the long run to fully implement the deepwater system. For example, due to funding shortfalls experienced to date, the Coast Guard has delayed the introduction of the new maritime patrol aircraft by 19 months and slowed the conversion and upgrade program for its 110-foot patrol boats. According to the Coast Guard, if the agency continues to receive funding at levels less than planned, new asset introductions--and the associated retirement of costly, less capable Coast Guard resources--will continue to be deferred. The cost of these delays will be exacerbated by the accompanying need to invest additional funds in maintaining current assets beyond their planned retirement date because of the delayed introduction of replacement capabilities and assets, according to the Coast Guard. For example, delaying the maritime patrol aircraft will likely require some level of incremental investment to continue safe operation of the current HU-25 jet aircraft. Similarly, a significant delay in the scheduled replacement for the existing 270-foot medium endurance cutter fleet could require an unplanned and expensive renovation for this fleet. System performance--and the Coast Guard's capability to effectively carry out its mission responsibilities--would also likely be impacted if funding for the Deepwater Project does not keep pace with planning estimates. For example, Coast Guard officials told us that conversions and upgrades for its 110-foot patrol boats would extend its operating hours from about 1,800 to 2,500 per year. Once accomplished, this would extend the time these boats could devote to both security and nonsecurity missions. As with the maritime patrol aircraft, reductions in funding levels for the project have slowed the conversions and upgrades for these vessels, which in turn, has prevented enhancements in mission performance that newer vessels would bring. Coast Guard officials also said that with significant, continuing funding shortfalls delaying new asset introductions, at some point, the Coast Guard would be forced to retire some cutters and aircraft--even as demand for those assets continues to grow. For example, in 2002, two major cutters and several aircraft were decommissioned ahead of schedule due to their deteriorated condition and high maintenance costs. The Coast Guard has also been tasked with a myriad of new homeland security requirements, but funding to implement them is not provided in either the enacted fiscal year 2003 budget or the fiscal year 2004 budget request. As a result, the Coast Guard will have to meet many of these requirements by pulling resources from other activities. Under the Maritime Transportation Security Act (MTSA), signed into law in November 2002, the Coast Guard must accomplish a number of security- related tasks within a matter of months and sustain them over the long term. For example, MTSA requires the Coast Guard to be the lead agency in conducting security assessments, developing plans, and enforcing specific security measures for ports, vessels, and facilities. In the near term, the Coast Guard must prepare detailed vulnerability assessments of vessels and facilities it identifies to be at high risk of terrorist attack. It must also prepare a National Maritime Transportation Security Plan that assigns duties among federal departments and agencies and specifies coordination with state and local officials--an activity that will require substantial work by Coast Guard officials at the port level. The Coast Guard must also establish plans for responding to security incidents, including notifying and coordinating with local, state, and federal authorities. Because the fiscal year 2004 budget request was prepared before MTSA was enacted, it does not specifically devote funding to most of these port security responsibilities. Coast Guard officials said that they will have to absorb costs related to developing, reviewing, and approving plans, including the costs of training staff to monitor compliance, within their general budget. Coast Guard officials expect that the fiscal year 2005 budget request will contain funding to address all MTSA requirements. In the meantime, officials said that the Coast Guard would have to perform most of its new port security duties without additional appropriation, and that the funds for these duties would come from its current operations budget. The costs of these new responsibilities, as well as the extent to which they will affect resources for other missions, are not known. Security alerts, as well as actions needed in the event of an actual terrorist attack, can also affect the extent to which the Coast Guard can devote resources to missions not directly related to homeland security. For example, Coast Guard officials told us that in the days around September 11, 2002, when the Office of Homeland Security raised the national threat level from "elevated" to "high risk," the Coast Guard reassigned cutters and patrol boats in response. In February 2003, when the Office of Homeland Security again raised the national threat level to high risk, the Coast Guard repositioned some of its assets involved in offshore law enforcement missions, using aircraft patrols in place of some cutters that were redeployed to respond to security-related needs elsewhere. While these responses testify to the tremendous flexibility of a multi-mission agency, they also highlight what we found in our analysis of activity-level trends--when the Coast Guard responds to immediate security needs, fewer resources are available for other missions. The Coast Guard's involvement in the military buildup for Operation Enduring Freedom in the Middle East further illustrates how such contingencies can affect the availability of resources for other missions. As part of the buildup, the Coast Guard has deployed eight 110-foot boats, two high-endurance cutters, four port security units, and one buoy tender to the Persian Gulf. These resources have come from seven different Coast Guard districts. For example, officials from the First District told us they sent four 110-foot patrol boats and three crews to the Middle East. These boats are multi-mission assets used for fisheries and law enforcement, search and rescue and homeland security operations. In their absence, officials reported, the First District is using other boats previously devoted to other tasks. For instance, buoy tenders have taken on some search and rescue functions, and buoy tenders and harbor tug/icebreakers are escorting high-interest vessels. Officials told us that these assets do not have capabilities equivalent to the patrol boats but have been able to perform the assigned mission responsibilities to date. The creation of DHS is one of the largest, most complex restructurings ever undertaken, and the Coast Guard, as one of many agencies joining the department, faces numerous challenges, including organizational, human capital, acquisition, process and technology issues. One particularly formidable challenge involves establishing effective communication links and building partnerships both within DHS and with external organizations. While most of the 22 agencies transferred to DHS report to under secretaries for the department's various directorates, the Coast Guard remains a separate entity reporting directly to the Secretary of DHS. According to Coast Guard officials, the Coast Guard has important functions that will require coordination and communication with all of these directorates, particularly the Border and Transportation Security Directorate. For example, the Coast Guard plays a vital role with Customs, Immigration and Naturalization Service, the Transportation Security Administration, and other agencies that are organized in the Directorate of Border and Transportation Security. Because the Coast Guard's homeland security activities require interface with these and a diverse set of other agencies organized within several DHS directorates, communication, coordination, and collaboration with these agencies is paramount to achieve department-wide results. Effective communication and coordination with agencies outside the department is also critical to achieving the homeland security objectives, and the Coast Guard must maintain numerous relationships with other public and private sector organizations outside DHS. For example, according to Coast Guard officials, the Coast Guard will remain an important participant in the Department of Transportation's (DOT) strategic planning process, since the Coast Guard is a key agency in helping to maintain the maritime transportation system. Also, the Coast Guard maintains navigation systems used by DOT agencies such as the Federal Aviation Administration. In the homeland security area, coordination efforts will extend well beyond our borders to include international agencies of various kinds. For example, the Coast Guard, through its former parent agency, DOT, has been spearheading U.S involvement in the International Maritime Organization. This is the organization that, following the September 11th attacks, began determining new international regulations needed to enhance ship and port security. Also, our work assessing efforts to enhance our nation's port security has underscored the formidable challenges that exist in forging partnerships and coordination among the myriad of public and private sector and international stakeholders. In previous work, we have examined some of the implications of the Coast Guard's new operating environment on the agency's ability to fulfill its various missions. This work, like our testimony today, has pointed to the difficulty the Coast Guard faces in devoting additional resources to nonsecurity missions, despite the additional funding and personnel the agency has received. In particular, we have recommended that the following actions be taken as a more candid acknowledgment of the difficulty involved: Opportunities for increased operational efficiency need to be explored. Over the past decade, we and other outside organizations, along with the Coast Guard, have studied Coast Guard operations to determine where greater efficiencies might be found. These studies have produced a number of recommendations, such as shifting some responsibilities to other agencies. One particular area that has come to the forefront since September 11th is the Coast Guard's potential ability to partner with other port stakeholders to help accomplish various security and nonsecurity activities involved in port operations. Some effective partnerships have been established, but the overall effort has been affected by variations in local stakeholder networks and limited information-sharing among ports. A comprehensive blueprint or strategy is needed for setting and assessing levels of effort and mission performance. One important effort that has received relatively little attention, while the Coast Guard has understandably put its homeland security responsibilities in place, is the development of a plan that proactively addresses how the Coast Guard should manage its various missions in light of its new operating reality. The Coast Guard's adjustment to its new post-September 11th environment is still largely in process, and sorting out how traditional missions will be fully carried out alongside new security responsibilities will likely take several years. But it is important to complete this plan and address in it key elements and issues so that it is both comprehensive and useful to decision makers who must make difficult policy and budget choices. Without such a blueprint, the Coast Guard also runs the risk of continuing to communicate that it will try to be "all things to all people" when, in fact, it has little chance of actually being able to do so. The Coast Guard has acknowledged the need to pursue such a planning effort, and the Congress has directed it to do so. Coast Guard officials told us that as part of the agency's transition to DHS, they are updating the agency's strategic plan, including plans to distribute all resources in a way that can sustain a return to previous levels of effort for traditional missions. In addition, the Congress placed a requirement in MTSA for the Coast Guard to submit a report identifying mission targets, and steps to achieve them, for all Coast Guard missions for fiscal years 2003 to 2005. However, this mandate is not specific about the elements that the Coast Guard should address in the report. To be meaningful, this mandate should be addressed with thoroughness and rigor and in a manner consistent with our recent recommendations; it requires a comprehensive blueprint that embodies the key steps and critical practices of performance management. Specifically, in our November 2002 report on the progress made by the Coast Guard in restoring activity levels for its key missions, we recommended an approach consisting of a long-term strategy outlining how the Coast Guard sees its resources--cutters, boats, aircraft, and personnel--being distributed across its various missions, a time frame for achieving this desired balance, and reports with sufficient information to keep the Congress apprised not only of how resources were being used, but what was being accomplished. The Coast Guard agreed that a comprehensive strategy was needed, and believes that it is beginning the process of developing one. Table 2 provides a greater explanation of what this approach or blueprint would entail. The events of recent months heighten the need for such an approach. During this time, the budgetary outlook has continued to worsen, further emphasizing the need to look carefully at the results being produced by the nation's large investment in homeland security. The Coast Guard must be fully accountable for investments in its homeland security missions and able to demonstrate what these security expenditures are buying and their value to the nation. At the same time, recent events also demonstrate the extent to which highly unpredictable homeland security events, such as heightened security alerts, continue to influence the amount of resources available for performing other missions. The Coast Guard needs a plan that will help the agency, the Congress, and the public understand and effectively deal with trade-offs and their potential impacts in such circumstances.

The Coast Guard is one of 22 agencies being placed in the new Department of Homeland Security (DHS). With its key roles in the nation's ports, waterways, and coastlines, the Coast Guard is an important part of enhanced homeland security efforts. But it also has important nonsecurity missions, such as search and rescue, fisheries and environmental protection, and drug and migrant interdiction. GAO has conducted a number of reviews of the Coast Guard's missions and was asked to testify about the Coast Guard's most recent level of effort for its various missions and the major operational and organizational challenges facing the agency during its transition into the newly created DHS. Data on the most recent levels of effort for the Coast Guard's various missions show clearly the dramatic shifts that have occurred among its missions since the September 11, 2001, attacks. Predictably, levels of effort related to homeland security remain at much higher levels than before September 11th. Other missions, such as search and rescue, have remained at essentially the same levels. In contrast, several other missions--most notably fisheries enforcement and drug interdiction--dropped sharply after September 11th and remain substantially below historical levels. Continued homeland security and military demands make it unlikely that the agency, in the short run, can increase efforts in the missions that have declined. Further, the fiscal year 2004 budget request contains little that would substantially alter the existing levels of effort among missions. The Coast Guard faces fundamental and daunting challenges during its transition to the new department. Delays in the planned modernization of cutters and other equipment, responsibility for new security-related tasks as directed under the Maritime Transportation Security Act (MTSA), and mandatory responses to unexpected events, such as terrorist attacks or extended terror alerts, will have an impact on the Coast Guard's ability to meet its new security-related responsibilities while rebuilding its capacity in other missions. Also, as one of the agencies being merged into the new department, the Coast Guard must deal with a myriad of organizational, human capital, acquisition, and technology issues. The enormity of these challenges requires the development of a comprehensive blueprint or strategy that addresses how the Coast Guard should balance and monitor resource use among its various missions in light of its new operating reality.

B-2 operational requirements specify that the weapon system have "low-observable" (stealth) characteristics and sufficient range and payload capability to deliver precision-guided conventional or nuclear weapons anywhere in the world with enhanced survivability. The B-2 combines conventional and state-of-the-art technology, such as special shaping and radar-absorbing materials, to achieve low-observability characteristics, high aerodynamic efficiency, and a large payload capacity. The blending of these technologies makes the aircraft complex and costly to develop, produce, and in some respects maintain. In the early 1990s, the number of B-2s to be acquired was reduced from 132 to 20 operational aircraft. The 20 aircraft include 15 production aircraft and 5 of 6 test aircraft that are to be modified to a fully capable operational configuration. In March 1996, the President directed that the one remaining test aircraft be upgraded to a fully capable operational configuration, bringing the total operational B-2s to be acquired to 21. B-2 development started in 1981. Production of long lead-time aircraft components began in 1986 and flight testing was initiated in 1989. The lengthy development and test program, which has been implemented concurrently with the production program for about 11 years, required the Air Force to devise a mechanism for initially accepting partially capable aircraft until their full capability could be demonstrated in the test program. Therefore, the Air Force agreed to accept the 15 production aircraft in 3 configurations--10 in a training configuration, 3 in an interim configuration, and 2 in the fully capable configuration known as block 30. The block 30 configuration is planned to be the first fully capable configuration that would meet all the essential employment capabilitiesdefined by the Air Force. All aircraft not delivered in the block 30 configuration, including test aircraft, have to be modified extensively to make them fully capable. Some of the aircraft in a training configuration have been modified to an interim configuration. The modification efforts began in 1995 and are scheduled to be complete in July 2000. The total production period for the 21 aircraft, including modifications to bring all B-2s into the fully capable configuration, is expected to be about 14 years. Flight testing was planned to take 4 years but has taken about 8 years and is not yet completed. The Air Force extended the estimated completion of flight testing from July 1997 to March 1998. The Air Force's estimate of the total program cost for the B-2 program has changed less than 1 percent since 1994; however, the estimate has been affected by changes made by both Congress and the Air Force. Table 1.1 shows the Air Force's 1994-96 cost estimates for the development, procurement, and military construction of the B-2 as reported in annual selected acquisition reports. Through fiscal year 1997, the Air Force was appropriated $43,178 million, or 96 percent, of the $44,754 million total program estimate. This leaves $1,576 million to be appropriated for fiscal years 1998-2004. The December 1996 estimate included costs to complete the program for 20 operational B-2s and other changes in the program. In the last 3 fiscal years, Congress added $734 million to the B-2 program--$125 million to preserve the B-2 industrial base, $493 million to upgrade the first test aircraft to operational status, and $116 million to enhance the block 30 capabilities. Enhanced capabilities include making the B-2 capable of launching the Joint Stand Off Weapon and a near-precision conventional penetrating bomb. The Air Force changes decreased various elements of the estimated development and procurement costs. Those decreases exceeded congressional additions, resulting in the overall net reduction in the total B-2 cost estimate. For example, between fiscal year 1997 and 1998, estimates for B-2 spares, support, and nonrecurring air vehicle cost decreased over $900 million. Spare parts estimates were reduced by $358 million because the Air Force now plans to fly fewer and shorter aircraft sorties and because the methodology for computing spare parts requirements changed. Interim contractor support estimates were also reduced by $142 million because parts reliability, according to the Air Force, has been better than anticipated. Other support decreases totaling $170 million covered peculiar support equipment, data, and training items. In addition to changes in the B-2 support estimate, the Air Force decreased its estimate for nonrecurring air vehicle cost by $237 million. According to the Air Force, the estimate of development cost reported in the December 1996 B-2 Selected Acquisition Report (included in table 1.1) and the fiscal year 1998 President's budget (app. I) is understated by $89 million. Air Force officials said that without these funds, two of the test aircraft would not be upgraded to fully capable aircraft, leaving only 19 fully capable B-2s. B-2 estimated costs could increase if (1) the flight test program is extended beyond March 1998, (2) more B-2 performance deficiencies are identified during the time remaining in the acquisition program, and (3) additional development and procurement activities are initiated to better maintain the low-observable features of the B-2s. The flight test program was not fully completed as scheduled on July 1, 1997, and the Air Force plans to extend flight testing with one test aircraft through March 1998. The Air Force is currently defining detailed testing that will be required and has included $28 million in the fiscal year 1998 budget to cover the extended flight test program. Any additional extension of testing, however, could increase the estimated B-2 cost. Some of the areas to be further tested are terrain-following/terrain-avoidance radar performance in the rain, mission effectiveness tests of the low-observable features, ground and flight tests of the environmental control system and auxiliary certain tests of the defensive management system. We plan to report on the results of B-2 testing after the Air Force issues reports scheduled for late 1997 and early 1998. Working on flight tests, aircraft production, and modifications concurrently has created the need for further corrections of deficiencies after fully capable aircraft are delivered and could cause development costs to increase. As of May 1997, the Air Force officials had identified 13 corrections that cannot be incorporated into up to nine aircraft during production or during the modification process. They estimate another 60 deficiencies could be identified that could impact the B-2s. These officials added that new corrections that cannot be incorporated during the modification process would be incorporated by retrofitting the aircraft at some future time. The cost estimate for production includes over $500 million in reserves (fiscal year 1993 and prior year funds) that are available for cost overruns and other anticipated costs. However, the development estimate includes only $12 million in reserves to correct deficiencies in the test aircraft. Air Force officials said that if significantly more or costly deficiencies are identified, development costs could increase. The Air Force has concluded it could not effectively deploy B-2s to forward operating locations without sheltering the aircraft to preserve and maintain its low-observable features. Accordingly, if permanent or temporary shelters must be developed and built at selected forward operation locations or additional support equipment must be acquired to meet deployment and maintenance requirements, additional costs will be incurred. According to the Air Force, the B-2 achieved initial operational capability on April 1, 1997, with interim aircraft capable of flying nuclear and limited conventional missions. The interim B-2 is supposed to be capable of participating in nuclear or conventional warfare either from its main operating base at Whiteman Air Force Base, Missouri, or from a forward operating location outside the continental United States. While the B-2's performance met requirements for initial operations, the aircraft are unable to meet intended deployment requirements because some low-observable features require substantial maintenance and the aircraft are more sensitive to climate and moisture than expected. As a result, the Air Force has eliminated the deployment requirement for interim aircraft and is evaluating potential actions to allow deployment when fully capable aircraft are delivered. Full operational capability of the B-2 is planned to be achieved in 1999. The Air Force demonstrated that interim B-2 aircraft can carry and deliver unguided Mk 84 bombs or the precision-guided Global Positioning System (GPS) aided munition (GAM) in the conventional role or B-83/B-61 nuclear weapons in the nuclear role. Reports of flight tests and demonstrations indicated the GAM to be an effective all-weather weapon in attacking fixed targets with near-precision accuracy. In one demonstration, 3 B-2s destroyed 16 targets using 16 GAMs dropped from over 40,000 feet. In addition, the interim aircraft have automatic terrain-following capability as low as 600 feet and some of the capabilities of the planned defensive management system. According to Air Force officials, the demonstrated capabilities are more than adequate to perform the mission defined for the interim configuration when operating from Whiteman Air Force Base, the B-2's main operating base. The Air Force decided it was unrealistic to deploy the B-2 without shelters, as planned, because some low-observable materials are not as durable as expected and require lengthy maintenance, some in an environmentally controlled shelter after each flight. In addition, B-2s must be kept in shelters because of their sensitivity to moisture, water, and other severe climatic conditions. Air Force operational requirements for the B-2 intended for both the interim and fully capable B-2s to be capable of deploying to forward operating locations, without shelters, in all types of weather and climates. The Air Force is reviewing specific B-2 deployment requirements and working to resolve deployment-related problems by the time the B-2s are scheduled to be fully capable in 1999. The operational test report for the interim aircraft stated the aircraft need frequent and lengthy maintenance and are sensitive to extreme climates and moisture. Tests showed that some low-observable materials on the aircraft were damaged each time the aircraft flew and that repair of those materials accounted for 39 percent of the 80 maintenance man-hours per flight hour experienced by the B-2 during flight testing. This is about three times greater than the next largest contributor to maintenance man-hours, which was aircraft structures. The current goal for total maintenance man-hours per flying hour is 60 hours, and the ultimate goal is 50 hours. The actual B-2 maintenance man-hours per flying hour at Whiteman Air Force Base averaged 124 hours over 12 months ending in March 1997. A major factor in maintenance of low-observable materials is the long time required to repair the damaged materials and aircraft surfaces. During operational testing of the interim configuration, low-observable materials took from 30 to 80 hours to repair and cure, and the processes require a shelter with a temperature and humidity controlled environment for proper curing. Problems with low-observable materials have also affected the percentage of time the B-2 was partially or fully capable of completing a mission, which was significantly less when low observability was considered. When low observability was not considered, the mission-capable rate was 66 percent for a 12-month period ending March 1997. However, when low-observability problems were considered for the same period of time, the rate dropped significantly to 26 percent. Testing indicated that B-2s are also sensitive to extreme climates, water, and humidity--exposure to water or moisture can damage some of the low-observable enhancing surfaces on the aircraft. Further, exposure to water or moisture that causes water to accumulate in aircraft compartments, ducts, and valves can cause systems to malfunction. If accumulated water freezes, it can take up to 24 hours to thaw and drain. Air Force officials said it is unlikely that the aircraft's sensitivity to moisture and climates or the need for controlled environments to fix low-observability problems will ever be fully resolved, even with improved materials and repair processes. Therefore, if B-2s are to be deployed, some form of aircraft sheltering at a forward operating location will likely become a requirement in the future. Air Force test officials stated that maintenance of low-observable features is an issue that requires significant further study and that the percentage of maintenance hours required to repair low-observable materials would increase even more before there are reductions. They said technological improvements in materials and repair processes will be required. Air Combat Command considers low-observable maintainability to be its number one supportability issue, and the Air Force has efforts underway to develop new materials, procedures, and support equipment. It is currently changing some of the materials on the aircraft to improve durability and reduce repair times. It has also established procedures to monitor conditions of low-observable materials on the operational aircraft and developed a model that characterizes the operational impacts of material degradations so that repairs can be prioritized relative to the operational requirements of the B-2s. In commenting on a draft of this report, the Department of Defense generally agreed with the report. The Department's comments are presented in their entirety in appendix II, along with our evaluation of them. To identify cost issues, we reviewed annual cost and budgetary estimates, financial and management reports, contract cost reports, program schedules and plans, and other documents. We compared annual estimates from 1995 to 1997, identifying increases and decreases and the basis for the changes. We interviewed Air Force, Defense Contract Management Command, and contractor financial and technical mangers to obtain explanations and information on cost issues and risks remaining in the B-2 program that were not included in the official reports and documents reviewed. To identify operational issues, we reviewed Air Force B-2 contract and operational requirements documents and operational test reports. We discussed deficiencies and planned development and corrective actions with Air Force B-2 Program, Test, and Operational Command officials to determine the nature and extent of problems, the impact of problems on operations, and schedules for achieving full capability. We performed our review from November 1996 through July 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense and the Air Force, the Director of the Office of Management and Budget, and other interested parties. We will make copies available to others upon request. Please contract me on (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. The following are GAO's comments on the Department of Defense's (DOD) letter, dated July 14, 1997. 1. DOD officials told us they plan to address the funding shortfall during the fiscal year 1999 DOD planning and budgeting process, which is incomplete at this time. 2. Cost growth risks will continue until the extent of changes needed as a result of the remaining test effort has been defined by the Air Force and it has some assurance that needed changes can be completed with existing program resources. 3. DOD's comments addressed 13 deficiencies already identified but did not address the potential impact of an additional 60 deficiencies that DOD suggested could occur. Although the cost estimate for development and production includes some provisions for correcting deficiencies that have not yet been defined, the amounts included are intended to accommodate corrections of deficiencies that are relatively minor. If the Air Force identifies any deficiencies that involve significant costs to correct, cost estimates could increase. 4. Design requirements for the B-2 include provisions for the B-2 aircraft to be deployed, without shelters, in all types of temperatures and climates. The operational test report for the interim B-2 concluded the B-2 must be sheltered or exposed only to the most benign environments (low humidity, no precipitation, moderate temperatures). According to B-2 Combined Test Force officials, permanent shelters at deployed locations are required. Therefore, while DOD commented that it is possible to deploy the B-2, it appears that effective operations from a forward operation location will require additional facilities and equipment not included in the original plan. The Air Force is still working to identify these additional requirements. B-2 Bomber: Status of Efforts to Acquire 21 Operational Aircraft (GAO/NSIAD-97-11, Oct. 2, 1996). B-2 Bomber: Status of Cost, Development, and Production (GAO/NSIAD-95-164, Aug. 4, 1995). B-2 Bomber: Cost to Complete 20 Aircraft Is Uncertain (GAO/NSIAD-94-217, Sept. 8, 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a legislative requirement, GAO reviewed the B-2 bomber, focusing on the current status of cost and operational issues. GAO noted that: (1) the total cost of the B-2 appears to have stabilized; (2) the Air Force has reported that the total estimated B-2 acquisition costs (development, procurement, and military construction) decreased from $44,946 million in early 1995 to $44,754 million in early 1997; (3) the estimated cost declined even though Congress added new requirements to the B-2 program and provided additional funds of $734 million in fiscal years 1995, 1996, and 1997; (4) Air Force officials advised GAO that the $44,754 million in cost reported to Congress was understated by $89 million; (5) they said that the impact of the understatement would be that two of the test aircraft would not be fully upgraded to block 30, making them less than fully capable; (6) through fiscal year 1997, Congress appropriated funds for about 96 percent of the estimated total cost of $44,754 million; (7) although the cost estimate has not changed substantially since 1995, costs could increase if: (a) the flight test program is extended beyond March 1998; (b) more performance deficiencies than predicted are identified during the remaining portions of the acquisition program; and (c) unplanned development and procurement activities become necessary to better maintain the low-observable features of the B-2s; (8) the Air Force declared on April 1, 1997, that the B-2s in an interim configuration had achieved initial operational capability; (9) however, the Air Force decided it was unrealistic to plan on deploying the interim aircraft to forward operating locations because of difficulties being experienced in maintaining low-observable characteristics at the B-2's main operating base; and (10) the Air Force is reviewing specific B-2 deployment requirements and working to resolve deployment-related problems by the time the B-2s are scheduled to be fully capable in 1999.

CMS's quality bonus payment demonstration includes several key changes from the quality bonus system established by PPACA. Specifically, PPACA required CMS to provide quality bonus payments to MA plans that achieve 4, 4.5, or 5 stars on a 5-star quality rating system developed by CMS. In contrast, the demonstration significantly increases the number of plans eligible for a bonus, enlarges the size of payments for some plans, and accelerates payment phase-in. In announcing the demonstration, CMS stated that the demonstration's research goal is to test whether scaling bonus payments to the number of stars MA plans receive under the quality rating system leads to larger and faster annual quality improvement for plans at various star rating levels compared with what would have occurred under PPACA. In March 2012, we reported that CMS's Office of the Actuary (OACT) estimated that the demonstration would cost $8.35 billion over 10 years-- an amount that is at least seven times larger than that of any other Medicare demonstration conducted since 1995 and greater than the combined budgetary effect of all those demonstrations. The cost is largely for quality bonus payments more generous than those prescribed in PPACA. Plans are required to use these payments to provide their enrollees enhanced benefits, lower premiums, or reduced cost-sharing.We also found that the additional Medicare spending will mainly benefit average-performing plans--those receiving 3 and 3.5-star ratings--and that about 90 percent of MA enrollees in 2012 and 2013 would be in plans eligible for a bonus payment. As we noted in our report, while a reduction in MA payments was projected to occur as a result of PPACA's payment reforms, OACT estimated that the demonstration would offset more than 70 percent of these payment reductions projected for 2012 alone and more than one-third of the reductions for 2012 through 2014. Our March 2012 report also identified several shortcomings of the demonstration's design that preclude a credible evaluation of its effectiveness in achieving CMS's stated research goal. Notably, the bonus payments are based largely on plan performance that predates the demonstration. In particular, all of the performance data used to determine the 2012 bonus payments and nearly all of the data used to determine the 2013 bonus payments were collected before the demonstration's final specifications were published. In addition, under the demonstration's design, the bonus percentages are not continuously scaled. For example, in 2014, plans with 4, 4.5, and 5 stars will all receive the same bonus percentage. Finally, since all plans may participate in the demonstration, there is no adequate comparison group for determining whether the demonstration's bonus structure provided better incentives for improving quality than PPACA's bonus structure. We therefore concluded that it is unlikely that the demonstration will produce meaningful results. Given the findings from our program review of the demonstration's features, we recommended in our March 2012 report that the Secretary of Health and Human Services (HHS), who heads the agency of which CMS is a part, cancel the demonstration and allow the MA quality bonus payment system authorized by PPACA to take effect. We further recommended that if that bonus payment system does not adequately promote quality improvement, HHS should determine ways to modify it, which could include conducting an appropriately designed demonstration. HHS did not agree. It stated that, in contrast to PPACA, the demonstration establishes immediate incentives for quality improvement throughout the range of quality ratings. Regarding their proposed evaluation of the demonstration, HHS did not consider the timing of data collection to be a problem and said that the comparison group it would use would enable them to determine the demonstration's impact. We continue to believe that, given the problems we cited, the demonstration should be canceled. In addition to our March 2012 report, we sent a letter on July 11, 2012, to HHS regarding CMS's authority to conduct the demonstration. In our letter, we stated that CMS had not established that the demonstration met the criteria set forth in the Social Security Amendments of 1967, as amended--the statute under which CMS is conducting the demonstration. Specifically, the statute authorizes the Secretary to conduct demonstration projects to determine whether changes in payment methods would increase the efficiency and economy of Medicare services through the creation of additional incentives, without adversely affecting quality. However, features of the demonstration, particularly those regarding the timing of data collection for plan star ratings, call into question whether the demonstration includes additional incentives to increase the efficiency and economy of Medicare services and raise concerns about the agency's ability to determine whether the payment changes under the demonstration result in increased efficiency and economy compared to the payment methods in place under PPACA. In 2003, Congress authorized the establishment of three types of MA coordinated care plans for individuals with special needs: dual-eligible special needs plans (D-SNP), which are exclusively for beneficiaries eligible for both Medicare and Medicaid; institutional special needs plans for individuals in nursing homes, and chronic condition special needs plans for individuals with severe or disabling chronic conditions. Of the three types of SNPs, D-SNPs are by far the most common, accounting for about 80 percent of SNP enrollment as of September 2012. The approximately 9 million dual-eligible beneficiaries are particularly costly to both Medicare and Medicaid in part because they are more likely than other Medicare beneficiaries to be disabled, report poor health status, and have limitations in activities of daily living. Furthermore, their care must be coordinated across Medicare and Medicaid, and each program has its own set of covered services and requirements. In September 2012, we reported that the 2012 D-SNP contracts with state Medicaid agencies that we reviewed varied considerably in their provisions for integration of benefits. Two-thirds of the 124 contracts between D-SNPs and state Medicaid agencies that were submitted to CMS for 2012 did not expressly provide for the integration of any benefits. To carry out the requirement in the Medicare Improvements for Patients and Providers Act of 2008 that each D-SNP contract provide or arrange CMS guidance required that, at a for Medicaid benefits to be provided,minimum, contracts list the Medicaid benefits that dual-eligible beneficiaries could receive directly from the state Medicaid agency or the state's Medicaid managed care contractor(s). Like other MA plans, D-SNPs must cover all the benefits of fee-for- service, with the exception of hospice, and may offer supplemental benefits, such as vision and dental care. In addition, they must develop a model of care that describes their approach to caring for their enrollees. The model of care describes how the plan will address 11 elements, including tracking measureable goals, performing health risk assessments, providing care management for the most vulnerable beneficiaries, and measuring plan performance and outcomes; and D-SNPs must offer the benefits that allow them to actualize these elements. In our September 2012 report, we examined the supplemental benefits offered by D-SNPs and found that D-SNPs provided fewer supplemental benefits than other MA plans. However, the individual services covered under vision and dental benefits were generally more comprehensive than in other MA plans. Despite offering these supplemental benefits somewhat less often than other MA plans, D-SNPs allocated a larger percentage of their rebates--additional Medicare payments received by many plans--to these benefits than other MA plans. They were able to do so largely because they allocated a smaller percentage of rebates to reducing cost-sharing. We could not report on the extent to which benefits specific to D-SNPs and described in the model of care were actually provided to beneficiaries because CMS did not collect the information. For the 15 models of care we reviewed, most did not report--and were not required by CMS to report--the number of beneficiaries who received a risk assessment, for example, or the number or proportion of beneficiaries who would be targeted as "most vulnerable." However, of the models of care we reviewed, past completion rates for risk assessment varied widely among the 4 plans that provided this information. None of the models of care we reviewed reported the number of beneficiaries that were expected to receive add-on services, such as social support services, that were intended for the most-vulnerable beneficiaries. We found that plans do not use standardized performance measures in their models of care, limiting the amount of comparable information available to CMS. Although the D-SNPs are required to report how they intend to evaluate their performance and measure outcomes, CMS does not stipulate the use of standard outcome or performance measures, making it difficult to use any data it might collect to compare D-SNPs' effectiveness or evaluate how well they have done in meeting their goals. Furthermore, without standard measures, it would not be possible for CMS to fully evaluate the relative performance of D-SNPs. We concluded that there was little evidence available on how well D-SNPs are meeting their goals of helping dual-eligible beneficiaries to navigate two different health care systems and receive services that meet their individual needs. Consequently, we recommended in our September 2012 report that CMS require D-SNPs to state explicitly in their models of care the extent of services they expect to provide, require D-SNPs to collect and report to CMS standard performance and outcome measures, systematically analyze these data and make the results routinely available to the public, and conduct an evaluation of the extent to which D-SNPs have provided sufficient and appropriate care to their enrollees. HHS agreed with our recommendations and in its comments on a draft of our report, said that it plans to obtain more information from D-SNPs. CMS is embarking on a new demonstration in up to 26 states with as many as 2 million beneficiaries to financially realign Medicare and Medicaid services so as to serve dual-eligible beneficiaries more effectively. CMS has approved one state demonstration-- Massachusetts--and continues to work with other states. If CMS systematically evaluates D-SNP performance, it can use information from the evaluation to inform the implementation and reporting requirements of this major new initiative. In contrast to MA plans, which have a financial incentive to control their costs, a small number of Medicare private health plans--called cost plans--are paid on the basis of their reasonable costs incurred delivering Medicare-covered services. Medicare cost plans also differ structurally from MA plans in several ways. For example, cost plans, unlike MA plans, allow beneficiaries to disenroll at any time. Despite their enrollment only totaling under 3 percent of Medicare private health plan enrollment, industry representatives stated that cost plans fill a unique niche by providing a Medicare private health plan option in rural and other areas that traditionally have had few or no MA plans. Under current law, new cost contracts are not being entered into and contracts with existing cost plans cannot be extended or renewed after January 1, 2013 if sufficient MA competition exists in the service area. Additionally, in general, organizations that offer cost plans and MA plans in the same area must close their cost plan to new enrollment. plan offerings by eliminating potentially duplicative plans and those with low enrollment. As part of our 2009 report on cost plans we also described the concerns of officials from Medicare cost plans about converting to MA plans. We found that the most-common concerns cited by these officials from organizations that offered Medicare cost plans were potential future changes to MA payments that may then necessitate closing the plan, difficulty assuming financial risk given their small enrollment, and potential disruption to beneficiaries during the transition. For future contacts regarding this testimony, please call James Cosgrove at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions include Phyllis Thorburn, Assistant Director; Alison Binkowski; Krister Friday; Gregory Giusto; and Eric Wedum. 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 August 2012, approximately 13.6 million Medicare beneficiaries were enrolled in MA plans or Medicare cost plans--two private health plan alternatives to the original Medicare fee-for-service program. This testimony discusses work GAO has done that may help inform the Congress as it examines the status of the MA program and the private health plans that serve Medicare beneficiaries. It is based on key background and findings from three previously issued GAO reports on (1) the MA quality bonus payment demonstration, (2) D-SNPs, and (3) Medicare cost plans. This information on cost plans was updated, based on information supplied by CMS, to reflect the status of cost plans in March 2012. In March 2012, GAO issued a report on the Centers for Medicare & Medicaid Services' (CMS) Medicare Advantage (MA) quality bonus payment demonstration--a demonstration CMS initiated rather than implementing the quality bonus program established under the Patient Protection and Affordable Care Act (PPACA). Compared to the PPACA quality bonus program, CMS's demonstration increases the number of plans eligible for a bonus, enlarges the size of payments for some plans, and accelerates payment phase-in. CMS stated that the demonstration's research goal is to test whether scaling bonus payments to quality scores MA plans receive increases the speed and degree of annual quality improvements for plans compared with what would have occurred under PPACA. GAO reported that CMS's Office of the Actuary estimated that the demonstration would cost $8.35 billion over 10 years--an amount greater than the combined budgetary impact of all Medicare demonstrations conducted since 1995. In addition, GAO also found several shortcomings of the demonstration design that preclude a credible evaluation of its effectiveness in achieving CMS's stated research goal. In July 2012, GAO sent a letter to the Secretary of Health and Human Services (HHS), the head of the agency of which CMS is a part, stating that CMS had not established that its demonstration met the criteria in the Social Security Act of 1967, as amended, under which the demonstration is being performed. In September 2012, GAO issued a report on Medicare dual-eligible special needs plans (D-SNP), a type of MA plan exclusively for beneficiaries that are eligible for Medicare and Medicaid. Dual-eligible beneficiaries are costly to Medicare and Medicaid in part because they are more likely than other beneficiaries to be disabled, report poor health status, and have limitations in activities of daily living. GAO found that two-thirds of 2012 D-SNP contracts with state Medicaid agencies that it reviewed did not expressly provide for the integration of Medicare and Medicaid benefits. Additionally, GAO found that compared to other MA plans, D-SNPs provided fewer, but more comprehensive supplemental benefits, such as vision, and were less likely to use rebates--additional Medicare payments received by many MA plans--for reducing beneficiary cost-sharing. GAO could not report on the extent to which benefits specific to D-SNPs were actually provided to beneficiaries because CMS did not collect the information. GAO also found that plans did not use standardized performance measures, limiting the amount of comparable information available to CMS. In December 2009, GAO issued a report on Medicare cost plans, which, unlike MA plans, are paid based on their reasonable costs incurred delivering Medicare-covered services and allow beneficiaries to disenroll at any time. GAO found that the approximately 288,000 Medicare beneficiaries enrolled in cost plans as of June 2009 had multiple MA options available to them. GAO updated this work using March 2012 data and found that enrollment in cost plans had increased to approximately 392,000 and that 99 percent of Medicare beneficiaries enrolled in cost plans had at least one MA option available to them, although generally fewer options than in 2009. In a March 2012 report on the MA quality bonus payment demonstration, GAO recommended that HHS cancel the MA quality bonus demonstration. HHS did not concur with this recommendation. In a September 2012 report on D-SNPs, GAO recommended that D-SNPs improve their reporting of services provided to beneficiaries and that this information be made public. HHS agreed with these recommendations.

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

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

Section 550 of the DHS appropriations act for fiscal year 2007 requires DHS to issue regulations establishing risk-based performance standards for the security of facilities that the Secretary determines to present high levels of security risk, among other things. The CFATS rule was published in April 2007, and appendix A to the rule, published in November 2007, listed 322 chemicals of interest and the screening threshold quantities for each. ISCD has direct responsibility for implementing DHS's CFATS rule, including assessing potential risks and identifying high-risk chemical facilities, promoting effective security planning, and ensuring that final high-risk facilities meet applicable standards through site security plans approved by DHS. From fiscal years 2007 through 2012, DHS dedicated about $442 million to the CFATS program. During fiscal year 2012, ISCD was authorized 242 full-time- equivalent positions. ISCD uses a risk assessment approach to develop risk scores to assign chemical facilities to one of four final tiers. Facilities placed in one of these tiers (tier 1, 2, 3, or 4) are considered to be high risk, with tier 1 facilities considered to be the highest risk. According to an ISCD document that describes how ISCD develops its CFATS risk score, the risk score is intended to be derived from estimates of consequence (the adverse effects of a successful attack), threat (the likelihood of an attack), and vulnerability (the likelihood of a successful attack, given an attempt). ISCD's risk assessment approach is composed of three models, each based on a particular security issue: (1) release, (2) theft or diversion, and (3) sabotage, depending on the type of risk associated with the 322 chemicals. Once ISCD estimates a risk score based on these models, it assigns the facility to a final tier. In July 2007, ISCD began reviewing information submitted by the owners and operators of approximately 40,000 facilities. By January 2013, ISCD had designated about 4,400 of the 40,000 facilities as high risk and thereby covered by the CFATS rule. ISCD had assigned about 3,500 of those facilities to a final tier, of which about 90 percent were tiered because of the risk of theft or diversion. The remaining 10 percent were tiered because of the risk of release or the risk of sabotage. Over the last 2 years, ISCD has identified problems with the way the release chemicals model assigns chemical facilities to tiers and has taken or begun to take action to address those problems. In February 2011, ISCD found that some chemical facilities had been placed in an incorrect final tier because this model included incorrect data about the release of high-risk chemicals of interest. In June 2011, ISCD officials adjusted the model, which resulted in lowering the tier for about 250 facilities, about 100 of which were subsequently removed from the CFATS program. In October 2012, ISCD officials stated that they had uncovered another defect that led the model to exclude population density calculations for about 150 facilities in states or U.S. territories outside the continental United States, including Alaska, Hawaii, Puerto Rico, and Guam. In February 2013, ISCD officials said that they had made adjustments to the model to resolve this issue and do not expect any facilities' tier will change due to this issue. Our preliminary analyses indicates that the tiering approach ISCD uses to assess risk and assign facilities to final tiers does not consider all of the elements of risk associated with a terrorist attack involving certain chemicals. According to the NIPP, which, among other things, establishes the framework for managing risk among the nation's critical infrastructure, risk is a function of three components--consequence, threat, and vulnerability--and a risk assessment approach must assess each component for every defined risk scenario. Furthermore, the CFATS rule calls for ISCD to review consequence, threat, and vulnerability information in determining a facility's final tier. However, ISCD's risk assessment approach does not fully consider all of the core criteria or components of a risk assessment, as specified by the NIPP, nor does it comport with parts of the CFATS rule. Consequence. The NIPP states that at a minimum, consequences should focus on the two most fundamental components--human consequences and the most relevant direct economic consequences. The CFATS rule states that chemical facilities covered by the rule are those that present a high risk of significant adverse consequences for human life or health, or critical economic assets, among other things, if subjected to terrorist attack, compromise, infiltration, or exploitation. Our review of ISCD's risk assessment approach and discussions with ISCD officials shows that the approach is currently limited to focusing on one component of consequences--human casualties associated with a terrorist attack involving a chemical of interest--and does not consider consequences associated with economic criticality. ISCD officials said that the economic consequences part of their risk-tiering approach will require additional work before it is ready to be introduced. In September 2012, ISCD officials stated that they had engaged Sandia National Laboratories to examine how ISCD could gather needed information and determine the risk associated with economic impact, but this effort is in the initial stages, with an expected completion date of June 2014. ISCD officials added they are uncertain about how Sandia's efforts will affect their risk assessment approach. Threat. ISCD's risk assessment approach is also not consistent with the NIPP because it does not consider threat for the majority of regulated facilities. According to the NIPP, risk assessments should estimate threat as the likelihood that the adversary would attempt a given attack method against the target. The CFATS rule requires that, as part of assessing site vulnerability, facilities conduct a threat assessment, which is to include a description of the internal, external, and internally assisted threats facing the facility and that ISCD review site vulnerability as part of the final determination of a facility's tier. Our review of the models and discussions with ISCD officials shows that (1) ISCD is inconsistent in how it assesses threat using the different models because while it considers threat for the 10 percent of facilities tiered because of the risk of release or sabotage, it does not consider threat for the approximately 90 percent of facilities that are tiered because of the risk of theft or diversion; and (2) ISCD does not use current threat data for the 10 percent of facilities tiered because of the risk of release or sabotage. ISCD did not have documentation to show why threat had not been factored into the formula for approximately 90 percent of facilities tiered because of the risk of theft or diversion. However, ISCD officials pointed out that the cost of adding a threat analysis for these facilities might outweigh the benefits of doing so. ISCD officials said that given the complexity of assessing threat for theft or diversion, they are considering reexamining their approach. ISCD officials also said that they are exploring how they can use more current threat data for the 10 percent of facilities tiered because of the risk of release or sabotage. Vulnerability. ISCD's risk assessment approach is also not consistent with the NIPP because it does not consider vulnerability when developing risk scores. According to the NIPP, risk assessments should identify vulnerabilities, describe all protective measures, and estimate the likelihood of an adversary's success for each attack scenario. Similar to the NIPP, the CFATS rule calls for ISCD to review facilities' security vulnerability assessments as part of its risk-based tiering process. This assessment is to include the identification of potential security vulnerabilities and the identification of existing countermeasures and their level of effectiveness in both reducing identified vulnerabilities and meeting the aforementioned risk-based performance standards. Our review of the risk assessment approach and discussions with ISCD officials shows that the security vulnerability assessment contains numerous questions aimed at assessing vulnerability and security measures in place but the information is not used to assign facilities to risk-based tiers. ISCD officials said they do not use the information because it is "self- reported" by facilities and they have observed that it tends to overstate or understate vulnerability. As a result, ISCD's risk assessment approach treats every facility as equally vulnerable to a terrorist attack regardless of location and on-site security. ISCD officials told us that they consider facility vulnerability, but at the latter stages of the CFATS regulatory process particularly with regard to the development and approval of the facility site security plan. Our preliminary work indicates that ISCD has begun to take some actions to examine how its risk assessment approach can be enhanced. For example, in addition to engaging Sandia National Laboratories to develop the framework for assessing economic consequences previously discussed, ISCD has commissioned a panel of subject matter experts to examine the strengths and weaknesses of its current risk assessment approach. ISCD officials stated that the panel's work is intended to focus on whether ISCD is heading in the right direction, and they view it as a preliminary assessment. According to ISCD's task execution plan, the panel is to provide actionable recommendations on potential improvements to the CFATS models, but the panel is not to develop alternative CFATS models or formally validate or verify the current CFATS risk assessment approach--steps that would analyze the structure of the models and determine whether they calculate values correctly. In February 2013, after the panel was convened, ISCD officials stated that they provided information to the panel about various issues that they might want to consider, among them, (1) how to address vulnerability in the models given ISCD concerns about data quality, and (2) what the appropriate variables to use, if any, are for threats associated with theft or diversion, as discussed earlier. We believe that ISCD is moving in the right direction by commissioning the panel to identify the strengths and weaknesses of its risk assessment approach, and the results of the panel's work could help ISCD identify issues for further review and recommendations for improvement. Given the critical nature of ISCD's risk assessment approach in laying the foundation for further regulatory steps in improving facility security--such as the development and approval of facility site security plans--it is important that its approach for assigning facilities to tiers is complete within the NIPP risk management framework and the CFATS rule. Once ISCD's develops a more complete approach for assessing risk it would then be better positioned to commission an independent peer review. In our past work, we reported that peer reviews are a best practice in risk management and that independent expert review panels can provide objective reviews of complex issues. Furthermore, the National Research Council of the National Academies has recommended that DHS improve its risk analyses for infrastructure protection by validating the models and submitting them to external peer review. As we have previously reported, independent peer reviews cannot ensure the success of a risk assessment approach, but they can increase the probability of success by improving the technical quality of projects and the credibility of the decision-making process. We will continue to monitor and assess ISCD's efforts to examine its risk assessment approach through our ongoing work and consider any recommendations needed to address these issues. Our preliminary work shows that ISCD has made various revisions to its security plan review process to address concerns expressed by ISCD managers about slow review times. Under the CFATS rule, once a facility is assigned a final tier, it is to submit a site security plan to describe security measures to be taken and how it plans to address applicable risk-based performance standards. The November 2011 internal memorandum that discussed various challenges facing the CFATS program noted that ISCD had not approved any security plans and stated that the process was overly complicated and created bottlenecks. The memorandum stated that revising the process was a top program priority because the initial security plan reviews were conducted using the risk- based standards as prescriptive criteria rather than as standards for developing an overall facility security strategy. According the ISCD officials, the first revision was called the interim review process, whereby individual reviewers were to consider how layers of security measures met the intent of each of the 18 standards. Under the interim review process, ISCD assigned portions of each facility's plan to security specialists (e.g., cyber, chemical, and physical, among others) who reviewed plans in a sequential, linear fashion. Using this approach, plans were reviewed by different specialists at different times culminating in a quality review. ISCD officials told us that the interim review process was unsustainable, labor-intensive, and time-consuming, particularly when individual reviewers were looking at pieces of thousands of plans that funneled to one quality reviewer. In July 2012, ISCD stopped using the interim review process and began using the current revised process, which entails using contractors, teams of ISCD employees (physical, cyber, chemical, and policy specialists), and ISCD field office inspectors, who are to review plans simultaneously. ISCD officials said that they believe the revised process for reviewing security plans is a "quantum leap" forward, but they did not capture data that would enable them to measure how, if at all, the revised process is more efficient (i.e., less time-consuming) than the former processes. They said that, under the revised process, among other things, field inspectors are to work with facilities with the intent of resolving any deficiencies ISCD identifies in their site security plans. They added that this contrasts with past practices whereby ISCD would review the entire plan even when problems were identified early and not return the plan to the facility until the review was complete, resulting in longer reviews. Moving forward, ISCD officials said they intend to measure the time it takes to complete parts of the revised process and have recently implemented a plan to measure various aspects of the process. Specifically, ISCD's Annual Operating Plan, published in December 2012, lists 63 performance measures designed to look at various aspects of the site security plan review process--from the point the plans are received by ISCD to the point where plans are reviewed and approved. Collecting data to measure performance about various aspects of the security plan review process is a step in the right direction, but it may take time before the process has matured to the point where ISCD is able to establish baselines and assess its progress. ISCD has taken action to improve its security plan review process, but based on our preliminary analysis, it could take years to review the plans of thousands of facilities that have already been assigned a final tier. ISCD hopes to address this by examining how it can further accelerate the review process. According to ISCD officials, between July 2012 and December 2012, ISCD had approved 18 security plans, with conditions. ISCD officials told us that, moving forward, they anticipate that the revised security plan review process could enable ISCD to approve security plans at a rate of about 30 to 40 a month. Using ISCD's estimated approval rate of 30 to 40 plans a month, our preliminary analysis indicates that it could take anywhere from 7 to 9 years to complete reviews and approvals for the approximately 3,120 plans submitted by facilities that have been final-tiered that ISCD has not yet begun to review. Figure 1 shows our estimate of the number of years it could take to approve all of the security plans for the approximately 3,120 facilities that, as of January 2013, had been final- tiered, assuming an approval rate of 30 to 40 plans a month. It is important to note that our 7- to 9-year preliminary estimate does not include other activities central to the CFATS mission, either related to or aside from the security plan review process. In addition, our estimate does not include developing and implementing the compliance inspection process, which occurs after security plans are approved and is intended to ensure that facilities that are covered by the CFATS rule are compliant with the rule, within the context of the 18 performance standards. According to ISCD officials, they are actively exploring ways to expedite the speed with which the backlog of security plans could be cleared, such as potentially leveraging alternative security programs, reprioritizing resources, and streamlining the inspection and review requirements. ISCD officials added that they plan to complete authorizations inspections and approve security plans for tier 1 facilities by the first quarter of fiscal year 2014 and for tier 2 facilities by the third quarter of fiscal year 2014. Our preliminary work shows that ISCD's efforts to communicate and work with owners and operators to help them enhance security at their facilities have increased since the CFATS program's inception in 2007, particularly in recent years. Since 2007, ISCD has taken various actions to communicate with facility owners and operators and various stakeholders--including officials representing state and local governments, private industry, and trade associations--to increase awareness about CFATS. From fiscal years 2007 through 2009, most of ISCD's communication efforts entailed outreach with owners and operators and stakeholders through presentations to familiarize them with CFATS; field visits with federal, state, and local government and private industry officials; and compliance assistance visits at facilities that are intended to assist facilities with compliance or technical issues. By 2010 and in subsequent years, ISCD had revised its outreach efforts to focus on authorization inspections during which inspectors visited facilities to verify that the information in their security plans was accurate and complete, and other outreach activities including stakeholder outreach. However, analysis of industry trade associations' responses to questions we sent them about the program shows mixed views about ISCD's efforts to communicate with owners and operators through ISCD outreach efforts. For example, 3 of the 11 trade associations that responded to our questions indicated that ISCD's outreach program was effective in general, 3 reported that the effectiveness of ISCD's outreach was mixed, 4 reported that ISCD's outreach was not effective, and 1 respondent reported that he did not know. Our preliminary results indicate that ISCD seeks informal feedback on its outreach efforts but does not systematically solicit feedback to assess the effectiveness of outreach activities, and it does not have a mechanism to measure the effectiveness of ISCD's outreach activities. Trade association officials reported that in general ISCD seeks informal feedback on its outreach efforts and that members provide feedback to ISCD. Association officials further reported that among other things ISCD has encouraged association members to contact local ISCD inspectors and has hosted roundtable discussions and meetings where members of the regulated community provide feedback, suggest improvements, or make proposals regarding aspects of the CFATS program such as site security plans, alternative security programs, and gasoline storage site risks. Furthermore, according to ISCD officials, while feedback is solicited from the regulated community generally on an informal basis, inspectors and other staff involved in ISCD's outreach activities are not required to solicit feedback during meetings, presentations, and assistance visits, and inspectors are also not required to follow up with the facilities after compliance assistance visits to obtain their views on the effectiveness of the outreach. ISCD, as part of its annual operating plan, has established a priority for fiscal year 2013 to develop a strategic communications plan intended to address external communication needs including industry outreach. We have previously reported on the benefits of soliciting systematic feedback. Specifically, our prior work on customer service efforts in the government indicates that systematic feedback from those receiving services can provide helpful information as to the kind and quality of services they want and their level of satisfaction with existing services. We will continue to monitor and assess ISCD's efforts to develop a systematic way to solicit feedback through our ongoing work and consider any recommendations needed to address this issue. Chairman Shimkus, Ranking Member Tonko, and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For information about this statement please contact Stephen L. Caldwell, at (202) 512-9610 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 included John F. Mortin, Assistant Director; Chuck Bausell; Jose Cardenas; Michele Fejfar; Jeff Jensen; Tracey King; Marvin McGill; Jessica Orr; and Ellen Wolfe. 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.

Facilities that produce, store, or use hazardous chemicals could be of interest to terrorists intent on using toxic chemicals to inflict mass casualties in the United States. As required by statute, DHS issued regulations that establish standards for the security of high-risk chemical facilities. DHS established the CFATS program in 2007 to assess the risk posed by these facilities and inspect them to ensure compliance with DHS standards. ISCD, which manages the program, places high-risk facilities in risk-based tiers and is to conduct inspections after it approves facility security plans. A November 2011 ISCD internal memorandum raised concerns about ISCD's ability to fulfill its mission. This statement is based on GAO's ongoing work conducted for several congressional committees and subcommittees and provides preliminary observations regarding the extent to which DHS has (1) assigned chemical facilities to tiers and assessed its approach for doing so, (2) revised its process to review facility security plans, and (3) communicated and worked with owners and operators to improve security. To conduct this ongoing work, GAO reviewed DHS reports and plans on risk assessments, security plan reviews, and facility outreach and interviewed DHS officials. GAO received input from 11 trade associations representing chemical facilities about ISCD outreach. The results of this input are not generalizable but provide insights about DHS outreach efforts. Since 2007, the Department of Homeland Security's (DHS) Infrastructure Security Compliance Division (ISCD) has assigned about 3,500 high-risk chemical facilities to risk-based tiers under its Chemical Facilities Anti-Terrorism Standards (CFATS) program, but it has not fully assessed its approach for doing so. The approach ISCD used to assess risk and make decisions to place facilities in final tiers does not consider all of the elements of consequence, threat, and vulnerability associated with a terrorist attack involving certain chemicals. For example, the risk assessment approach is based primarily on consequences arising from human casualties, but does not consider economic consequences, as called for by the National Infrastructure Protection Plan (NIPP) and the CFATS regulation, nor does it include vulnerability, consistent with the NIPP. ISCD has begun to take some actions to examine how its risk assessment approach can be enhanced. Specifically, ISCD has, among other things, engaged Sandia National Laboratories to examine how economic consequences can be incorporated into ISCD's risk assessment approach and commissioned a panel of experts to assess the current approach, identify strengths and weaknesses, and recommend improvements. Given the critical nature of ISCD's risk assessment approach in laying the foundation for further regulatory steps in improving facility security, it is important that its approach for assigning facilities to tiers is complete within the NIPP risk management framework and the CFATS regulation. DHS's ISCD has revised its process for reviewing facilities' site security plans-- which are to be approved by ISCD before it performs compliance inspections-- but it did not track data on the prior process so is unable to measure any improvements. The past process was considered by ISCD to be difficult to implement and caused bottlenecks in approving plans. ISCD views its revised process to be a significant improvement because, among other things, teams of experts review parts of the plans simultaneously rather than sequentially, as occurred in the past. Moving forward, ISCD intends to measure the time it takes to complete reviews, but will not be able to do so until the process matures. Using ISCD's expected plan approval rate of 30 to 40 plans a month, GAO estimated that it could take another 7 to 9 years before ISCD is able to complete reviews on the approximately 3,120 plans in its queue. ISCD officials said that they are exploring ways to expedite the process, such as reprioritizing resources. DHS's ISCD has also taken various actions to work with facility owners and operators, including increasing the number of visits to facilities to discuss enhancing security plans, but trade associations that responded to GAO's query had mixed views on the effectiveness of ISCD's outreach. ISCD solicits informal feedback from facility owners and operators on its efforts to communicate and work with them, but it does not have an approach for obtaining systematic feedback on its outreach activities. Prior GAO work on customer service efforts in the government indicates that systematic feedback from those receiving services can provide helpful information as to the kind and quality of services they want and their level of satisfaction with existing services. GAO will continue to assess ISCD's efforts in these areas and consider any recommendations needed to address these issues. GAO expects to issue a report on its results in April 2013.

VETS administers national programs to (1) ensure that veterans receive priority in employment and training opportunities from the employment service; (2) assist veterans, reservists, and National Guard members in securing employment; and (3) protect veterans' employment rights and benefits. VETS carries out its responsibilities through a nationwide network that includes representation in each of Labor's 10 regions and staff in each state. The Office of the Assistant Secretary for VETS administers the agency's activities through regional administrators and a VETS director in each state. The state VETS directors are the link between VETS and the states' employment service system, to whom the DVOP and LVER staff--as state employees--directly report, and which is overseen by Labor's ETA. In fiscal year 2005, VETS requested $220.6 million for all its programs, including $162.4 million for the DVOP and LVER programs. States plan to use this funding to support more than 2,100 DVOP and LVER positions. In September 2001, we identified some key areas in which VETS could better serve its clients by providing more flexibility and accountability in its programs. With its passage in November 2002, JVA amended the legislation that governs the DVOP and LVER programs by addressing many of the concerns we raised in our prior work. For example, JVA clarified the roles of DVOP and LVER staff, and gave states greater flexibility in determining how the staff are used. Under VETS guidance, the DVOP staff's duties now focus on providing intensive services--with priority given to disabled veterans--including assessing the veterans' special needs and skills, developing a plan of action, and coordinating any needed supportive services, such as training and job referrals. The DVOP staff also provide outreach activities to locate candidates who could benefit from intensive services, such as homeless veterans. As stated in VETS guidance, the LVER staff's duties now include developing regular contact with employers to promote employment and training for veterans, developing relationships with community leaders to further promote veterans' employment, and promoting and monitoring the participation of veterans in federally funded programs. The JVA legislation required states to develop plans that include details of the specific duties required of the DVOP and LVER positions and the strategy for their integration into the one-stop system. The legislation also required the establishment of a comprehensive performance accountability system to measure performance of the DVOP and LVER staff, using performance measures consistent with those of WIA. In addition, JVA established an incentive program to recognize eligible employees for excellence in providing veterans services and to encourage the improvement of services, with 1 percent of each state's annual grant allocation to be designated for incentive funding. In addition, JVA required VETS to establish a minimum standard for the rate at which veterans enter employment, a standard which all states are required to meet. The JVA legislation further required annual performance reviews of veterans' services, which VETS uses to monitor the DVOP and LVER programs to ensure proper accountability. VETS has taken action to implement the changes to the DVOP and LVER programs. VETS has issued policy guidance and conducted training on the DVOP and LVER staff's new roles and responsibilities. In addition, nearly half the states are taking advantage of JVA's flexibility to employ part-time DVOP staff. Although VETS has issued guidance on the performance incentive program to recognize exemplary staff as required by JVA, states have implemented this program differently, and 11 states do not plan to implement the incentive program because sometimes it conflicts with the state's policy if awards are given to individuals. In addition, integrating DVOP and LVER staff into one-stop centers continues to be challenging. Through its policy guidance letters, VETS has clarified the DVOP and LVER staff's new functions, along with new staffing and reporting requirements, including the use of part-time positions for DVOPs. In addition, shortly after JVA was enacted, NVTI held a series of implementation seminars covering DVOP and LVER staff's new roles and responsibilities that were attended by representatives from all states. NVTI also conducts case management training aimed at DVOP staff. At the end of its first training year in October 2004 following passage of JVA, NVTI reported training 282 DVOPs and estimated that an additional 144 would be trained each year in the future. Similarly, NVTI conducts employer outreach training focused on LVERs. Because this class is new, NVTI estimates that it will train 264 LVERs by October 2005, and projects that an additional 240 LVERs would be trained each year. One of the key changes in the new law gives states the flexibility to establish part-time DVOP and LVER positions, though this was already permitted to some extent for LVERs. According to their fiscal year 2005 state plans, 23 states planned to use the new flexibility under JVA to employ both full- and part-time DVOPs, while 34 states planned to use the long-standing authority to employ both full- and part-time LVERs. As shown in table 1, part-time DVOP positions would comprise about 18 percent of the total DVOP staff and about 44 percent of the total LVER staff. Some states plan to use part-time DVOPs and LVERs extensively. For example, two states, Maine and Washington, planned to use part-time LVERs exclusively. In addition, South Dakota plans on having 87 percent of its DVOPs be part-time, and Vermont plans to have 91 percent of LVERs be part-time. By contrast, in New Jersey, only 5 percent of DVOPs are to be part-time and, in Indiana, 6 percent of LVERs are to be part-time. VETS has implemented JVA's requirement to establish a performance incentive awards program by issuing policy guidance that lays out criteria and monetary as well as nonmonetary awards for states to consider in developing an awards program. According to fiscal year 2005 state plans, 11 states did not plan to use the incentive program due to reasons such as conflicts with state law or other policies if the awards are given to individuals. The remaining 40 states planned to implement the incentive program in various ways. For example, in one state, two DVOPs were awarded a one-time maximum award of $1,000. In another state, however, top performing DVOP and LVER staff were given a one-time cash award for as little as $16. Regardless of their current approach to implementing incentives, some VETS officials said they would like to see award eligibility criteria expanded beyond individuals to include entire units. Labor officials acknowledge that integration of DVOP and LVER staff into the one-stop centers has been a persistent challenge. The extent that implementing changes under JVA will assist in breaking down the barriers and entrenched cultures that have precluded integration in the one-stop centers will likely take years. According to the DVOP and LVER staff we interviewed, integration still varied widely among local areas, depending on the level of support provided by the one-stop manager for the DVOP and LVER programs. For example, one DVOP staff told us that the veterans program is highly integrated with the WIA program in her local one-stop, with both sharing case management responsibilities. In addition, she participates in regular meetings with the one-stop partners and attributed this cohesion to the commitment by her one-stop manager to work cooperatively with all the partners. In contrast, a DVOP from another state told us that he was assigned to tasks that prevented him from serving as many veterans as he would have liked. In cases where there was poor integration, several reasons were cited by DVOP and LVER staff we interviewed from various states. One reason was that other one-stop staff were not educated or trained on serving veterans. An NVTI official told us that the institute has provided training to states that have requested it, but was concerned that the states that were struggling with providing veterans' services were the very ones that did not request training. Other reasons included the perception among DVOP and LVER staff we interviewed that there is little coordination between VETS and ETA to ensure integration among all partner programs, adopt uniform definitions of eligible veterans, and consistently give veterans priority of service regardless of program. VETS has implemented some JVA changes to the accountability system related to the measures used for assessing DVOP and LVER performance, but it estimates that it will be at least 2007 before it can implement a minimum standard for veterans entering employment that all states will be expected to meet. Until the standard becomes available, VETS has used historically based outcomes in negotiating performance goals with states. In addition, Labor has established an entered-employment goal of 58 percent for veterans served through the DVOP and LVER programs. While VETS reported that the DVOP and LVER programs met Labor's program year 2003 goals for some measures, concerns about data reliability remain, preventing an accurate assessment of how well DVOP and LVER staff are performing. The performance measurement system for the DVOP and LVER programs has been in transition over the last several years. Prior to JVA, performance measures placed more emphasis on process-oriented measures--measures that simply tracked services provided to veterans, not on the employment outcomes veterans achieved. In addition, states used different data sources to report employment-related outcomes, resulting in performance that was not comparable across states. According to VETS officials, VETS adopted performance measures, beginning July 1, 2003, that are consistent with those of WIA, but has not yet specified when it will implement a system for weighting the measures to provide special consideration for such groups as disabled veterans, in accordance with JVA's requirements. Another fundamental change was the use of Unemployment Insurance (UI) wage records to identify veterans who get jobs rather than the use of time-consuming follow-up procedures. The current performance standards for the DVOP and LVER programs apply to various veterans populations, including disabled veterans. Three measures are based on WIA: (1) veterans that entered employment; (2) retention in employment at 6 months; and (3) job seeker satisfaction. In addition, VETS tracks entered employment following receipt of staff- assisted services and entered employment following receipt of case management. VETS officials told us, however, that the measures will change again on July 1, 2005, when VETS will adopt the Office of Management and Budget's new common measures. VETS will retain several existing measures that track employment following services provided by DVOP and LVER staff. While the new common measures afford some advantages over existing measures, the frequent shifts in focus have made it difficult to collect comparable data that can be used to establish a pattern of performance for the DVOP and LVER programs and compare outcomes across different time periods. As such, VETS anticipates that it will take at least until 2007 to collect the necessary trend data to establish the minimum standard for the entered-employment rate that all states will be expected to meet. In the interim, states are required to meet performance goals that they negotiate annually with VETS based on historic outcome levels. For example, according to VETS, states' program year 2004 negotiated goals for entered employment ranged from 46 percent to 67 percent for veterans, and from 41 percent to 65 percent for disabled veterans. Nationwide, VETS reported that the DVOP and LVER programs met Labor's goals for the entered employment rate (58 percent) for all eligible veterans in program year 2003, while they fell short of their 60-percent target entered employment rate for disabled veterans (see table 2). Similarly, VETS reported that the programs exceeded goals for the rate at which veterans retained employment 6 months later. Even after the new measures will be adopted, VETS officials remain concerned about the reliability of data used to assess performance. VETS officials attribute their concerns about service-related data reliability to DVOP and LVER staff not understanding the new definitions of the performance measures, lacking training on entering data into an automated system, inconsistent registration policies, or simply inputting erroneous data. In addition, VETS officials told us that some states have known data reliability issues with their management information systems. While Labor has established data validation procedures, the reliability of performance data is an issue that is not fully addressed by Labor's current validation procedures. For example, all states must certify that their data are correct using validation software that cross-checks the totals they report to VETS. However, validation does not extend to the case file level to ensure that DVOP and LVER staff accurately collect and report data at the point of service delivery. In comparing the reliability of data on services to those on employment outcomes, VETS officials believe that outcome data are more reliable because they are based on Unemployment Insurance (UI) wage records. However, as we have noted in past work, while UI wage records are reliable, they suffer from significant time lags, resulting in at least an approximately 1 1/2- year wait to obtain information on outcomes. In response to JVA's requirement to monitor the DVOP and LVER programs, VETS has shifted greater responsibility for monitoring program performance to the state level, and VETS' monitoring role continues to evolve from enforcer to partner in achieving state goals. VETS staff completed their first review of annual state self-assessments in program year 2004 and have completed their first round of site visits to a random sample of local offices. However, the extent that this new approach to monitoring DVOP and LVER performance strengthens program accountability may require several years of state and VETS experience collecting, reporting, and using information to improve services to veterans. Beginning in program year 2004, VETS began reviewing all the state plans for compliance with program requirements and, for any deficiencies noted during the review, required states to correct the relevant section of the plan. In addition, VETS requires states to submit annual self-assessments to identify best practices, ensure the approved state plan is being effectively implemented, determine the state's progress toward meeting its performance goals, and identify areas for technical assistance and training. Besides conducting reviews of the state plans and self-assessments, VETS also conducts annual on-site monitoring reviews of 20 percent of local offices within each state, and all local offices must be visited at least once in 5 years. While we do not know how many offices have DVOP or LVER staff, there are an estimated 1,900 comprehensive one-stop centers and about 1,600 affiliate one-stop centers around the nation. The on-site reviews include interviewing personnel who are involved in providing services to veterans, observing the flow of customers in the lobby, and reviewing local guidance and plans. Now that VETS has completed its first year under the new performance accountability system, it is unclear how it will use its monitoring results to improve DVOP and LVER program performance. At the national level, VETS has developed a system to track corrective actions needed in states' plans, but has not yet developed a strategy to best meld performance information from its other monitoring efforts to improve program performance at the local, state, and regional levels. For example, VETS officials in two states we visited told us that they use the site visit results to identify local offices needing targeted technical assistance. However, one state VETS official told us that because local offices varied considerably in their performance, he was uncertain whether the 20- percent sample used for site visits would accurately capture areas most in need of technical assistance. While information on DVOP and LVER performance is also available through local office reporting, VETS officials have not provided a consistent methodology to incorporate and analyze relative performance among the local offices, states, and regional offices. VETS and ETA continue to work on issues related to sharing the results of monitoring efforts, coordinating corrective actions, and taking a joint approach to enforcement. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other members of the subcommittee may have. Our remaining work will examine these and other issues in greater depth to meet our mandated reporting date at the end of the year. For further information regarding this testimony, please contact me at (202) 512- 7215. Key contributors to this testimony were Lacinda Ayers, Jeremy Cox, Meeta Engle, Emily Pickrell, and Stanley Stenersen. Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Veterans' Employment and Training Service: Flexibility and Accountability Needed to Improve Service to Veterans. GAO-01-928. Washington, D.C.: September 12, 2001. Veterans' Employment and Training Service: Proposed Performance Measurement System Improved, But Further Changes Needed. GAO-01-580. Washington, D.C.: May 15, 2001. Veterans' Employment and Training Service: Strategic and Performance Plans Lack Vision and Clarity. GAO/T-HEHS-99-177. Washington, D.C.: July 29, 1999. Veterans' Employment and Training Service: Assessment of the Fiscal Year 1999 Performance Plan. GAO/HEHS-98-240R. Washington, D.C.: September 30, 1998. Veterans' Employment and Training: Services Provided by Labor Department Programs. GAO/HEHS-98-7. Washington, D.C.: October 17, 1997. 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 Labor's Veterans' Employment and Training Service (VETS) administers two programs designed to assist the roughly 700,000 veterans who are unemployed in any given month. These two programs, the Disabled Veterans' Outreach Program (DVOP) and the Local Veterans' Employment Representative (LVER) program, fund employment, training, and job placement services to veterans. In 2002, Congress passed the Jobs for Veterans Act (JVA), which redefined the roles of DVOP and LVER staff and required that VETS establish a new performance accountability system. This testimony is based on GAO's ongoing work in this area and focuses on three aspects: (1) the separation of DVOP's and LVER's roles and responsibilities; (2) VETS' performance accountability system for DVOP and LVER staff; and (3) VETS' system for monitoring DVOP and LVER performance. VETS has established separate roles for DVOP and LVER staff and has provided policy guidance and training to states explaining these changes. Under JVA, states now determine how many DVOP and LVER staff they hire, where to place them within the local workforce areas, and 23 states are planning to use some part-time DVOP staff. There are indications that integrating DVOP and LVER staff into the local workforce offices remains challenging. While VETS has issued guidance on an incentive program to encourage improved performance, state implementation of the program has varied, and 11 states do not plan to participate. VETS has implemented employment measures for DVOP and LVER staff, but a minimum standard that all states must meet for veterans entering employment will not be available before 2007. VETS reported meeting Labor's goal of achieving a 58-percent employment rate for all veteran job seekers during program year 2003, but fell somewhat short of reaching a 60-percent employment goal for disabled veterans. Assessing how well DVOP and LVER programs are serving veterans may continue to be difficult due to ongoing concerns about data reliability. VETS implemented a monitoring system in program year 2004 that relies primarily on state self-assessments of performance in conjunction with onsite reviews. It is unclear, however, how VETS staff at the state, regional, and national levels will use this information consistently to guide or improve the DVOP and LVER programs. VETS is working with other Labor agencies to coordinate monitoring and enforcement efforts.

As shown in table 1, CMS and TMA contract with numerous firms to perform many of the functions necessary to administer the Medicare and TRICARE programs. In addition, state agencies administer the Medicaid program. Federal contractors and state Medicaid agencies perform a wide variety of functions that require the use of personal health information. Such information may include medical diagnosis and treatment records and patient identifiers, such as name, address, date of birth, Social Security number, and evidence of insurance coverage. For example, when making a claims payment determination, federal contractors and state Medicaid agencies verify patient eligibility and assess whether the services provided were medically necessary. In some cases, assessing medical necessity requires a review of the patient's medical history and treatment records. In addition to claims processing, federal contractors and state Medicaid agencies use personal health information when enrolling beneficiaries, operating telephone call centers, conducting disease management programs, administering pharmaceutical benefit management services, and performing fraud investigations. A number of laws provide protection for personal health information. Under the HIPAA Privacy Rule, certain health care organizations and individuals--known as covered entities--are required to ensure that patients' personal health information is not improperly disclosed. Covered entities--health care providers, health plans, and health care clearinghouses--must develop policies and procedures for protecting health information. These include restricting the amount of information disclosed to the minimum necessary to accomplish the intended purpose and to the workforce needing access. Other requirements under the HIPAA Privacy Rule include designating a privacy official and training employees on the covered entity's privacy policies. Certain HIPAA Privacy Rule safeguards also apply to "downstream users"--whether or not they are covered entities--through contractual agreements. The HIPAA Privacy Rule requires covered entities to enter into "business associate agreements" with other firms or individuals to which they transfer personal health information for certain clinical, operational, or administrative functions. Business associate agreements must establish the conditions under which a downstream vendor may use and disclose personal health information and the privacy safeguards they must apply. Covered entities are not required, under the rule, to monitor their business associates' use of privacy safeguards, but must take corrective action if they become aware of a pattern of activity or practice that amounts to a material breach of the agreement. The HIPAA Privacy Rule applies directly to state Medicaid agencies, Medicare Advantage contractors, and TRICARE contractors that act as health plans or providers, and indirectly to Medicare FFS contractors and other TRICARE contractors. Specifically, state Medicaid agencies, Medicare Advantage, and TRICARE contractors that act either as health plans or providers are covered entities under the HIPAA Privacy Rule, while Medicare FFS contractors and the remaining TRICARE contractors are considered business associates to CMS and TRICARE, respectively, in their capacity as program contractors. Requirements under the HIPAA Privacy Rule also apply to certain downstream vendors that receive personal health information from federal contractors and state Medicaid agencies through outsourcing arrangements. In addition to the HIPAA Privacy Rule, U.S. law includes a number of statutes that provide privacy protections, and some of them are applicable only to federal agencies and their contractors. The Privacy Act of 1974, for example, places limitations on agencies' collection, disclosure, and use of privacy information. Furthermore, the Federal Information Security Management Act of 2002 generally concerns the protection of personal information in the context of securing federal agencies' information, and requires agencies to develop information security programs that include contractors. Finally, the Social Security Act requires that state Medicaid agencies limit the use and disclosure of personally identifiable information to purposes directly related to administering the state's Medicaid program. A majority of the federal contractors and state Medicaid agencies we surveyed engage domestic vendors to perform services involving personal health information, but rarely transfer personal health information directly offshore. However, offshore outsourcing is initiated by some domestic vendors, which transfer personal health information to offshore locations. The actual prevalence of offshore outsourcing by domestic vendors may be greater than reported, as many federal contractors and state Medicaid agencies did not know whether their domestic vendors further transferred personal health information. A majority of federal contractors and state Medicaid agencies use domestic vendors to perform services involving personal health information. (See table 2.) At the same time, only one Medicare Advantage contractor and one state Medicaid agency reported direct offshore outsourcing of services involving personal health information. No Medicare FFS contractors or TRICARE contractors reported direct offshore outsourcing. When outsourcing domestically, the federal contractors and state Medicaid agencies typically rely on more than one vendor, although the extent to which this occurs varies across the three insurance programs. In our survey, Medicare Advantage contractors reported outsourcing services involving personal health information to a median of 20 domestic vendors per contractor. In contrast, TRICARE contractors and Medicaid agencies reported a median of 7 domestic vendors, while Medicare FFS contractors reported a median of 3 domestic vendors per contractor. Although only one federal contractor and one state Medicaid agency reported transferring personal health information directly to an offshore vendor, contractors and Medicaid agencies also reported offshore outsourcing through the activities of their domestic vendors. Specifically, federal contractors and state Medicaid agencies reported that their domestic vendors further transfer personal health information either to the vendors' offshore locations or to another vendor located outside the United States through downstream outsourcing. Nineteen percent--33 of 173--of the Medicare Advantage contractors who responded to our survey reported that one or more of their largest domestic vendors transfer personal health information to a location outside of the United States. Four percent (2 of 45) of Medicare FFS contractors and 2 percent (1 of 45) of Medicaid agencies reported offshore outsourcing initiated by domestic vendors. Although each respondent indicated that these offshore transfers involved personal health information, we did not ask for detailed information about amount of data transferred. No TRICARE contractors reported offshore outsourcing by their domestic vendors. Our survey results may underestimate the full extent of offshore outsourcing of services involving personal health information. Some federal contractors and state Medicaid agencies did not always know whether their domestic vendors engaged in further transfers of personal health information--domestically or offshore--while others indicated that they did not have mechanisms in place to obtain such information. Medicare Advantage contractors--which have more domestic vendors per contractor than other federal contractors or state agencies in our survey-- were least likely to have information about whether further data transfers were occurring on behalf of their program. When asked about their three largest domestic vendors, 57 percent of Medicare Advantage contractors reported that they did not know whether these vendors further transferred personal health information. Similarly, 29 percent of Medicare FFS contractors and 26 percent of Medicaid agencies reported that they did not have this information for all three of their largest domestic vendors. (See table 3.) According to our survey, most instances of offshore outsourcing by vendors occur when the domestic vendor transfers personal health information to one of its own locations outside of the United States or to an affiliated entity, such as a subsidiary, located in another country. Of the 33 Medicare Advantage contractors that reported offshore outsourcing by vendors, 30 described instances that fit this pattern. For example, one Medicare Advantage contractor reported outsourcing to a Midwest vendor a contract to scan paper claims and create and store electronic records. The vendor, which has multiple domestic and several international locations, performs these services in Mexico. In another case, a Medicare Advantage contractor reported using its wholly owned subsidiary to provide claims data entry services. Rather than using employees at its U.S. location, the subsidiary transfers the personal health information to a location it has in India, where the data entry services are performed. A Medicare FFS contractor reported a similar instance in describing its vendor's offshore outsourcing. Its domestic vendor transfers personal health information to the vendor's own facility in Jamaica to process Medicare claims. Offshore outsourcing was also reported to occur when domestic vendors transfer data to independent, third-party vendors located in other countries. According to our survey, this type of offshore outsourcing is less common than the type in which the offshore vendor is related to the domestic vendor. Three of the 33 Medicare Advantage contractors who reported vendor-initiated offshore outsourcing indicated that their domestic vendors transfer personal health information to an independent foreign vendor. For example, a Medicare Advantage contractor reported using a domestic subsidiary to provide claims data entry services. This subsidiary, in turn, engages in downstream outsourcing with an independent vendor located in India, where the data entry services for the Medicare Advantage contractor are performed. Medicare Advantage contractors were not the only respondents to report such downstream outsourcing relationships. A state Medicaid agency reported that its domestic vendor for customer services, which include handling call center operations and member enrollment, relies on an independent vendor located in India to perform these services. Although our survey identified several countries as locations for offshore vendors, India was the predominant destination for outsourcing services that involve personal health information. Of the 33 Medicare Advantage contractors whose domestic vendors were responsible for most of the offshore outsourcing reported in our survey, 25 reported that personal health information had been transferred to workers located in India. Less common locations included Ghana and Mexico, with nine and six instances of offshore outsourcing, respectively. (See table 4.) Privacy experts have emphasized that the contracts between firms and their vendors are important to ensuring privacy when outsourcing services that involve personal information. They also suggest safeguard measures that should be considered to protect privacy when outsourcing. These include measures to be taken during the vendor selection process and after personal health information has been outsourced. Federal contractors and state Medicaid agencies responding to our survey varied substantially in their reported use of these safeguard measures. Privacy experts indicated that having specific provisions in contractual agreements is key to ensuring that personal information is properly protected when transferred to a vendor. They noted that contracts should specify the vendors' responsibilities for maintaining safeguards to protect personal information, circumstances under which personal information may be disclosed, and rules for subcontracting. In fact, the HIPAA Privacy Rule requires such contractual agreements to protect against unauthorized disclosure of personal health information by vendors that receive such information from covered entities to perform certain clinical, operational, or administrative functions. The Privacy Rule further specifies certain contract elements, including the conditions and safeguards for uses and disclosures of personal health information. To ensure that these conditions and safeguards also apply to downstream vendors, the Privacy Rule requires a firm's or individual's business associates to agree in writing that any subcontractor to which they subsequently transfer personal health information will also contractually agree to the same set of safeguards. At the same time, however, privacy experts point out that differences in national data privacy laws may influence the significance of a firm's contracts with its vendors. Countries differ in the scope of their data privacy laws, with some offering broader data privacy protections than those available in the United States and others with essentially no legal protections for data privacy. For example, personal data transferred to a member country of the European Union (EU) would have to be handled in a manner consistent with the European Commission's Data Protection Directive, which is generally considered to require more comprehensive data protection than does the United States. By contrast, India has no law that establishes protections for personal data. When a U.S. firm does business with a vendor in a country with relatively weak or narrow data privacy protections, experts noted that the contract between the outsourcing firm and the vendor can be used to help ensure data privacy. In the United States, vendors could be held liable according to the terms of their contract with the covered entity, which they are required to have by the HIPAA Privacy Rule. To make certain that data are similarly protected when outsourcing to a country with weaker privacy protections, experts indicate that the contract should be used to specify, in detail, the vendor's privacy practices and the right to terminate the contract in the event of a privacy breach. The contract also may specify which country's laws will be applied to resolve disputes that arise under the contract, which has implications for both interpretation and enforcement of the contract. When considering the implications of foreign privacy laws on data transferred offshore, another factor to consider is the legal status of the vendor. The experts we consulted generally agreed that transferring personal data to an entity with an offshore location may afford--at least in theory--the same level of privacy protections available in the United States, if the offshore entity is subject to U.S. law, such as may be the case with entities with offshore locations that are incorporated in the United States. For firms seeking data protections beyond those afforded by contracts, experts recommend several safeguard measures. Specifically, experts suggest that firms transferring personal health information to vendors should assess potential vendors' privacy practices when selecting a vendor, monitor vendor performance on privacy practices, and be aware of downstream outsourcing. Experts recommended that in the vendor selection process, firms assess potential vendors' privacy practices. In addition to evaluating a vendor's written policies, experts suggested that the overall importance afforded privacy within the organization's culture may be an equally significant factor, as it drives the likely implementation of written privacy policies. Experts noted different approaches to evaluating potential vendors. Describing his organization's informal approach, the privacy officer for a large provider group explained that he consults with other clients of the vendor about their level of satisfaction and considers the vendor's long- term stability and reputation. In contrast, the chief privacy officer for a large information technology company described her firm's formal process for evaluating potential vendors. Using written risk-rating criteria, her firm's legal and procurement departments evaluate potential vendors' privacy practices. Beyond informing selection decisions, the criteria subsequently serve as the basis for vendor evaluation and auditing. When considering a potential vendor, some experts suggested that the extent of the assessment should be determined by the perceived data privacy risk-- such as the sensitivity of the data being transferred. Experts also emphasized the importance of ongoing oversight of vendors and their activities, noting that monitoring vendor performance on privacy practices helps to ensure that contractual agreements are implemented. Experts described monitoring activities as a good risk management practice, and particularly important if the vendor is performing a critical business function or handling very sensitive personal health information. As one approach, a privacy expert suggested that outsourcing firms should require regular reports from vendors describing compliance efforts, privacy violations, and the use of any downstream vendors. While privacy experts recognized monitoring as a valuable safeguard, some said that adequate monitoring may be a challenge to implement. Vendors--especially those with substantial market power--may be reluctant to allow monitoring of their operations. In other cases, outsourcing firms may find it impractical or may not have sufficient resources to monitor each of their vendors. In such a situation, experts suggested that monitoring efforts should be focused on vendors that handle the most sensitive information, handle the largest volume of personal data, or have the highest risk for privacy breaches. With respect to monitoring the operations of geographically distant vendors, experts stressed that alternatives to traditional monitoring may be used to minimize logistical challenges, such as hiring a third-party audit organization to conduct regular on-site visits. Experts stressed that information about the number, and identity, of vendors that handle personal information is critical to the outsourcing firm's ability to assess and mitigate privacy risks. One expert we spoke with explained that with information about its vendors' downstream data transfers, the outsourcing firm is in a better position to monitor how its data are being handled. Some outsourcing firms require their vendors to obtain approval prior to subcontracting, while others require vendors to report regularly on all subcontractors. In some cases, however, information about downstream vendors can be difficult to obtain, experts noted. One expert on corporate compliance cautioned that vendors may resist such prior approvals and reporting requirements, citing the need for flexibility in responding quickly to changes in workload. Federal contractors and state Medicaid agencies that outsource services involving personal health information varied substantially in their reported use of the three expert-recommended safeguard measures. For example, 39 percent of Medicare FFS contractors reported taking steps to assess potential vendors' privacy practices compared with 67 percent of state Medicaid agencies. With respect to monitoring vendors' privacy practices, 42 percent of Medicare FFS contractors reported doing so compared with 100 percent of TRICARE contractors. Forty-five percent of Medicare Advantage contractors reported awareness of downstream outsourcing compared with 74 percent of Medicaid agencies. With respect to the three recommended measures together, Medicare Advantage and Medicare FFS contractors reported the lowest use rates, at 27 and 29 percent, respectively. Use of the three recommended measures was more common among Medicaid agencies, at 51 percent, and TRICARE contractors, with 60 percent. (See table 5.) Our survey results show that a substantial number of federal contractors and state Medicaid agencies reported privacy breaches involving personal health information. However, TMA and CMS--the federal agencies that oversee the TRICARE, Medicare, and Medicaid programs--differ in their requirements for notification of privacy breaches involving personal health information. TMA requires reports of privacy breaches from all of its contractors. CMS collects such information from FFS contractors but not from Medicare Advantage contractors or from state Medicaid agencies. In responding to our survey, over 40 percent of federal contractors and state Medicaid agencies indicated that they, or one of their vendors, experienced a privacy breach involving personal health information in 2004 or 2005. Among Medicare Advantage contractors, 47 percent reported recent privacy breaches, as did 42 percent of Medicare FFS contractors, 44 percent of Medicaid agencies, and 38 percent of TRICARE contractors. (See table 6.) These rates are comparable to the rate recently reported by commercial health insurers. In a 2005 health care industry survey, 45 percent of commercial health insurers reported the occurrence of at least one privacy breach from January through June 2005. It is difficult to interpret these data, because we did not ask respondents for information about the frequency or severity of their privacy breaches. The reported privacy breaches could have involved inappropriate disclosure of limited personal health information, such as mailing an insurance statement to the wrong address, or extensive disclosures, such as privacy breaches that involved information on many individuals or that occurred repeatedly. The federal agencies with responsibility for these programs vary in their requirements with respect to notification of privacy breaches. Since 2004, TMA has required all TRICARE contractors to report monthly on privacy breaches, including those experienced by each vendor handling enrollees' personal health information and by health care providers. According to TRICARE officials, monthly reports provide detailed information about each privacy breach, including the contractor's assessment of the "root cause" of the breach and steps taken to prevent further occurrences. TMA officials indicated that most privacy breaches occur at the vendor level or with health care providers, rather than with TRICARE contractor staff. During 2005, three large regional TRICARE contractors reported more than 130 separate privacy breaches to TMA officials. TMA officials told us that most breaches occurred inadvertently, such as when personal information was transferred to the wrong person because of incorrect mailing addresses (electronic and paper mail) or fax errors. In other cases, breaches occurred when health care providers or contractor staff--such as call center employees--inappropriately discussed personal health information with other employees. TMA officials said that the agency analyzes trends in the monthly reports and follows up with federal contractors that report recurring lapses in privacy. In May 2005, CMS began requiring Medicare FFS contractors--but not Medicare Advantage contractors or Medicaid agencies--to report privacy breaches. CMS officials told us that in prior years, FFS contractors reported privacy breaches to CMS regional office staff responsible for contractor oversight. The agency changed its approach to monitoring privacy breaches by establishing a policy for federal contractors to notify CMS central office staff directly. Under the new policy, CMS requires FFS contractors to provide written notice, within 30 days of discovery, of all known or suspected privacy breaches, including those experienced by a vendor. These federal contractors must describe the privacy breach and subsequent corrective action plan--including any changes to policies, procedures, or employee training. From May through December 2005, under the new reporting requirement, CMS received eight reports of privacy breaches from four FFS contractors. CMS officials noted that most breaches occurred as a result of accidental disclosure of personal information. For example, the most commonly reported incident during 2005 occurred when beneficiary health information was mailed by a FFS contractor to the wrong health care provider. CMS does not have comparable notice requirements for privacy breaches occurring with personal health information held by Medicare Advantage contractors or state Medicaid agencies. Agency officials told us that they do not require routine reporting of privacy breaches that may occur at these federal contractors and state Medicaid agencies or their vendors. However, based on our survey results, these contractors and agencies, and their vendors, are likely to experience privacy breaches at a rate similar to FFS contractors. When federal contractors and state Medicaid agencies outsource services involving personal health information, they typically engage U.S. vendors that may further transfer the personal health information they receive to downstream domestic or offshore workers. CMS and TMA officials have only recently taken steps to oversee their federal contractors' and vendors' management of sensitive health information. While reporting data transfers and data privacy breaches is now required under the TRICARE program and the Medicare fee-for-service program, CMS has yet to establish a reporting requirement for Medicare Advantage contractors and Medicaid agencies. We believe that federal contractors and state Medicaid agencies should be held accountable for how well personal health information, held by them or disclosed to their vendors, is protected. To help ensure that the personal health information entrusted to federal and state health programs is being adequately protected and to facilitate prompt corrective action when appropriate, the privacy breach notification requirements that currently apply to TRICARE and Medicare FFS contractors should also apply to other Medicare contractors that handle personal health information (such as Medicare Advantage contractors) and to state Medicaid agencies. We recommend that the Administrator of CMS require all Medicare contractors responsible for safeguarding personal health information and state Medicaid agencies to notify CMS of the occurrence of privacy breaches. We received written comments on a draft of this report from CMS and DOD. CMS agreed with our recommendation and described recent steps the agency has taken to obtain information on privacy breaches from Medicare Advantage contractors. Specifically, CMS highlighted its June 9, 2006, memo to Medicare Advantage contractors requiring them to notify agency officials of breaches involving personal health information. CMS noted that it is developing specific instructions for its regional and central office staff about how to respond to such reports of privacy breaches. CMS also indicated that the HHS Office of Inspector General will be assisting the agency in assessing the adequacy of the Medicare Advantage contractor's systems for securing personal health information. In addition, CMS stated that it sent privacy reminder notices to the FFS contractors and selected other CMS contractors that handle beneficiaries' personal health information. Although the administration of the new Medicare Part D outpatient prescription drug benefit was outside the scope of our work, CMS noted that its new requirements for reporting privacy breaches will also apply to the contractors that implement this benefit. CMS pointed out that the Social Security Act requires that state Medicaid agencies limit the use and release of personally identifiable information to purposes directly related to administering the state's Medicaid program. We included a reference to relevant provisions of the Social Security Act in the background section of this report. Finally, CMS indicated that it has added language to its FFS contracts that would require contractors and subcontractors to obtain written approval from CMS prior to performing work at locations outside of the United States. In further discussion, agency officials clarified that CMS will be including this contract language in future Medicare FFS contracts. Thus, the revised language will take effect over the next several years as the current Medicare FFS contracts are competed and awarded to entities called Medicare administrative contractors (MACs). CMS noted that 4 of the 23 MAC contracts have been awarded to date; the agency plans to complete its transition to the new MAC contracts by the end of fiscal year 2009. DOD concurred with our report findings and provided a technical comment which we incorporated. We have reprinted the letters from CMS and DOD in appendixes II and III. We will send copies of this report to the Administrator of CMS, the Secretary of Defense, appropriate congressional committees, and other interested parties. Copies will be made available to others upon request. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about matters discussed in this report, please contact me at (312) 220-7600 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who contributed to this report are listed in appendix IV. We focused our review on Medicare, Medicaid, and the Department of Defense's TRICARE program, which together cover over 100 million Americans. In this report we (1) examined the extent to which the Medicare and TRICARE federal contractors and state Medicaid agencies outsource--domestically or offshore--services involving the use of personal health information; (2) identified measures recommended by privacy experts for safeguarding outsourced personal information and examined use of these measures by the federal contractors and state Medicaid agencies; and (3) determined whether the federal contractors and state Medicaid agencies have experienced privacy breaches and whether the federal agencies that oversee Medicare, Medicaid, and TRICARE require notice from them when privacy breaches occur. To determine the extent of service outsourcing, use of recommended practices, and experience with privacy breaches, we surveyed the federal contractors and state Medicaid agencies responsible for performing many of the administrative tasks associated with the day-to-day operations of Medicare, Medicaid, and TRICARE. In August 2005, we sent our survey to all 56 state Medicaid agencies, 252 Medicare Advantage contractors, 59 Medicare fee-for-service (FFS) contractors, and 11 TRICARE contractors. The federal contractors included in our survey were all those that held contracts with the Department of Health and Human Services' Centers for Medicare & Medicaid Services (CMS) and the Department of Defense's TRICARE Management Activity (TMA) to participate in these programs at the national level, as of January 2005. In some cases, a firm could have more than one contract. For example, the 59 Medicare FFS contracts included in our study were held by 42 firms in January 2005. In these instances, we sent the firms a separate survey for each of their contracts with the federal agencies. Consequently, for analysis and reporting purposes, we considered each contract separately. Survey response rates ranged from 69 percent (Medicare Advantage contractors) to 80 percent (state Medicaid agencies). (See table 7.) Survey questions addressed whether the federal contractor or state Medicaid agency outsourced services during 2005--domestically or offshore--that involved the use of personal health information. We asked the federal contractors and state Medicaid agencies that used outsourcing to provide the total number of domestic and offshore outsourcing agreements. To obtain information about downstream outsourcing, we asked respondents whether each of their three largest vendors further transferred personal health information, and if so, to which country. For most survey items, we did not independently verify information provided by respondents. However, we performed quality checks, such as reviewing survey data for inconsistency errors and completeness. When necessary, we contacted survey respondents to obtain clarification before conducting our analyses. Our analysis of respondents and nonrespondents in each survey group, on variables such as entity size, type, and geographic location, did not identify substantial differences, suggesting that the risk of respondent bias is low. Among the survey items we reported on, we did not find substantial variation in item response rate. Based on these efforts, we determined that the survey data were sufficiently reliable for the purposes of this report. To identify privacy practices recommended by industry experts to protect personal information from inappropriate disclosure when outsourcing, we reviewed relevant literature on privacy practices, domestic outsourcing, and offshore outsourcing. Our review included perspectives from the health care and financial business sectors, including syntheses of best practices. Using a structured interview guide, we then interviewed privacy experts to identify commonly recommended business practices for protecting the privacy of personal information when outsourcing. We selected individuals to interview based upon literature they published on the topics of outsourcing and privacy protections and through referrals from other experts. We interviewed experts representing industry, consumer, and regulatory perspectives. We did not independently evaluate the feasibility, potential cost, or effectiveness of implementing experts' recommended practices. Survey questions asked whether federal contractors and state Medicaid agencies routinely use these expert- recommended practices. We did not review to what extent the practices used by the federal contractors and Medicaid agencies comply with existing statutory and administrative requirements. Through the survey, we also asked the federal contractors and state Medicaid agencies to report on their experience with privacy breaches during the previous 2 years. To obtain information on federal agencies' requirements for notification of privacy breaches experienced by the federal contractors and state Medicaid agencies, we interviewed officials at TMA and CMS--the federal agency with oversight responsibility for Medicare and Medicaid. We asked agency officials to provide us with summary data on the number and type of privacy breaches reported by federal contractors and state Medicaid agencies during 2004 and 2005. We did not provide a definition of privacy breach in the survey. We also examined the Health Insurance Portability and Accountability Act and its implementing regulations, but did not assess compliance with them or with other federal laws and regulations. In addition, we reviewed information on data privacy laws in selected countries that are destinations for offshore outsourcing. We conducted our work from October 2004 through July 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, Rosamond Katz, Assistant Director; Manuel Buentello; Adrienne Griffin; Jenny Grover; Kevin Milne; and Daniel Ries made key contributions to this report.

Federal contractors and state Medicaid agencies are responsible for the day-to-day operations of the Medicare, Medicaid, and TRICARE programs. Because these entities may contract with vendors to perform services involving the use of personal health data, outsourcing and privacy protections are of interest. GAO surveyed all federal Medicare and TRICARE contractors and all state Medicaid agencies (a combined total of 378 entities) to examine whether they (1) outsource services--domestically or offshore--and (2) must notify federal agencies when privacy breaches occur. Survey response rates ranged from 69 percent for Medicare Advantage contractors to 80 percent for Medicaid agencies. GAO interviewed officials at the Department of Health and Human Services' Centers for Medicare & Medicaid Services (CMS), which oversees Medicare and Medicaid, and the Department of Defense's TRICARE Management Activity (TMA), which oversees TRICARE. Federal contractors and state Medicaid agencies widely reported domestic outsourcing of services involving the use of personal health information but little direct offshore outsourcing. Among those that completed GAO's survey, more than 90 percent of Medicare contractors and state Medicaid agencies and 63 percent of TRICARE contractors reported some domestic outsourcing in 2005. Typically, survey groups reported engaging from 3 to 20 U.S. vendors (commonly known as subcontractors). One federal contractor and one state Medicaid agency reported outsourcing services directly offshore. However, some federal contractors and state Medicaid agencies also knew that their domestic vendors had initiated offshore outsourcing. Thirty-three Medicare Advantage contractors, 2 Medicare fee-for-service (FFS) contractors, and 1 Medicaid agency indicated that their domestic vendors transfer personal health information offshore, although they did not provide information about the scope of personal information transferred offshore. Moreover, the reported extent of offshore outsourcing by vendors may be understated because many federal contractors and agencies did not know whether their domestic vendors transferred personal health information to other locations or vendors. In responding to GAO's survey, over 40 percent of the federal contractors and state Medicaid agencies reported that they experienced a recent privacy breach involving personal health information. (The frequency or severity of these breaches was not reported.) By survey group, 47 percent of Medicare Advantage contractors reported privacy breaches within the past 2 years, as did 44 percent of Medicaid agencies, 42 percent of Medicare FFS contractors, and 38 percent of TRICARE contractors. TMA and CMS differ in their requirements for notification of privacy breaches. TMA requires monthly reports on privacy breaches from its TRICARE contractors and follows up with contractors that report recurring lapses in privacy. While CMS requires Medicare FFS contractors to report privacy breaches within 30 days of discovery, such oversight is lacking for privacy breaches that may occur with personal health information held by state Medicaid agencies and Medicare Advantage contractors, as CMS does not require reports of privacy breaches from these entities.

The Tongass National Forest covers about 16.8 million acres in southeast Alaska and is the largest national forest in the United States, equal to an area about the size of West Virginia. The U.S. Department of Agriculture's Forest Service manages the Tongass for multiple uses, such as timber production, outdoor recreation, and fish and wildlife. The Forest Service's Alaska Region, headquartered in Juneau, Alaska, carries out the management responsibilities. Because of its magnitude, the Tongass is divided into three administrative areas--Chatham, Stikine, and Ketchikan--each having an area office headed by a forest supervisor. Each area office has between two and four ranger districts, headed by a district ranger, to carry out daily operations. In the 1950s, the Forest Service awarded 50-year (long-term) contracts to the Ketchikan Pulp Company (KPC)--now a wholly owned subsidiary of the Louisiana Pacific Corporation--and the Alaska Pulp Corporation (APC)--a Japanese-owned firm--to harvest Tongass timber. As stipulated in their contracts, each company built a pulp mill to process the harvested timber--KPC near Ketchikan and APC in Sitka. In return, the Forest Service guaranteed a 50-year timber supply totaling about 13.3 billion board feet for both contracts. KPC's contract expires in 2004. APC's contract was to expire in 2011, but the Forest Service terminated it for breach of contract on April 14, 1994, because APC shut down its pulp mill in September 1993. The Forest Service also sells Tongass timber to companies other than APC and KPC. These companies, referred to as independent short-term contractors, purchase timber under contracts usually lasting 3 to 5 years. Since 1980, about 30 percent of all Tongass timber sales have been made under independent short-term contracts. Although some of these short-term contracts have been awarded to APC and KPC, most have been awarded to other contractors. Since the early 1980s, the Congress has expressed concern about the adverse impacts of the long-term contracts on competition for timber in southeast Alaska and on the Forest Service's ability to effectively manage the Tongass. Part of the concern centered on the perceived competitive advantages to APC and KPC that resulted from differences between certain provisions of the long-term and short-term independent contracts. Another part of the concern centered on the relationship of the long-term contracts to the overall management of the Tongass National Forest and, more specifically, to issues related to other forest resources such as fish and wildlife. ". . . it is in the national interest to modify the contracts in order to assure that valuable public resources in the Tongass National Forest are protected and wisely managed. Modification of the long-term timber sale contracts will enhance the balanced use of resources on the forest and promote fair competition within the southeast Alaska timber industry." Among other things, the act directed the Secretary of Agriculture to unilaterally revise the long-term contracts in order to reflect nine specific modifications (see app. I for a complete list). A number of these modifications called for making long-term contracts consistent with short-term contracts in such respects as timber sale planning, environmental assessment, and the administration of road credits. Other provisions of the act added new environmental requirements, such as leaving timber buffers at least 100 feet in width along designated streams. Four months after the act was passed, and pursuant to one of the act's requirements, we issued a report to the Senate Committee on Energy and Natural Resources and the House Committee on Interior and Insular Affairs. That report described the Forest Service's revisions to the long-term contracts for each of the nine modifications and discussed whether the changes reflected the modifications specified in section 301(c) of the act. We concluded that, with the exception of dealing with the administration of road credits, the contract changes complied with the act's requirements. We also concluded that more time would be needed to determine how these changes were actually carried out. You requested that we review the Forest Service's implementation of certain contract modifications and other provisions of the Tongass Timber Reform Act. As agreed with your office, we focused this report mainly on two issues--road credits and timber buffers. More specifically, we determined whether credits that timber harvesters receive for building harvest-related roads are used consistently between long-term and short-term timber sale contracts and whether buffers of standing timber have been left along designated streams as the act requires, and how the Forest Service monitors the buffers' effectiveness. During our review, we also noted inconsistencies in the Forest Service's documentation of the environmental significance of changes to timber harvest unit boundaries after environmental impact statements had been prepared. As agreed with your office, we included an analysis of this issue in this report. To address the first objective, we analyzed the use of road credits by short-term contractors in fiscal years 1990-93 and compared this usage with road credits used by long-term contractors. Using Forest Service accounting data, we also determined the extent to which the long-term contractors had applied road credits against the cost of purchasing Tongass timber since the inception of the long-term contracts through the end of fiscal year 1993. To address the second objective, we reviewed and analyzed the results of buffer monitoring conducted in 1992 and 1993 by the Forest Service and the Alaska Department of Fish and Game, reviewed the monitoring reports for 1991-93 from the Forest Service's Alaska Region and visited the Craig and Thorne Bay Ranger Districts within the Tongass National Forest to observe stream buffers. We also reviewed changes made in buffer-related policies and procedures by the Forest Service's Alaska Region in 1993-94. To address the third objective, we reviewed and compared the planned harvest unit boundary maps included in the environmental impact statements with maps of the actual harvest boundaries. On the basis of discussions with the Forest Service, the state of Alaska's Department of Environmental Conservation, and a private conservation group, we selected 19 APC timber harvest units and 41 KPC harvest units where the boundary changes may have been significant enough to require further environmental analyses. Our sample constituted about 33 percent of the APC units and 18 percent of the KPC units in which harvests had occurred outside the original boundaries. To determine the adequacy of documentation, we reviewed and analyzed harvest unit files. More specifically, we determined whether the files contained evidence that the forest supervisor had determined that the proposed boundary changes would not significantly change the effects discussed in the environmental impact statement or that the change was significant and would require a supplement to the environmental impact statement. In conducting our work, we also obtained additional information and comments from the Forest Service, the state of Alaska, timber industry officials, and representatives of conservation groups. Within the Forest Service, we performed work at the headquarters in Washington, D.C.; the Alaska Regional Office in Juneau, Alaska; the Ketchikan Area Office in Ketchikan, Alaska; and the Thorne Bay Ranger District in Thorne Bay, Alaska and the Craig Ranger District in Craig Alaska. Our work with Forest Service officials was focused on the timber management and wildlife and fisheries staffs. In September 1993, while our review was under way, APC closed its pulp mill, charging that it was losing money because the prices it paid for timber as a result of the long-term contract modifications were too high. The Forest Service responded that closure of the pulp mill constituted a breach of contract, and in April 1994 the Forest Service terminated APC's long-term contract. Although the APC contract is not active, we elected to retain certain data on APC in this report for illustrative purposes, and also because the courts have not yet ruled on the Forest Service's action in terminating the contract. We conducted our review between September 1992 and October 1994 in accordance with generally accepted government auditing standards. As requested, we did not obtain official agency comments on a draft of this report. However, the information in this report was discussed with timber management officials, including the Director, Timber Management Staff, at Forest Service headquarters, the Director's counterpart in the Alaska Region, and officials in the Department of Agriculture's Office of General Counsel. As chapter 2 will discuss, these officials disagreed with our conclusions about purchaser road credits. In other respects, however, they agreed that the information presented was accurate. We have incorporated their suggested changes where appropriate. Purchasers of timber in the Tongass National Forest often pay for part of the timber they purchase with credits they have received for building harvest-related roads. The Tongass Timber Reform Act required modifications to KPC's and APC's long-term contracts to ensure that credits KPC and APC received for building such roads would be provided in a manner consistent with procedures used in providing road credits to short-term contractors. This provision was aimed at eliminating KPC's and APC's competitive advantage of being able to maintain certain road credits for much longer periods of time than short-term contractors. As we pointed out in our March 1991 report, the Forest Service did not modify the APC and KPC contracts to address this provision of the act. Forest Service officials continue to believe this contract modification is not required. They maintain that consistency already exists because road credits are canceled at the end of all timber sale contracts, whether long-term or short-term. However, this approach leaves the long-term contractors' competitive advantage intact and is not consistent with congressional direction that the contracts be modified. Harvesting timber often requires that the company harvesting the timber build roads to move logging equipment in and out of the harvest area and transport harvested logs. As compensation to the timber purchaser, the Forest Service gives road credits equal to the estimated cost of building the roads. Timber purchasers can use these credits instead of cash to pay for timber. Certain limitations apply to road credits used to pay for harvested timber. When the Forest Service prepares a timber sale, it establishes a base value for the timber. This base value must be paid in cash. For example, if a timber sale has a base value of $400,000 and is sold under competitive bid for $900,000, the purchaser must pay the base value ($400,000) in cash. The remaining $500,000 can be paid in whole or in part with road credits. Because timber purchasers cannot use road credits to pay the entire cost of the timber, situations may arise in which they cannot use all the road credits they have earned. To continue the example above, if the purchaser earned road credits worth $700,000, the purchaser could apply only $500,000 in credits against the cost of the timber, because the difference between the purchase price and the base value is only $500,000. Those road credits that can be applied against the cost of timber are called "effective"; those road credits left over are called "ineffective." In this example, the timber purchaser has $500,000 of effective credits and $200,000 of ineffective credits. Under Forest Service contracts, a timber purchaser retains ineffective road credits until the expiration of the timber sale contract in which the credits are earned. Although such credits may appear valueless, for long-term contractors they can become effective--and therefore acquire value--if the timber's purchase price is adjusted upwards to reflect higher current market values for timber. Again using the earlier example, a subsequent adjustment in the purchase price from the original $900,000 to $1 million would also mean that $100,000 of ineffective road credits would be made effective. This additional amount could be used to offset the increased purchase price. APC and KPC have made extensive use of road credits as a means of paying for timber. Each used road credits to pay for about three-fourths of the value of timber harvested under its long-term contract. Through the end of fiscal year 1993, the value of timber sold to the two companies since the inception of the long-term contracts has been about $268 million (in constant 1993 dollars). The two companies used road credits to pay for 75 percent, or $201 million, of the total price of timber. KPC used road credits to pay for 73 percent of its timber; APC used road credits to pay for 79 percent. (See table 2.1.) The Forest Service did not revise the provision on the use of road credits in its long-term contracts to make them similar to the provision in its short-term contracts, as required by the reform act. Because this modification was not made, APC and KPC have been able to use ineffective road credits from timber offering to timber offering throughout the remaining life of their long-term contracts. By contrast, ineffective road credits for short-term contracts are canceled at the end of the contracts. We pointed out this inconsistency in our March 1991 report and recommended that action be taken. The Forest Service, however, has not acted on our recommendation. The Forest Service maintained--and continues to do so--that for ineffective road credits, no modification was needed to make the treatment of road credits consistent between long-term and short-term contracts. The Forest Service believes that the treatment is consistent, in that ineffective road credits are terminated at the end of either type of contract. It maintains that the amount of time the long-term contractors could hold the credits is not relevant. Our concern about the Forest Service's argument is that although ineffective credits are canceled at the end of both types of contracts, long-term contractors continue to hold a competitive advantage. Short-term contractors can use ineffective road credits only during the length of their contracts, which are considerably shorter than the 50-year long-term contracts--short-term contracts usually last 3 to 5 years. The long-term contractors are able to keep these credits available for possible use over a longer period by transferring them from timber offering to timber offering. Their competitive advantage is that they have greater ability to retain and use ineffective credits to offset timber payments if the price of timber rises during the life of their contracts. In our view, the language of the Tongass Timber Reform Act, as well as its legislative history, makes it clear that the Congress intended the Forest Service to make changes in road credits so that they would be treated substantially the same under both long- and short-term contracts. Comparisons between the two types of contracts show that this competitive advantage can be substantial. For example, as of March 1993, APC and KPC held $5.4 million in ineffective road credits; four short-term contractors held $3 million in ineffective road credits. The contracts held by the short-term contractors are scheduled to expire in 1995 and 1996, at which time any remaining ineffective credits will be canceled. By contrast, KPC retains the ability to convert or transfer its ineffective credits between offerings until the year 2004. APC would have been able to carry forward its ineffective credits to 2011 had its contract not been terminated. The following are more specific illustrations of how KPC has been able to use ineffective road credits in ways that short-term timber contract holders cannot: In March 1992, KPC transferred $7,510,248 in road credits it had received from five previous timber offerings back to the long-term contract's main account for use in subsequent offerings. Of this amount, only $26,086 was effective road credits. Had the credits been treated consistently with those of short-term contracts, KPC would not have been able to transfer the $7,484,162 in ineffective credits. In January 1993, KPC paid cash in the amount of $407,747 instead of using road credits for timber that it had harvested. Had this been a short-term contract, the financial transaction would have been closed and the credits could not have been used. However, because it was under a long-term contract, KPC was able to transfer ineffective road credits from other offerings to this one, replace the cash with ineffective credits, and thus receive a refund of the cash it paid above the base rate. In our March 1991 report, we noted that the Forest Service did not modify the long-term timber sales contracts to comply with the requirements of the reform act that road credits be treated substantially the same under both long- and short-term contracts. We pointed out that the language of the Tongass Timber Reform Act, as well as its legislative history, makes it clear that the Congress intended the Forest Service to make changes in road credits so that they would be treated substantially the same under both long- and short-term contracts. In that report, we recommended that the Forest Service revise the contracts accordingly. We continue to believe that ineffective road credits resulting from each timber offering should be canceled under KPC's long-term contract after each timber offering is completed. Unless the Forest Service revises KPC's long-term contract to bring this change about, KPC will continue to have a competitive advantage over short-term timber contract holders. Our conclusions would also be applicable to APC if the Forest Service had not terminated APC's long-term contract or if for some reason APC's contract is reinstated in the future. In its response to our earlier report and in its discussions on a draft of this report, the Forest Service has continued to maintain that its current policy complies with the act and intends to take no action to modify the provision for road credits in long-term contracts. The Forest Service maintains that the treatment of road credits is consistent, in that ineffective road credits are terminated at the end of either type of contract. They maintain that the length of time that the long-term contractors can hold the road credits is not relevant. Our concern about the Forest Service's argument is that although ineffective credits are canceled at the end of both types of contracts, long-term contractors continue to hold a competitive advantage. Their competitive advantage is that they have greater ability to retain and use ineffective credits to offset timber payments if the price of timber rises during the life of their contracts. In our view, the language of the Tongass Timber Reform Act, as well as its legislative history, makes it clear that the Congress intended the Forest Service to make changes in road credits so that they would be treated substantially the same under both long-and short-term contracts. In light of the Forest Service's position that it needs to take no action to comply with the Tongass Timber Reform Act's provision on road credits, the Congress may wish to consider directing the Secretary of Agriculture to modify the Ketchikan Pulp contract so that ineffective road credits generated during a timber offering would be canceled after the timber offering is completed. The Tongass Timber Reform Act directs the Forest Service to protect fish and wildlife habitat in streamside, or "riparian," areas of harvest units by designating 100-foot buffers of timber to be left standing along the sides of many streams in timber harvest areas. During inspections of these buffers in 1992 and 1993, however, both the Forest Service and the state of Alaska found buffers that, at some point along their length, did not meet the minimum 100-foot width requirement. The Forest Service has since taken sufficient steps to ensure greater compliance with this requirement. The Forest Service's management plan for the Tongass National Forest, as well as its agreement with the state of Alaska for managing water quality, calls for monitoring the effectiveness of buffers. We found that before 1994, the Forest Service's monitoring efforts had been limited in scope and often did not include measurements against important criteria that could help determine how effectively buffers were working. This situation was partly the result of the lack of specific monitoring guidance from the Alaska Regional Office. In fiscal year 1994, the Forest Service implemented a new program to monitor buffers' effectiveness that, among other things, provides clearer direction for the types of information to be gathered. The reform act requires that timber harvesters leave 100-foot buffers of standing timber along two classes of streams in the Tongass National Forest--class I streams and class II streams that flow directly into class I streams: Class I streams are perennial or intermittent streams that (1) are direct sources of domestic-use water; (2) provide spawning, rearing, or migration habitat for migratory and resident fish; or (3) have a major effect on the water quality of another class I stream. Class II streams that flow directly into a class I stream are perennial or intermittent streams that (1) provide spawning and rearing habitat for resident fish or (2) have moderate influence on the water quality of other class I or class II streams. Such buffers are designed to protect riparian areas, which are important in such ways as providing fish and wildlife habitat, protecting stream channels and stream banks, and stabilizing floodplains. Whenever the stream lies within the harvest area, the act requires a 100-foot buffer on each side. Whenever the stream forms a boundary of the harvest area, the buffer must be at least 100 feet wide on the side where timber is to be harvested. The act required buffers for those timber harvest units from which timber was either sold or released for harvest on or after March 1, 1990. The Forest Service took two main steps to implement this provision of the act. First, it modified APC's and KPC's long-term contracts to require that buffers of at least 100 feet be established along class I and class II streams. Second, the Forest Service modified its regional Soil and Water Conservation Handbook in February 1991 to incorporate changes resulting from the act. The handbook now identifies the management practices needed to maintain and protect water quality and fisheries habitat and to minimize adverse effects on riparian areas from logging and other land-disturbing management activities. The handbook's changes reinforce the importance of the buffers by calling for special attention to land and vegetation for 100 feet from the edges of all streams, lakes, and other bodies of water. Under an agreement with the Alaska Department of Environmental Conservation, the Forest Service is to monitor how well the buffers have been implemented. Among other things, the Forest Service is to determine whether established buffers comply with applicable standards and guidelines, including checking whether the buffers are at least 100 feet wide. In addition to the Forest Service's monitoring, the Alaska Departments of Fish and Game and Environmental Conservation monitor buffer widths. On-site monitoring inspections during 1992 and 1993 by the Forest Service and the Department of Fish and Game of portions of KPC's and APC's buffers showed instances in which the 100-foot minimum requirement was not met. More specifically: In September 1992, the Department of Fish and Game reported that during an inspection of harvest units on northern Prince of Wales Island, at least 16 of the 20 buffer measurements taken did not meet the 100-foot requirement. The narrowest portions of the buffers measured were about 50 feet wide, and portions of 11 buffers were less than 75 feet wide. In October 1992, Thorne Bay Ranger District staff made 132 buffer measurements and found that portions of 38 buffers--almost 29 percent--were less than 100 feet wide; most were narrower by 10 to 20 feet. In July 1993, an interdisciplinary team from the Sitka Ranger District reviewed more than 120 timber harvest units and found that portions of the buffers in more than 100 of the units were less than 100 feet wide. However, these buffers were usually only narrower by a few feet. The inspectors noted that such factors as uneven terrain, dense vegetation, and meandering, multichannel stream courses can lead to errors in designating buffers and adhering to minimum widths across the many miles of riparian areas affected by timber harvests. Changes have been made to address the problems identified in the inspections of buffer widths by the Forest Service and the Alaska Department of Fish and Game. Each of the three area offices of the Tongass National Forest--Ketchikan, Stikine, and Chatham--recognized the need to take corrective action to attain a higher degree of conformity with the requirement and have taken actions to ensure greater compliance. The Ketchikan area office, where the greatest concentration of buffers exists, provides an example. In March 1993, in response to a December 1992 directive from the area office, the area's three district rangers reported that corrective actions had either been taken or would be taken in the near future. For example, the rangers said that a certification statement on buffer widths had been added to the planning documents for all harvest units, cloth tapes and laser guns were being used to provide precise measurements of buffer widths, and district personnel received training on buffer measurements and other aspects of harvest unit layout. Similar steps have been taken or are under way in the Stikine and Chatham areas. We believe the steps taken at the area and district levels will help ensure that buffers with the appropriate widths are established. The Tongass Land Management Plan and the Forest Service's agreement with the Alaska Department of Environmental Conservation specify that the Forest Service is to monitor the effectiveness of its projects, activities, and practices. As part of its monitoring effort, the Forest Service is to determine if buffers have been effective in minimizing the adverse effects that logging and other land-disturbing activities could have on riparian areas. We found that before 1994, the Forest Service did not have a regional program to monitor the buffers' effectiveness. Each of the area offices had its own monitoring procedures. However, these procedures to monitor buffer effectiveness were limited in scope and often did not include measurements against important criteria (such as water quality) needed to determine how effectively buffers were working. For example, within the Stikine area, monitoring of the buffers' effectiveness consisted of visual observations of the extent to which the buffers contained timber that had been blown down by wind. While these observations yielded insights into the relative lack of effectiveness of buffers with blown-down timber, the focus on this single characteristic left many questions about effectiveness unaddressed. Similarly, the Ketchikan area limited its monitoring efforts to steep, deeply cut drainages. Again, the efforts yielded useful information, but the effectiveness of buffers that did not fall into this one limited category went largely unaddressed. According to Stikine area officials, the lack of sufficient funds, staff, and monitoring objectives were the primary reasons why monitoring buffers' effectiveness has been limited. In addition, Ketchikan area officials told us that more specific direction was needed from the Alaska Regional Office identifying the kinds of information needed to monitor buffers' effectiveness. Alaska Regional Office officials said that they initiated a monitoring project in 1992 that would lead to establishing a regionwide program to monitor buffers' effectiveness. The project reviewed the condition of buffers, evaluated their effectiveness at maintaining riparian habitat and water quality, and recommended improvements to buffers' design. The project identified six types of information for use in assessing buffers' effectiveness, including measuring the volume of large woody debris in a stream and determining the stability of stream banks. According to the regional office monitoring coordinator, the project was tested at eight sites in the Chatham area in 1993. For example, in June 1993 the Forest Service and the Alaska Department of Environmental Conservation jointly monitored the effectiveness of two buffers along a class II stream. The environmental specialist with the Alaska Department of Environmental Conservation told us preliminary indications showed that the two buffers were meeting expectations in being able to protect riparian areas. The regional office monitoring coordinator also told us that the 1994 buffer monitoring plans for each of the area offices included the types of information identified as contributing to the evaluation of buffers' effectiveness in the eight-site project. Currently, each of the three areas is also participating in a multiyear, forestwide study of the stability and effectiveness of stream buffers. According to the regional monitoring coordinator, the interim results of the study will be available in the spring of 1995. The Forest Service has taken steps to improve both monitoring the width of buffers and evaluating their effectiveness. These steps should help ensure that buffers more consistently meet minimum width requirements and that their overall effectiveness is assessed more systematically. Because the buffer requirement is relatively new and because the effectiveness of buffers has been studied only to a limited degree, more time will be needed to determine how well they are working to help protect fish and wildlife habitat in timber harvest areas. If the boundary of a timber harvest unit is changed after the environmental impact statement (EIS) for the area has already been prepared, the Forest Service's policy requires that forest supervisors determine and document whether the changes are environmentally significant enough to require additional environmental study. Forest supervisors were not, in all cases, documenting the environmental significance of the harvest units' boundary changes or the need for additional analysis beyond what had been described in the existing EIS. This was particularly the case for KPC's harvest units. We examined 41 instances in which boundary changes had occurred in areas harvested by KPC and found that in 39 instances the documentation was not adequate. In 17 instances, there was no documentation at all, and in 22 instances the documentation had not been reviewed according to the Forest Service's policy. We also examined 19 instances in which boundary changes had occurred in areas harvested by APC and found that adequate documentation was present in 18 of them. As a result, the Forest Service had no assurance that the environmental consequences of the boundary changes were analyzed. During our review, in October 1993 the current forest supervisor responsible for KPC's harvest units sent instructions to district rangers detailing a process for assessing boundary changes and specifically stated that he would document the environmental significance of any changes and the need for any additional environmental analysis. Under the Forest Service's policy and in compliance with the National Environmental Policy Act, the Forest Service is required to assess the environmental impacts of proposed timber harvests and prepare an EIS. Among other things, an EIS documents the location and design of the planned timber harvest units within the area covered by the timber offering and identifies the volume of timber to be cut. For a number of reasons, the boundaries of timber harvest units analyzed in the EIS may subsequently be revised. At the time the EIS is developed, precise information about the volume of economically harvestable timber, unique habitat for endangered species, or other specific characteristics of the land may not be known with complete accuracy. For example, more detailed on-site review could show that the planned boundaries contain less harvestable timber than originally projected or that additional eagle nesting areas or streams requiring buffer protection might be found. To deal with such circumstances and still provide the needed volume of harvestable timber, boundary adjustments may be needed. However, by this time the EIS may have been developed, made available for comment, and approved. The Forest Service's policy contains several requirements for assessing and documenting the environmental effects of boundary changes made after environmental review has already been completed. The EIS specifies that for any proposed action (such as a boundary change) that deviates from a planned activity, the forest supervisor is to document the environmental significance of the proposed action. In doing so, if the forest supervisor determines that the impacts of the change do not deviate significantly from the impacts discussed in the EIS, the timber sale can proceed without further environmental study. However, if the forest supervisor determines that the change is significant, a supplemental EIS must be prepared. Contrary to the Forest Service's policy, forest supervisors had not in all cases documented the environmental significance of changes to harvest unit boundaries or the need for additional environmental analysis--particularly for KPC's harvest units. This situation occurred primarily because the forest supervisor inappropriately delegated his authority to district rangers to determine if boundary changes were signifcant and did not require the district rangers to provide documentation if they determined that the change was not significant. The Forest Service's policy does not allow this authority to be delegated to district rangers and in all cases requires documentation of the environmental significance. We reviewed the files for 60 harvest units--19 for APC and 41 for KPC--that had boundary changes after the EIS had been prepared. These units represented about 33 percent of APC's units and 18 percent of KPC's units in which harvests had occurred outside the original boundaries. Adequate documentation was present in 18 of the 19 files for APC's units but in only 2 of the 41 files for KPC's units. More specifically, for KPC's units, 16 units had no documentation at all of the environmental significance of 1 unit had adequate documentation of the environmental significance of one boundary change but no documentation for a second boundary change, and 22 units had documentation prepared by someone other than the forest supervisor--such as a district ranger--with no indication that the forest supervisor had reviewed the results. Guidance from the region places the responsibility for such determinations with the forest supervisor. Documentation of environmental impacts is important because it clearly demonstrates that the impacts were considered. However, the lack of documentation goes beyond simply being out of compliance with the Forest Service's policy. When no documentation was present in the file, the Forest Service had no assurance that the environmental significance of the boundary changes had actually been analyzed. While the absence of a forest supervisor's review of documentation may seem of less concern than the absence of documentation altogether, the absence of review has been a concern that the Forest Service has tried to correct for some time. In a November 1990 review, personnel in the Alaska Region noted that the forest supervisor responsible for KPC's harvest units at that time had inappropriately delegated to others the authority to make determinations about the environmental significance of boundary changes. Contrary to the Forest Service's policy, the delegation of authority did not require documentation if it was determined that the boundary change was not significant. The Alaska Region personnel recommended that the delegation of authority be withdrawn. When those personnel followed up in February 1992, they noted that the practice had apparently stopped since the forest supervisor had verbally withdrawn his delegation of authority. However, 9 of the 22 instances we examined in which the forest supervisor's review was lacking occurred after February 1992. We discussed our findings with the current forest supervisor and he agreed that there was a need for better documentation of boundary changes and their significance. In October 1993, the forest supervisor sent a letter to district rangers setting forth a detailed five-step process for assessing boundary changes and specifically stating that the forest supervisor will determine the significance of any changes and the action necessary. The Forest Service needs to ensure that the problems of missing or inadequate documentation of the environmental significance of boundary changes to timber harvest units are addressed. In recent years, although the problem has been noted, progress in correcting it has been slow. Improved compliance is important in providing assurance that environmental concerns associated with timber harvesting activities under long-term contracts have been fully addressed. Accordingly, we believe the Alaska Regional Office needs to continue its oversight of forest supervisors' compliance with the documentation requirements for changes to harvest unit boundaries that are made after the EIS have been issued. To ensure full consideration and disclosure of the environmental impacts of boundary changes to harvest units, we recommend that the Secretary of Agriculture direct the Chief of the Forest Service to require Alaska Regional Office officials to periodially check to ensure that forest supervisors are properly documenting the environmental significance of boundary changes to timber harvest units made after EIS's have been issued in the Tongass National Forest. We discussed the facts and our conclusions with the Forest Service officials responsible for timber management activities at headquarters and the Alaska Regional Office. These officials generally agreed with our facts and conclusions concerning documenting changes to timber harvest units and provided some technical clarifications that we incorporated, as appropriate.

Pursuant to a congressional request, GAO reviewed the Forest Service's implementation of certain unilateral modifications to long-term contracts in Alaska and other requirements of the Tongass Timber Reform Act, focusing on whether: (1) road credits are used consistently between long-term contracts and short-term contracts; (2) buffers of standing timber have been left along designated streams as required; and (3) the Forest Service is requiring full documentation of environmental effects whenever changes are made to timber harvest area boundaries. GAO found that: (1) the Forest Service believes it treats road credits consistently across all contracts, since unused road credits are cancelled at the end of all timber sales contracts; (2) the long-term contractors' ability to carry unused road credits forward for longer periods than short-term contractors gives them an unfair competitive advantage; (3) some streamside buffers did not meet the 100-foot minimum width during the first years immediately following the act's passage, but the Forest Service has since taken steps to enforce this requirement; (4) in 1994, the Forest Service issued guidance and initiated a new monitoring program to ensure the buffers' effectiveness; (5) the Forest Service often does not document the environmental effects of timber harvest boundary changes; (6) in some instances, the forest supervisor has inappropriately delegated his documenting authority to district rangers and waived documentation where he believed boundary changes were insignificant; and (7) the forest supervisor has since withdrawn the authority delegation and established a detailed process for assessing boundary changes.

The Coast Guard is a multi-mission, maritime military service within the Department of Homeland Security (DHS). The Coast Guard's responsibilities fall into two general categories--those related to homeland security missions, such as port security, vessel escorts, security inspections, and defense readiness; and those related to non-homeland security missions, such as search and rescue, environmental protection (including oil spill response), marine safety, and polar ice operations. To carry out these responsibilities, the Coast Guard operates a number of vessels and aircraft and, through its Deepwater Program, is currently modernizing or replacing those assets. At the start of Deepwater, the Coast Guard chose to use a system-of-systems acquisition strategy that would replace its assets with a single, integrated package of aircraft, vessels, and communications systems through Integrated Coast Guard Systems (ICGS), a system integrator that was responsible for designing, constructing, deploying, supporting and integrating the assets to meet Coast Guard requirements. The decision to use a system integrator was driven in part because of the Coast Guard's lack of expertise in managing and executing an acquisition of this magnitude. In a series of reports since 2001, we have noted the risks inherent in the systems integrator approach and have made a number of recommendations intended to improve the Coast Guard's management and oversight. In particular, we raised concerns about the agency's ability to keep costs under control in future program years by ensuring adequate competition for Deepwater assets and pointed to the need for better oversight and management of the system integrator. We, as well as the DHS Inspector General and others, have also noted problems in specific acquisition efforts, notably the National Security Cutter and the 110-Foot Patrol Boat Modernization, which the Coast Guard Commandant permanently halted in November 2006 because of operational and safety concerns. Over the past year, the Coast Guard's Deepwater Program has been in the midst of a major shift, from heavy reliance on a system integrator to greater government control and a greater government role in decision- making. Coast Guard officials acknowledged that the initial approach gave too much control to the contractor. The Coast Guard has made a number of significant program decisions and taken actions, including: an increase in the Coast Guard's management role through a reorganization of its acquisition directorate; a restructured approach to the review and approval of individual planned improvements to the use and quality of information on program performance, and initiatives to develop a workforce with the requisite acquisition and program management skills. Although many of the changes the Coast Guard has undertaken are positive and may assist the program in meeting its goals, these initiatives are in their preliminary stages, with many processes and procedures yet to be implemented. Maintaining momentum will be important in improving the Deepwater Program; we will continue to evaluate the Coast Guard's progress in all of these areas as part of our ongoing work. As of July 2007, the Coast Guard began consolidating acquisition responsibilities into a single Acquisition Directorate, known as CG-9, and is making efforts to standardize operations within this directorate. Previously, Deepwater acquisitions were managed separately from other Coast Guard acquisitions by the Deepwater Program Executive Office. The Coast Guard's goal for the reorganization is that it will provide greater consistency in the Coast Guard's oversight and acquisition approach by concentrating acquisition activities under a single official and allowing greater leveraging of knowledge and resources across programs. Figure 1 depicts the changes. As part of asserting a larger management role in Deepwater, the Coast Guard has taken additional steps, such as the following. Integrated product teams--a key program management tool--are in the process of being restructured and re-chartered. In the past, the teams were led and managed by the contractor, while government team members acted as "customer" representatives. Now, the teams are led by Coast Guard personnel. The teams are responsible for discussing options for problem solving relating to cost, schedule, and performance objectives. For example, one team oversees management of the National Security Cutter project. The Coast Guard has formally established a technical authority for engineering to oversee issues related to Deepwater; Coast Guard officials told us a similar authority for C4ISR is pending. The role of the technical authority in program acquisition is to review, approve, and monitor technical standards and ensure that assets meet these standards, among other duties. Previously the contractor had some decision making power and the Coast Guard held an advisory role. In some cases this led to bad outcomes. For example, Coast Guard officials told us their engineering experts had raised concerns during the National Security Cutter's design phase about its ability to meet service life requirements and recommended design changes, but they were ignored. If the recommendations had been heeded, changes to the ship's design could have been made earlier and some additional costs may have been avoided. Coast Guard project managers, who manage individual Deepwater assets, now have increased responsibility and accountability for acquisition outcomes. Previously, the project managers' role was less significant. For example, the contractor, not the project manager, provided Coast Guard management with quarterly updates on the status of assets. Now, project manager charters for individual assets outline project managers' responsibilities and authorities, including ensuring projects are on time and within budget. The Coast Guard is moving away from the ICGS contract and the systems- of-systems model to a more traditional acquisition strategy, where the Coast Guard will manage the acquisition of each asset separately. Agency officials told us that they are in the process of re-evaluating their long term relationship with ICGS, including an assessment of the value of continuing this contractual relationship. The government is under no further obligation to acquire services under this contract, as the minimum specified quantity of services was met during the 5-year base term. However, Coast Guard officials told us they may continue to issue task orders under the contract for specific efforts, such as logistics, or for assets that are already well under way. The Coast Guard recently demonstrated this new approach by holding its own competition for the Fast Response Cutter-B (FRC-B), in lieu of obtaining the asset through the ICGS contract. The Coast Guard issued a request for proposals in June 2007 for the design, construction, and delivery of a modified commercially available patrol boat. Coast Guard officials told us they are currently evaluating proposals and expect to award the contract by the third quarter of fiscal year 2008, with the lead cutter expected for delivery in 2010. The Coast Guard plans to hold other competitions outside of the ICGS contract for additional assets in the future, including the Offshore Patrol Cutter. The Coast Guard's transition to an asset-by-asset acquisition strategy is enabling increased government visibility and control over its acquisitions. Cost and schedule information are now captured at the individual asset level rather than at the overall, system-of-systems program level. For example, while cost and schedule breaches in the past were to be reported at the Deepwater system-of-systems level only, the Coast Guard is now reporting breaches by asset, as occurred recently with the cost increase on the C-130J long range surveillance aircraft and the first National Security Cutter. In implementing this new acquisition approach, the Coast Guard also plans to start following the processes set forth in its Major Systems Acquisition Manual (MSAM), which include acquisition milestones, documentation requirements, and cost estimates for individual assets. Previously, the Coast Guard was authorized to deviate from the MSAM requirements for the Deepwater Program. Reviews were required on a schedule-driven basis--planned quarterly or annually--as opposed to the more disciplined, event-driven process outlined in the MSAM. In addition, the Coast Guard scheduled key decision points only occasionally and focused primarily at the Deepwater Program as a whole, as opposed to at an individual asset level. Coast Guard officials told us that little, if any, documentation of key decisions was maintained. The MSAM process requires reports on specific elements of program knowledge at milestones in the acquisition process, supplemented by annual briefings. For example, reports on the maturity of technology and estimates of an asset's life cycle cost are required at Milestone 2, before an asset enters the capability development and demonstration phase. Figure 2 depicts the key phases and milestones of the MSAM process. Although the Coast Guard's decision to follow a more formalized and asset-driven acquisition process is a positive step, the Coast Guard faces challenges in implementing the process. The transition to the MSAM process is estimated to take at least 2 years to complete, as the Coast Guard is determining where Deepwater assets are in the process and is having to create basic documentation that was not required under the prior process--such as statements of requirements and technology assessments--to bring assets into compliance. For example, the National Security Cutter is in the production phase, but the Coast Guard is reviewing what documentation should be completed for milestones that already passed. Coast Guard officials also acknowledged the hurdles they face in bringing C4ISR efforts under the MSAM process, as this asset may require a broader Deepwater-level approach to tie individual assets together. GAO's work on best practices for major acquisitions has demonstrated that a knowledge-based approach to decision making, where specific knowledge is gathered and measured against standards at key points in the acquisition process to inform decisions about the path forward, can significantly improve program outcomes. While the MSAM process contains some characteristics of a knowledge-based approach, there are key differences that could affect acquisition outcomes. For example, the Milestone 2 decision to approve low-rate initial production precedes the majority of the design activities in the capability development and demonstration phase. We will continue to evaluate the Coast Guard's process as compared to established commercial best practices in our ongoing work. The MSAM requires, as part of the acquisition approval process, the Coast Guard to report to DHS on all major program decisions beginning with the start of an acquisition program. Coast Guard and DHS officials told us that the processes and procedures for coordinating acquisitions with DHS's Investment Review Board, which is tasked with reviewing major acquisition programs, are currently undergoing revision. According to the Coast Guard, DHS approval of acquisition decisions is not technically necessary because the department delegated oversight responsibility for the Deepwater Program to the Coast Guard in 2003. Recently, however, the Coast Guard has increased communication and coordination through good will and informal procedures such as personal working relationships. We are currently conducting work on DHS's investment review process for this committee and will release our findings later this year. The proper functioning of an acquisition organization and the viability of the decisions made through its acquisition process are only as good as the information it receives. In the past, much of the Deepwater Program information was collected on an ad-hoc basis and focused more at the Deepwater Program level, as opposed to the individual asset level. The Coast Guard is now putting processes in place to improve the use and quality of its information on program performance through a number of different efforts. The Coast Guard recently developed Quarterly Project Reports, a compilation of cost and schedule information that summarizes the status of each acquisition for reporting through the Coast Guard chain of command as well as to DHS and the Congress. The Coast Guard also plans to analyze program information using the "probability of project success" tool. Coast Guard acquisition officials told us they will use this tool to grade each asset on 19 different elements, including acquisition process compliance and progress and earned value management data, to assess the risk of assets failing to meet their goals. This information is intended to enable senior Coast Guard management officials to review project risks and status at a glance. At this time, the Coast Guard has completed reports on ten Deepwater assets. The Coast Guard is working to improve the quality and reporting of earned value management data. For example, officials have developed standard operating procedures for earned value reporting and analysis to create consistency among Deepwater assets. As part of these procedures, Coast Guard analysts have begun to review the earned value management data provided by contractors and provide the results to project managers. The Coast Guard is also exploring how it can use the Defense Contract Management Agency to validate contractor earned value systems. Certification would provide the Coast Guard greater assurance that contractor data are accurate. The Coast Guard has acknowledged the need for a workforce that can effectively manage its major acquisitions--including Deepwater--a challenge common within the federal government. With the July 2007 creation of the Acquisition Directorate, the Coast Guard has taken steps to develop a workforce with the requisite acquisition and program management skills, while trying to reduce reliance on support contractors. The Coast Guard's 2008 acquisition human capital strategic plan sets forth a number of acquisition workforce challenges, including a shortage of civilian acquisition staff, lack of an acquisition career path for Coast Guard military personnel, difficulty in tracking acquisition certifications, and absence of policy guidance on the use of support contractors in the acquisition process. To address these challenges, the Coast Guard has begun initiatives that leverage expertise and best practices from other organizations, including use of GAO's Framework for Assessing the Acquisition Function at Federal Agencies. These initiatives include establishing an Office of Acquisition Workforce Management to contracting for development of a strategic tool to forecast acquisition workforce needs in terms of numbers and skill sets; utilizing hiring flexibilities such as reemployed annuitants, relocation bonuses, and direct hire authority; and developing certification requirements for the entire Acquisition Directorate (not just for project managers) to help develop what it calls "bench strength" in the acquisition workforce. Some of these initiatives have begun to see concrete results; for example, key Acquisition Directorate leadership positions have been filled and, through use of hiring flexibilities, over 100 vacant civilian acquisition positions have been filled, 40 of them using direct hire authority. However, as Table 1 shows, the Acquisition Directorate still has not fully staffed its billets, including a range of positions--such as contract specialists, financial analysts, systems engineers, and program management staff-- that the directorate has designated as "hard-to-fill." The Acquisition Directorate has also identified a need for about 189 contractor billets for fiscal year 2008. These support contractors fill a range of positions, such as contracting support and logisticians. Despite the Coast Guard's stated goal of reducing its reliance on support contractors, acquisition management officials told us that use of contractors will likely continue for the foreseeable future and is contingent upon the Coast Guard's ability to build its core staff. Other initiatives are still in the early stages, and it is too soon to evaluate their outcomes. For example, the Coast Guard is developing a workforce forecasting tool, which it plans to use to answer key questions about its strategic acquisition workforce needs. This tool requires significant up- front data collection and management training efforts to be used effectively. The Coast Guard is also evaluating a similar tool developed by the Air Force and will determine which tool best suits their needs in the future. The new and modernized assets the Coast Guard expects to acquire under the Deepwater Program are intended to be used to help meet a wide range of missions. After the September 11, 2001, terrorist attacks, the Coast Guard's priorities and focus had to shift suddenly and dramatically toward protecting the nation's vast and sprawling network of ports and waterways. Coast Guard cutters, aircraft, boats, and personnel normally used for non-homeland security missions were shifted to homeland security missions, which previously consumed only a small portion of the agency's operating resources. Although we have previously reported that the Coast Guard is restoring activity levels for many of its non-homeland security missions, the Coast Guard continues to face challenges in balancing its resources between the homeland and non-homeland security missions. In addition to the growing demands for homeland security missions, there are indications that the Coast Guard's requirements are also increasing for selected non-homeland security missions. The Coast Guard's heightened responsibilities to protect America's ports, waterways, and waterside facilities from terrorist attacks owe much of their origin to the Maritime Transportation Security Act of 2002 (MTSA). This legislation, enacted in November 2002, established a port security framework that was designed, in part, to protect the nation's ports and waterways from terrorist attacks by requiring a wide range of security improvements. The SAFE Port Act, which was enacted in October 2006, made a number of adjustments to programs within the MTSA-established framework, creating additional programs or lines of efforts and altering others. The additional requirements found in the SAFE Port Act have added to the resource challenges already faced by the Coast Guard, some of which are described below: Inspecting domestic maritime facilities: Pursuant to Coast Guard guidance, the Coast Guard has conducted annual inspections of domestic maritime facilities to ensure that they are in compliance with their security plans. The SAFE Port Act added additional requirements that inspections be conducted at least twice per year and that one of these inspections be conducted unannounced. More recently, the Coast Guard has recently issued guidance requiring that unannounced inspections be more rigorous than before. Fulfilling the requirement of additional inspections and potentially more rigorous inspections, may require additional resources in terms of Coast Guard inspectors. Inspecting foreign ports: In response to a MTSA requirement, the Coast Guard established the International Port Security Program to assess and, if appropriate, make recommendations to improve security in foreign ports. Congressional directives have called for the Coast Guard to increase the pace of its assessments of foreign ports. However, to increase its pace, the Coast Guard may have to hire and train new staff, in part because a number of experienced personnel are rotating to other positions as part of the Coast Guard's standard personnel rotation policy. Coast Guard officials also said that they have limited ability to help countries build on or enhance their own capacity to implement security requirements because the program does not currently have the resources or authority to directly assist countries with more in-depth training or technical assistance. Fulfilling port security operational requirements: The Coast Guard conducts a number of operations at U.S. ports to deter and prevent terrorist attacks. Operation Neptune Shield, first released in 2003, is the Coast Guard's operations order that sets specific security activities (such as harbor patrols and vessel escorts) for each port and specifies the level of security activities to be conducted at each port. As individual port security concerns change, the level of security activities also change, which affects the resources required to complete the activities. Many ports are having difficulty meeting their port security requirements, with resource constraints being a major factor. Meeting security requirements for additional Liquified Natural Gas (LNG) terminals: The Coast Guard is also faced with providing security for vessels arriving at four domestic onshore LNG import facilities. However, the number of LNG tankers bringing shipments to these facilities will increase considerably because of expansions that are planned or under way. As a result of these changes, Coast Guard field units will likely be required to significantly expand their security workloads to conduct new LNG security missions. Boarding and inspecting foreign vessels: Security compliance examinations and boardings, which include identifying vessels that pose either a high risk for noncompliance with international and domestic regulations or a high relative security risk to the port, are a key component in the Coast Guard's layered security strategy. An increasing number of vessel arrivals in U.S. ports may impact the pace of operations for conducting security compliance examinations and boardings in the future. For example, in the 3-year period from 2004 through 2006, vessel arrivals rose by nearly 13 percent and, according to the Coast Guard, this increase is likely to continue. Moreover, officials anticipate that the increase in arrivals will also likely include larger vessels, such as tankers, that require more time and resources to examine. At present, it is unclear to what extent increased demands on resources may impact the ability of Coast Guard field units to complete these activities on vessels selected for boarding. Establishing interagency operational centers: The SAFE Port Act called for establishment of interagency operational centers, directing the Secretary of DHS to establish such centers at all high-priority ports no later than 3 years after the Act's enactment. The Coast Guard estimates the total acquisition cost of upgrading 24 sectors that encompass the nation's high priority ports into interagency operations centers will be approximately $260 million. Congress funded a total of $60 million for the construction of interagency operational centers for fiscal year 2008. The Coast Guard has not requested any additional funding for the construction of these centers as part of its fiscal year 2009 budget request. However, as part of its fiscal year 2009 budget request, the Coast Guard is requesting $1 million to support its Command 21 acquisition project (which includes the continued development of its information management and sharing technology in command centers). So, while the Coast Guard's estimates indicate that it will need additional financial resources to establish the interagency operational centers required by law, its current budget and longer term plans do not include all of the necessary funding. Updating area maritime security plans: MTSA, as amended, required that the Coast Guard develop, in conjunction with local public and private port stakeholders, Area Maritime Security Plans. The plans describe how port stakeholders will deter a terrorist attack or other transportation security incident or secure the port in the event such an attack occurs. These plans were initially developed and approved by the Coast Guard by June 2004. MTSA also requires that the plans be updated at least every 5 years. The SAFE Port Act added a requirement to the plans that specified that they identify salvage equipment able to restore operational trade capacity. The Coast Guard, working with local public and private port stakeholders, is required to revise its plans and have them completed and approved by June 2009. This planning process may require a significant investment of Coast Guard resources, in the form of time and human capital at the local port level for existing plan revision and salvage recovery development as well as at the national level for the review and approval of all the plans by Coast Guard headquarters. While the Coast Guard continues to be in the center of the nation's response to maritime-related homeland security concerns, it is still responsible for rescuing those in distress, protecting the nation's fisheries, keeping vital marine highways operating efficiently, and responding effectively to marine accidents and natural disasters. Some of the Coast Guard's non-homeland security missions are facing the same challenges faced by its homeland security missions with regard to increased mission requirements. Examples of these additional requirements include (1) revising Area Maritime Security Plans so they also cover natural disasters, (2) revising oil spill regulations to better protect the Oil Spill Liability Trust Fund from risks related to certain vessels with disproportionately low limits of liability, (3) patrolling and enforcing a Presidential declaration regarding new protected areas such as the Northwestern Hawaiian Islands Coral Reef Ecosystem Reserve, and (4) increasing polar activities commensurate with increased resource exploitation and vessel traffic in the artic. In closing, we would like to emphasize several key points as we continue to oversee the various Coast Guard initiatives discussed today. First, now that the Coast Guard has made the decision to assume a greater management and oversight role of the Deepwater Program, sustained effort on a number of fronts will be needed for some time to come. Whether the Coast Guard will achieve its goals is largely contingent on continued strong leadership and a commitment to adhering to a knowledge-based acquisition approach that was lacking in the past. In addition, the Coast Guard originally turned to the private sector to manage Deepwater, in part, because the government lacked requisite expertise. Thus, the Coast Guard's ability to build an adequate acquisition workforce is critical, and over time the right balance must be struck between numbers of government and contractor personnel. Similarly, the right balance must be struck between homeland and non- homeland security missions. In the aftermath of the September 11, 2001 terrorist attacks, the Coast Guard understandably shifted its focus to homeland security missions at the expense of non-homeland security missions. Congress passed and the President signed legislation that supported and reinforced this shift that further increased Coast Guard missions related to security. Our recent work on the Coast Guard's homeland security programs has indicated that these missions continue to increase demands on resources. To further complicate the Coast Guard's resource and mission balancing act, unexpected events such as terrorist attacks or natural disasters could result in major shifts in resources and operations. Thus, the Coast Guard will continue to face the challenge inherent in being a multi-mission force. Mr. Chairman, this concludes our testimony. We would be happy to respond to any questions Members of the Committee may have. For further information about this testimony, please contact John P. Hutton, Director, Acquisition and Sourcing Management, at (202) 512-4841, [email protected] or Stephen L. Caldwell, Director, Homeland Security and Justice, (202) 512-9610, [email protected]. Other individuals making key contributions to this testimony include Michele Mackin, Assistant Director; Greg Campbell, Wayne Ekblad, Jessica Gerrard-Gough, Maura K. Hardy, Dawn Hoff, J. Kristopher Keener, Angie Nichols-Friedman, Scott Purdy, Ralph Roffo, Sylvia Schatz, April Thompson, and Tatiana Winger. In 2005, the Coast Guard revised its Deepwater acquisition program baseline to reflect updated cost, schedule, and performance measures. The revised baseline accounted for, among other things, new requirements imposed by the events of September 11. The initially envisioned designs for some assets, such as the Offshore Patrol Cutter and Vertical Unmanned Aerial Vehicle, are being rethought. Other assets, such as the National Security Cutter and Maritime Patrol Aircraft, are in production. Table 2 shows the 2005 baseline and current status of selected Deepwater assets. Coast Guard: Status of Efforts to Improve Deepwater Program Management and Address Operational Challenges. GAO-07-575T (Washington, D.C.: Mar. 8, 2007). Coast Guard: Preliminary Observations on Deepwater Program Assets and Management Challenges. GAO-07-446T (Washington, D.C.: February 15, 2007). Coast Guard: Status of Deepwater Fast Response Cutter Design Efforts. GAO-06-764 (Washington, D.C.: June 23, 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.: Apr. 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.: Jul. 22, 2005). Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges. GAO-05-651T (Washington, D.C.: Jun. 21, 2005). Coast Guard: Deepwater Program Acquisition Schedule Update Needed. GAO-04-695 (Washington, D.C.: Jun. 14, 2004). Contract Management: Coast Guard's Deepwater Program Needs Increased Attention to Management and Contractor Oversight. GAO-04-380 (Washington, D.C.: Mar. 9, 2004). Coast Guard: Actions Needed to Mitigate Deepwater Project Risks. GAO-01-659T (Washington, D.C.: May 3, 2001). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Deepwater Program is intended to replace or modernize 15 major classes of Coast Guard assets--including vessels, aircraft, and communications systems. At the program's start, the Coast Guard chose to use a system integrator, Integrated Coast Guard Systems, to design, build, deploy, and support Deepwater in a system-of-systems approach. In a series of reports, we have noted the risks inherent in this approach. With the Deepwater program under way, the Coast Guard's priorities and focus shifted after September 11 toward homeland security missions, such as protecting the nation's ports and waterways. The 2002 Maritime Transportation Security Act and the 2006 SAFE Port Act required a wide range of security improvements. GAO is monitoring the acquisition of Deepwater and the Coast Guard's ability to carry out its numerous missions. This testimony addresses: (1) changes the Coast Guard is making as it assumes a larger role in managing the Deepwater Program and (2) challenges the Coast Guard is facing in carrying out its various missions. To conduct this work, GAO reviewed key documents, such as Deepwater acquisition program baselines, human capital plans, and Coast Guard budget and performance documents. For information on which GAO has not previously reported, GAO obtained Coast Guard views. The Coast Guard generally concurred with the information. With a recognition that too much control had been ceded to the system integrator under the Deepwater Program, the Coast Guard began this past year to shift the way it is managing the acquisition. Significant changes pertain to: (1) increasing government management of the program as part of the Coast Guard's reorganized Acquisition Directorate; (2) acquiring Deepwater assets individually as opposed to through a system-of-systems approach; (3) improving information to analyze and evaluate progress; and (4) developing an acquisition workforce with the requisite contracting and program management skills. Many of these initiatives are just getting under way and, while they are positive steps, the extent of their impact remains to be seen. The Coast Guard will likely continue to face challenges balancing its various missions within its resources for both the short and long term. For several years, we have noted that the Coast Guard has had difficulties fully funding and executing both homeland security missions and its non-homeland security missions. GAO's recent and ongoing work has shown that the Coast Guard's requirements continue to increase in such homeland security areas as providing vessel escorts, conducting security patrols of critical infrastructure, and completing inspections of maritime facilities here and abroad. In several cases, the Coast Guard has not been able to keep up with these security demands, in that it is not meeting its own requirements for vessel escorts and other security activities at some ports. In addition, there are indications that the Coast Guard's requirements are also increasing for selected non-homeland security missions. Since 2001, we have reviewed the Deepwater Program and have informed Congress, the Department of Homeland Security, and the Coast Guard of the risks and uncertainties inherent with such a large acquisition. In March 2004, we made a series of recommendations to the Coast Guard. The Coast Guard has taken actions on many of them. Three recommendations remain open, as the actions have not yet been sufficient to allow us to close them. In past work on Coast Guard missions, GAO made recommendations related to strategic plans, human capital, performance measures, and program operations.

Preference clauses have existed throughout the history of federal power legislation and have been directed to a variety of customers and regions of the nation. The Congress has mandated preference in the sale of electricity by federal agencies in a number of power-marketing and land reclamation statutes. The idea of establishing public priority or preference in the use of public water resources dates back to the 1800s, when the Congress decided to keep navigable inland waterways free from state taxes, duties, and the construction of private dams. The Reclamation Act of 1906, which is also referred to as the Town Sites and Power Development Act of 1906, is generally considered the federal government's entry into the electric power field. The act grants preference in the disposition of surplus hydroelectric power from federal irrigation projects for "municipal purposes," such as street lighting. As the availability and sources of electricity have changed over time, the types of preference clauses the Congress has included in legislation have evolved. For example, with the Federal Power Act of 1920, preference began to evolve from serving "municipal purposes" to serving particular classes of users, such as public bodies and cooperatives. The 1920 act required the federal government, when faced with breaking a tie between competing equal applications, to give preference to states and municipalities in awarding licenses for hydroelectric plants owned and operated by nonfederal entities. The act defined a municipality as a city, county, irrigation district, drainage district, or other political subdivision or agency of a state competent under law to develop, transmit, utilize, or distribute power. One primary benefit that the Congress sought in giving priority to public utilities and cooperatives, which distribute power directly to customers without a profit incentive, was to obtain lower electricity rates for consumers. At that time, competitive rate setting was not used to provide lower electricity rates for service from regulated monopolies with dedicated service territories. The Congress has also provided preference to specified regions of the nation. The notion of providing public bodies and cooperatives with preference for federal hydropower rests on the general philosophy that public resources belong to the nation and their benefits should be distributed directly to the public whenever possible. Under the various preference clauses, preference customers are given priority over nonpreference customers in the purchase of power. In many cases, the preference provisions of federal statutes give the electric cooperatives, many of which are rural, and public bodies priority in seeking to purchase federally produced and federally marketed power. However, the courts have held that preference customers do not have to be treated equally and that all potential preference customers do not have to receive an allotment of federal power. Preference provisions come into play only when a potential customer that does not have preference (such as an industrial user or a commercial power company) and a preference customer (such as a municipally owned utility or a rural electric cooperative) want to buy federal power and not enough is available for both. The Congress initially granted preference in the sale of federal electricity to public bodies and cooperatives for several reasons. First, it was a way to ensure that the benefits of this power were passed on to the public at the lowest possible cost, using cost-based rates, because the preference customers generally were entities that would not incorporate a profit in their rates. Second, it was also meant to extend the benefits of electricity to remote areas of the nation using publicly and cooperatively owned power systems. Additionally, the Congress gave preference to public bodies and cooperatives to prevent the monopolization of federal power by private interests. The rates charged by such nonprofit entities could then serve as a yardstick for comparison with the rates charged by public and private utilities. For example, the Boulder Canyon Project Act of 1928 encouraged public nonprofit distributors to begin marketing power by allowing them a reasonable amount of time to secure financing in order to construct generation and transmission facilities. According to the House Committee on Irrigation and Reclamation, one of the committees that drafted the 1928 act, the allocation of power rights between the preference and nonpreference customers was expected to create competition among various entities, ensuring reasonable rates and good service. These entities included states, political subdivisions, municipalities, domestic water- supply districts, and private companies. The committee viewed the preference clause as a bulwark against the monopolization of power by private companies. Another, more recent embodiment of the premise that public resources should be provided to the public without an effort to profit from their sale is the Hoover Power Plant Act of 1984. This act gives preference primarily to municipalities and others for power generated at the Hoover Dam. It also authorizes the renewal of a preference power contract with an investor-owned utility, originally entered under the Boulder Canyon Project Act of 1928. At about the same time as the Congress was enacting the Rural Electrification Act of 1936 to encourage cooperatives and others to extend their electric systems into nearby rural areas, it enacted other statutes that affect how federally generated electricity is sold, especially to cooperatives. The Bonneville Project Act of 1937, along with the earlier (1933) Tennessee Valley Authority (TVA) Act, extended preference to include nonprofit cooperative organizations. The acts also authorized the construction of federal transmission lines to carry the power, thus minimizing regional reliance on private power companies. The two laws established a statutory framework of energy allocation policies in an era of extensive federal hydroelectric development. The 1937 Bonneville Project Act authorized the construction of federal power lines in order to transmit the federal power as widely as practicable. The act states that preference was provided to public bodies and cooperatives to ensure that the hydropower projects were operated for the benefit of the general public, particularly domestic (residential) and rural customers. The preference clauses in the Bonneville and TVA acts were both viewed as yardsticks for evaluating the rates charged by private utilities. Preference for public entities and cooperatives is also found in the Reclamation Project Act of 1939 and the Flood Control Act of 1944. The Reclamation Project Act of 1939, which provides guidance for projects operated by the Bureau of Reclamation, gives preference to municipalities, other public corporations or agencies, and cooperatives and other nonprofit organizations. The Bureau is an agency within the Department of the Interior whose projects generate much of the electricity sold by Bonneville and Western. The 1939 act limited preference for cooperatives to those financed at least in part by loans made under the Rural Electrification Act of 1936, as amended. The Flood Control Act of 1944, which gives guidance for projects operated by the U.S. Army Corps of Engineers, gives preference to public bodies and cooperatives. The Corps' projects generate electricity sold by all four PMAs. The act requires that electricity be sold to encourage the most widespread use of power at the lowest rates to consumers consistent with sound business practices. The federal government was authorized to construct or acquire transmission lines and related facilities to supply electricity to federal facilities, public bodies, cooperatives, and privately owned companies. The legislative history indicates that priority was given to public bodies and cooperatives to expand rural electrification and to avoid monopolistic domination by private utilities. Subsequent statutes, while building on preference provisions provided by other federal power marketing laws, granted regional, geographic preference. The Pacific Northwest Power Preference Act, enacted in 1964, authorizes Bonneville to sell outside its marketing area, the Pacific Northwest region, surplus federal hydropower if there is no current market in the region for the power at the rate established for its disposition in the Pacific Northwest. The 1980 Northwest Power Act requires Bonneville to provide power to meet all the contracted-for needs of its customers in the Northwest, extending the regional preference provisions of the 1964 act to include not only hydropower but also power from Bonneville's and customers' other resources--including coal-fired and nuclear plants. As a result of this regional preference, Bonneville's customers in the Pacific Northwest--including private utility and direct service customers as well as public utilities--have priority over preference customers in the Pacific Southwest. The act also requires Bonneville to generally charge lower rates to preference customers than to nonpreference customers. Such rates are based upon the cost of the federal system resources used to supply electricity to those customers. In September 2000, the 1980 Northwest Power Act was amended to allow Bonneville to sell preference power to existing "joint operating entities" (public bodies or cooperatives formed by two or more public bodies or cooperatives that were Bonneville preference customers by Jan. 1, 1999). As indicated in the legislative history of the amendment, the new entities could pool their members' or participating customers' power purchases from Bonneville, which could result in operating efficiencies and reductions in overhead costs for them, without reducing Bonneville's receipts from the sale of power. The Congress also granted regional preference in the sale of electricity from federal projects to other parts of the country, such as the Northeast, that are not served by the PMAs or TVA. The 1957 Niagara Redevelopment Act establishes (1) a division of all power from the project into preference and nonpreference power, (2) a preference for public bodies and cooperatives, with an emphasis on serving domestic and rural consumers, and (3) a geographic preference for preference customers in New York and in neighboring states. Other statutes give geographic preference to entire states or portions of states for purchases of electricity generated in those areas. For example, the 1928 Boulder Canyon Project Act gives preference to customers in Arizona, California, and Nevada for purchases of excess power from the Boulder Canyon Project. This preference language distinguishes among preference customers, giving the states (e.g., California) a priority over municipalities (e. g., Los Angeles). Although we found no instances in which the statutory preference provisions themselves were challenged, specific applications of these provisions by the PMAs have been challenged in the courts and in administrative proceedings. The cases have included disputes among preference customers and between preference and nonpreference customers of the various PMAs. In some instances, the courts have directed a PMA to provide power to preference customers, and in other instances, they have supported a PMA's denial of power to such customers. General principles that may be drawn from the various court interpretations and rulings are that (1) PMAs must act in favor of customers specifically provided preference and priority in purchasing surplus power when nonpreference customers are competing for this power, (2) PMAs have discretion in deciding how and to which preference customers they will distribute electricity when the customers are in competition with each other for limited power, and (3) preference customers do not have to be treated equally, nor do individual preference customers have an entitlement to all or any of the power. The Federal Energy Regulatory Commission has affirmed the application of preference clauses in its rulings, as has the Attorney General in an opinion interpreting the preference provision of the 1944 Flood Control Act. A list of the court cases and administrative rulings we reviewed, with a brief description of each, is included in appendix I. The characteristics of the electricity industry on a national and regional basis have changed over time and continue to change. For example, the issues and problems of the 1930s, when rural America was largely without electricity and private utilities were not extensively regulated, were not those that confronted the Congress in later decades or that confront the Congress now. The issue of preference in power sales by the PMAs was of continuing interest during the 106th Congress. Not only was the Northwest Power Act amended in September 2000, but also a bill was introduced in the Senate in April 2000 to amend the Niagara Redevelopment Act. This bill would have eliminated the geographic preference allocating up to 20 percent of the power from the Niagara Power Project to states neighboring New York. The preference status of sales to selected cooperatives and public bodies in those states, however, would not have been affected. In September 2000, a bill was introduced in the House of Representatives to eliminate all future sales of preference power; its provisions would have taken effect only as each existing power sale contract expired. In October 2000, another bill was introduced in the House of Representatives to authorize investor-owned electric utilities in California to purchase power directly from Bonneville at specified rates. The 106th Congress adjourned, however, without taking further action on these bills. As of January 30, 2001, no bills directly relating to preference power had been introduced in the 107th Congress, according to DOE officials. Over the last 20 years, competition has been replacing regulation in major sectors of the U.S. economy. New legislation at the federal and state levels and technological changes have created a climate for change in traditional electricity markets. The extent to which the federal government should participate in fostering retail competition has yet to be decided. Over the last several years, the Congress has deliberated on the restructuring of the electricity industry. As the Congress continues these deliberations, it is considering redefining existing federal roles, as well as how to more efficiently and equitably produce and distribute electricity to all customers. The way that the federal government generates, transmits, and markets federal preference power has not changed in the same manner as the industry surrounding it. In a March 1998 report, we noted that the Congress has options that, if adopted, would affect preference customers. Considering changes to the preference provisions would be consistent with the spirit of several of our testimonies before various Senate and House committees. Examining the legacy of existing federal programs in light of changing conditions can yield important benefits. At these hearings, we discussed the need to reexamine many federal programs in light of changing conditions and to redefine the beneficiaries of these programs, if necessary. In our testimony, we noted that as the restructuring of the electricity industry proceeds, the Congress has an opportunity to consider how the existing federal system of generating, transmitting, and marketing electricity is managed, including the role of preference in federal power sales. We provided DOE with copies of a draft of this report. We met with officials of DOE's Bonneville Power Administration and DOE's Power Marketing Liaison Office, which is responsible for the other three PMAs. The PMAs generally agreed with the information in our draft report. They also observed that the previous administration did not support the repeal of the "preference clause" as part of the restructuring of the electricity industry. That administration did not incorporate such provisions in its bill to restructure the industry because it believed that federal restructuring legislation should be designed to ensure that consumers in all states benefit and that those in certain parts of the nation not be adversely affected. They also stated that, consistent with applicable statutes and current contracts, they have continually evaluated their roles and policies in light of changes occurring in the electric utility industry. They agreed with us that the Congress has the latitude to reconsider all laws containing both customer and geographic preference in federal electricity sales. To examine the evolution of preference in the PMAs' marketing, we reviewed statutes, federal court cases, rulings by the Federal Energy Regulatory Commission, and an Attorney General's opinion on federally mandated preference in electricity licensing or sales by federal facilities. As requested, we performed detailed reviews of legislative histories for nine of these statutes. We also reviewed past GAO reports, testimonies, and other products that relate to preference in the PMAs' electricity sales. We interviewed the staffs of the PMA liaison offices in Washington, D.C., as well as the General Counsels of each of the four PMAs. We reviewed various other preference-related documents, including relevant law review articles, issue briefs from trade associations, and the PMAs' marketing plans. We performed our review from October 1999 through January 2001 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 5 days after the date of this letter. At that time, we will send copies to appropriate House and Senate Committees and Subcommittees; interested Members of the Congress; Steve Wright, Acting Administrator and Chief Executive Officer, Bonneville Power Administration; Charles A. Borchardt, Administrator, Southeastern Power Administration; Michael A. Deihl, Administrator, Southwestern Power Administration; and Michael S. Hacskaylo, Administrator, Western Area Power Administration. We will also make copies available to others on request. If you or your staff have any questions or need additional information, please contact me or Peg Reese at (202) 512-3841. Key contributors to this report were Charles Hessler, Martha Vawter, Doreen Feldman, and Susan Irwin. Grants preference to certain classes of public users to surplus reclamation water from public lands. Act of April 16, 1906 (Reclamation Act of 1906 or Town Sites and Power Development Act of 1906) Establishes the first precedent for a municipality's preference to surplus hydropower generated at federal irrigation projects. Provides for the disposition of hydroelectric power from irrigation projects and requires the Secretary of the Interior to give a preference to power sales for municipal purposes. Provides the city and county of San Francisco with a right-of-way over public lands for the construction of aqueducts, tunnels, and canals for a waterway, power plants, and power lines for the use of San Francisco and other municipalities and water districts. Prohibits grantees of the right to develop and sell water and electric power from selling or leasing those rights to any corporation or individual other than another municipality, municipal water district, or irrigation district. Federal Water Power Act (1920) (Federal Power Act) Requires FERC (formerly the Federal Power Commission) to give preference to states and municipalities in issuing licenses for hydropower projects operated by nonfederal entities, if the competing applications are equally well adapted for water development. (Preference criteria in this act may be used in disposing of power to preference customers under the Boulder Canyon Act of 1928.) Gives preference to municipal purposes for surplus power from the Salt River Project in Arizona. Act of December 21, 1928 (Boulder Canyon Project Act) Requires the Secretary of the Interior to give preference within the policy of the Federal Water Power Act, i.e., to states and municipalities, when selling power from the project. Gives the states of Arizona, California, and Nevada initial priority over other preference customers. Requires TVA to give preference in power sales to states, counties, municipalities, and cooperative organizations of citizens or farmers that are organized or doing business not for profit but primarily for the purpose of supplying electricity to their own citizens or members. Authorizes TVA to construct its own transmission lines to serve farms and small villages not otherwise supplied with reasonably priced electricity and to acquire existing electric facilities used to provide power directly to these customers. Authorizes loans for rural electrification and grants preferences to states; municipalities; utility districts; and cooperative, nonprofit, or limited-dividend associations. Requires BPA to give preference and priority to public bodies (nonfederal government agencies) and cooperatives. Allows the people within economic transmission distance of the Bonneville project (Washington, Oregon, Idaho, and Montana) a reasonable amount of time to create public or cooperative agencies so as to qualify for the public power preference and secure financing. Act of May 18, 1938 (Fort Peck Project Act) Requires the Bureau of Reclamation to give preference and priority to public bodies and cooperatives. Reclamation Project Act of 1939 [53 Stat. 1187, 1194, 43 U.S.C. 485, 485h (c) Requires the government, when selling surplus power from its reclamation projects, to give preference to municipalities and other government agencies, and to cooperatives and other nonprofit organizations financed in whole or in part by loans from the Rural Electrification Administration. Authorizes water projects in the Great Plains and arid and semiarid areas of the nation. Gives preference in sales or leases of surplus power to municipalities and other public corporations or agencies; and to cooperatives and other nonprofit organizations financed in whole or in part by loans under the Rural Electrification Act of 1936. Act of June 5, 1944 (Hungry Horse Dam Act) Authorizes the construction of the Hungry Horse Dam in western Montana for uses primarily in the state of Montana. This "Montana Reservation" has been interpreted as a geographic preference requiring a calculated quantity of power (221 average megawatts) from Hungry Horse Dam to be offered first for sale in Montana to preference and nonpreference customers before the calculated amount of power is offered to other BPA customers, including preference customers in other states. Act of December 22, 1944 (Flood Control Act of 1944) Gives preference to public bodies and cooperatives for power generated at Corps of Engineers projects and authorizes transmission to federal facilities and those owned by public entities, cooperatives, and private companies. Act of March 2, 1945 (Rivers and Harbors Act of 1945) Provides for the distribution of power from the Snake River Dams and the Umatilla Dam in accordance with the preference provisions of the Bonneville Project Act. Act of July 31, 1950 (Eklutna Act) Gave preference to public bodies and cooperatives and to federal agencies in sales of power from the Eklutna project near Anchorage, Alaska. Provides for the sale or lease of power from the Palisades Dam in southeastern Idaho to bodies entitled to preference under federal reclamation laws. Requires the Secretary of the Interior to give preference in the sale of power generated at the Falcon Dam on the Texas/Mexico border to public bodies and cooperatives. Authorizes BPA to purchase power generated at the Priest Rapids Dam in Washington. Requires BPA to sell the power according to the preference provisions applicable to other sales of BPA power. Provides for preference to public bodies and cooperatives in the sale of power from the Department of Energy's nuclear production facilities; also provides preference to private utilities serving high-cost areas not serviced by public bodies and cooperatives. Act of August 12, 1955 (Trinity River Division Act) Reserves 25 percent of the power from the Trinity power plants for preference customers in Trinity County, California. Act of April 11, 1956 (Colorado River Storage Project Act) Provides for the sale of power from the Colorado River Storage Project and participating projects to bodies entitled to preference under reclamation laws. Niagara Redevelopment Act (1957) Sets out preference and allocation provisions required to be included in FERC's license to the state of New York for the sale of power generated from the Niagara River. Contains several allocation mechanisms: (1) a division of all project power into preference and nonpreference power, (2) a preference clause for public bodies and cooperatives, particularly for the benefit of domestic and rural customers, (3) a provision that preference power sold initially to private utilities is subject to withdrawal to meet the needs of preference customers, (4) a geographic preference (80 percent of the preference power is reserved for New York preference customers and up to 20 percent for neighboring states), and (5) an allocation of a specific amount of power to an individual nonpreference customer for resale to specific industries. Provides that a reasonable amount of power, up to 50 percent, from dams subsequently constructed by the Corps of Engineers on the Missouri River, shall be reserved for preference customers within the state in which each dam is located. Atomic Energy Commission Authorization Act (1962) Authorizes the sale of by-product energy from the Hanford New Production Reactor to purchasers agreeing to offer 50 percent of the electricity generated to private organizations and 50 percent to public organizations. (DOE has terminated the operation of this reactor.) Requires "first preference" for customers in Tuolomne and Calaveras Counties in California for 25 percent of the additional power generated by the New Melones project. Required preference for federal agencies, public bodies, and cooperatives in power sales from the Snettisham project near Juneau, Alaska. Requires the Secretary of the Interior to give preference in the sale of power generated at Amistad Dam on the Texas/Mexico border to federal facilities, public bodies, cooperatives, and privately owned companies. Authorizes the sale outside the Pacific Northwest of federal hydroelectric power for which there is no current market in the region or that cannot be conserved for use in the region. Provides that sales outside the Pacific Northwest are subject to termination of power deliveries if a BPA customer in the Pacific Northwest needs the power. Grants reciprocal protection with respect to energy generated at, and the peaking capacity of, federal hydroelectric plants in the Pacific Southwest, or any other marketing area, for use in the Pacific Northwest. Explicitly provides that the Hungry Horse Dam Act's geographical preference for power users in Montana is not modified by this act. Authorizes the purchase of nonfederal thermal power for the Central Arizona irrigation project. Authorizes, subject to the preference provisions of the Reclamation Project Act, the disposal of power purchased, but not yet needed, for the project. Explicitly retains the preference provisions of the Bonneville Project Act of 1937 and other federal power marketing laws. Requires BPA to provide power to meet all the contracted-for needs of its customers in the Northwest. As a result of this regional preference, BPA's public as well as private utility and direct service industry customers in the Pacific Northwest have priority over preference customers in the Pacific Southwest. Requires BPA to charge lower rates to preference customers than to nonpreference customers. Also requires BPA to offer initial 20-year power sale contracts to specific nonpreference as well as preference customers throughout the Pacific Northwest: (1) publicly owned utilities, (2) federal agencies, (3) privately owned utilities, and (4) directly served industrial customers. Gives preference power to municipalities, an investor-owned utility, and others for power generated at the Hoover Power Plant. Amends the Federal Power Act to provide that preference does not apply to relicensing. (Retains preference for original licenses.) For a 10-year period, reserves power that becomes available because of military base closures for sale to preference entities in California that are served by the Central Valley Project and that agree to use such power for economic development on bases closed or selected for closure under the act. Authorizes BPA to sell excess power outside the Pacific Northwest on a firm basis for a contract term not to exceed 7 years, if the power is first offered to public bodies, cooperatives, investor-owned utilities, and direct service industrial customers identified in the Northwest Power Act. Amends the Northwest Power Act of 1980 to allow BPA to sell preference power to joint operating entities' members who were customers of BPA on or before January 1, 1999. Arizona Power Pooling Association v. Morton, 527 F.2d 721, (9th Cir. 1975), cert. denied, 425 U.S. 911 (1976) The court applied the Reclamation Project Act of 1939's preference clause to governmental sales of thermally generated electric power from the Central Arizona Project. The court held that under the act's preference clause, the Secretary of the Interior must give preference customers an opportunity to purchase excess power before offering it to a private customer. The court also held that preference customers do not have entitlement to federal power. Arizona Power Authority v. Morton, 549 F.2d 1231 (9th Cir. 1977), cert. denied, 434 U.S. 835 (1977) The court held that the implementation of geographic preferences in the allocation of federal hydroelectric power under the Colorado River Storage Project Act in a manner that discriminated among preference customers was within the discretion of the Secretary of the Interior and not reviewable by the court. City of Santa Clara v. Andrus, 572 F.2d 660 (9th Cir.), cert. denied, 439 U.S. 859 (1978) The court held that the Secretary of the Interior could not sell federally marketed power to a private utility, even on a provisional basis, while denying power to a preference customer. Only if the available supply of power exceeds the demands of interested preference customers may power be sold to private entities. Preference means that preference customers are given priority over nonpreference customers in the purchase of power. However, preference customers do not have to be treated equally, nor do all potential preference customers have to receive an allotment. City of Anaheim v. Kleppe, 590 F.2d 285 (9th Cir. 1978); City of Anaheim v. Duncan, 658 F.2d 1326 (9th Cir. 1981) The court held that the preference clause of the Reclamation Project Act of 1939 was not violated by the sale of federal power to private utilities on an interim basis when preference customers lacked transmission capacity to accept such power within a reasonable time and did not offer to buy power when it was originally sold. As a result, there was no competing offer between a preference and a nonpreference customer. Aluminum Company of America v. Central Lincoln Peoples' Utility District, 467 U.S. 380 (1984), rev'g Central Lincoln Peoples' Utility District v. Johnson, 686 F. 2d 708 (9th Cir. 1982) The Supreme Court held that terms of contracts, which the Pacific Northwest Electric Power Planning and Conservation Act required BPA to offer to certain nonpreference customers, did not conflict with the applicable preference provisions. The preference provisions determine the priority of different customers when there are competing applications for power that can be allocated administratively. Here, however, the contracts in question were not part of an administrative allocation of preference power, and the power covered by the initial contracts was allocated directly by the statute. Since BPA was not authorized to administratively allocate this power, there could be no competing applications for the power, and the preference provisions did not apply to the transactions. ElectriCities of North Carolina, Inc. v. Southeastern Power Administration, 774 F.2d 1262 (4th Cir. 1985) A challenge to SEPA's 1981 allocation policy for the Georgia-Alabama power system, changing the location and list of preference customers, was denied. The court held that the allocation of preference power is discretionary and that the preference provision of the Flood Control Act is too vague to provide a standard for the court to apply to SEPA's actions. Greenwood Utilities Commission v. Hodel, 764 F. 2d 1459 (11th Cir. 1985), aff'g Greenwood Utilities Commission v. Schlesinger, 515 F. Supp. 653 (M.D. Ga. 1981) A challenge to sales of capacity without energy to investor-owned utilities was denied. The court held that the Flood Control Act's preference provision did not establish an entitlement to power or standards for eligibility for power. The statute is too vague to permit judicial review of sales and allocations decisions. Arvin-Edison Water Storage District v. Hodel, 610 F. Supp. 1206 (D. D.C. 1985) Irrigation districts' claim to an allocation of power ahead of other preference customers (super preference) for WAPA power was denied. The preference clause of the Reclamation Project Act does not provide a superpreference for irrigators; it only provides that public entities be given preference over private entities. The clause does not require that all preference customers be treated equally or that they even receive an allocation. The allocation decision is within an agency's discretion and cannot be reviewed by the court. Brazos Electric Power Cooperative, Inc. v. Southwestern Power Administration, 828 F.2d 1083 (5th Cir. 1987) The court upheld the dismissal of a challenge by an electric cooperative to an exchange arrangement between a SWPA customer and an investor-owned utility. The investor-owned utility's arrangement with preference customers does not violate the preference provision of the Flood Control Act. Even though the investor-owned utility receives some economic benefits, this is not a sham sale of preference power. ElectriCities of North Carolina, Inc. v. Southeastern Power Administration, 621 F. Supp. 358 (W.D.N.C. 1985) SEPA's decision to create two divisions and sell some power to nonpreference customers in its Western Division while excluding preference customers in its Eastern Division is not subject to challenge by those excluded, who have no right or entitlement to allocations of SEPA power. Salt Lake City v. Western Area Power Administration, 926 F.2d 974 (10th Cir. 1991) The court held that WAPA reasonably interpreted the preference provisions of the Reclamation Project Act of 1939 in determining that preference applied only to municipalities that operated their own utility systems, and not to every city or town that fit the act's definition of "municipality." Municipal Electric Utilities Association of the State of New York v. Power Authority of the State of New York (PASNY), 21 FERC P 61,021 (Oct. 13, 1982); PASNY v. FERC, 743 F.2d 93 (2d Cir. 1984) FERC held that in the Niagara Redevelopment Act, the Congress defined the term "public bodies" as those governmental bodies that resell and distribute power to the people as consumers. The appellate court affirmed that preference rights under the act accrue to public bodies and nonprofit cooperatives that are engaged in the actual distribution of power. In determining the ultimate retail distribution of the power sold to them, public entities could resell the power to industrial and commercial users, not just to domestic and rural customers. The court also described "yardstick competition," a theory that underlies preference. The court stated that the Congress, while concerned with meeting the needs of rural and domestic consumers, believed that all interests could best be served by giving municipal entities the right to decide on the ultimate retail distribution of the preference power sold to them. This belief was founded on the so-called "yardstick competition" principle, which assumes that if the municipal entities are supplied with cheap hydropower, their lower competitive rates will force the private utilities in turn to reduce their rates, with resulting benefits to all, including rural and domestic consumers. Massachusetts Municipal Wholesale Electric Company v. PASNY, 30 FERC P 61, 323 ( Mar. 27, 1985) FERC reaffirmed parts of an earlier decision interpreting the Niagara Redevelopment Act as providing allocations of preference power for states neighboring New York and clarified which states were included. FERC held that any public body or nonprofit cooperative in a state neighboring New York within economic transmission distance of the Niagara Power Project is entitled to an allocation of preference power. FERC also held that only publicly owned entities that are capable of selling and distributing power directly to retail consumers are public bodies entitled to preference under the act. Disposition of Surplus Power Generated At Clark Hill Reservoir Project, 41 Op. Atty Gen. 236 (1955) The Attorney General construed section 5 of the Flood Control Act of 1944, providing preference to public bodies and cooperatives, to mean that if there are two competing offers to purchase federal power, one by a preference customer and the other by a nonpreference customer, and the former does not have at the time the physical means to take and distribute the power, the Secretary of the Interior must contract with the preference customer on condition that within a reasonable time fixed by the Secretary, the customer will obtain the means for taking and distributing the power. If within that period the preference customer does not do so, the Secretary is authorized to contract with the nonpreference customer, subject to the condition that should the preference customer subsequently obtain the means to take and distribute the power, the Secretary will be enabled to deal with the preference customer. The Secretary's duty to provide preference power is not satisfied by the disposition of the power to a nonpreference customer under an arrangement whereby the nonpreference customer obligates itself to sell an equivalent amount of power to preference customers. Affected PMA(s) Water Conservation and Utilization Act (1940) Colorado River Storage Project Act (1956) Pacific Northwest Power Preference Act (1964) Pacific Northwest Electric Power Planning and Conservation Act (1980) The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. 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. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system)

Congress has enacted many statutes that designate types of customers or geographic areas for preference and priority in purchasing electricity from federal agencies. In general, the preference has been intended to (1) direct the benefits of public resources--relatively inexpensive hydropower--to portions of the public through nonprofit entities, (2) spread the benefits of federally generated hydropower widely and encourage the development of rural areas, (3) prevent private interests from exerting control over the full development of electric power on public lands, and (4) provide a yardstick against which the rates of investor-owned utilities can be measured. The applications of various preference provisions have been challenged several times in the courts, which have directed a power marketing administration (PMA) to provide power to preference customers. In other instances, they have supported the denial of power to such customers. The characteristics of the electricity industry have changed. During the last 20 years, competition has been replacing regulation in major sectors of the U.S. economy. Several proposals have come before Congress to restructure the electrical industry, including some that would encourage the states to allow retail customers a choice in selecting their electricity supplier. As it debates these proposals, Congress has continued to consider the role of preference in the PMA's sale of electricity.

The Financial Recordkeeping and Currency and Foreign Transactions Reporting Act, commonly referred to as the Bank Secrecy Act, passed by Congress in 1970, requires that financial institutions file certain currency and monetary instrument reports and maintain certain records for possible use in criminal, tax, and regulatory proceedings. As a result, the BSA helps to provide a paper trail of the activities of money launderers for law enforcement officials in pursuit of criminal activities. Congress has amended the BSA a number of times to increase the effectiveness of the regulators' efforts. For example, the initial BSA reporting system did not include provisions for separate money laundering charges against those who had not satisfied reporting requirements. Thus, Congress enacted the Money Laundering Control Act of 1986, which made money laundering a criminal offense separate from any BSA reporting violations. This act created criminal liability for individuals or entities that conduct monetary transactions knowing that the proceeds involved were obtained from unlawful activity and made it a criminal offense to knowingly structure transactions to avoid BSA reporting. The 1986 act also directed the regulators (1) to issue regulations that require the financial institutions subject to their respective jurisdiction "to establish and maintain procedures reasonably designed to assure and monitor the compliance of such institutions;" (2) to review such procedures during the course of each examination of such financial institutions; (3) to issue cease and desist orders to ensure compliance with the requirements; and (4) to assess civil money penalties for failure to maintain such compliance procedures. In 1992, Congress increased the penalties for institutions and their employees who violate the BSA and authorized the regulators to take additional supervisory actions for such violations. More specifically, the Annunzio-Wylie Anti-Money Laundering Act authorized the federal banking regulators to revoke an institution's charter if it was convicted of money laundering and, in certain circumstances, to issue removal and prohibition orders against individuals charged with BSA offenses. As authorized by this act, in 1996, Treasury issued a rule requiring that banks and other depository institutions use a Suspicious Activity Report (SAR) form to report activities involving possible money laundering. Institutions file these forms with the Financial Crimes Enforcement Network (FinCEN) at Treasury. Congress amended the BSA again in 1994, with The Money Laundering Suppression Act, to require that financial regulators develop enhanced examination procedures and training to improve identification of money- laundering schemes at financial institutions under their supervision. Accordingly, the federal banking regulators adopted a core set of examination procedures to determine whether an institution has the necessary system of internal controls, policies, procedures, and auditing standards to assure compliance with the BSA and implementing regulations. The procedures also require examiners to review an institution's internal audit function, procedures, selected workpapers, records, reports, and responses. Based on the results, examiners may conclude the examination or continue with expanded procedures, which might include transaction testing and review of related documentation. This act also directed the Secretary of the Treasury to delegate to appropriate federal banking regulatory agencies the authority to assess civil penalties for BSA violations. In May 1994, the Secretary delegated this authority to FinCEN but, to date, this delegation has not been made to the banking regulators. In October 2001, Congress again amended the BSA through passage of the USA PATRIOT Act, specifically through Title III of this act. The passage of the USA PATRIOT Act was prompted, in part, by the September 11, 2001, terrorist attacks in Washington, D.C. and New York City, which in turn enhanced awareness of the importance of combating terrorist financing through the U.S. government's AML efforts. Title III expanded the scope of the BSA to include organizations not previously covered, such as securities brokers, insurance companies, and credit card system operators. Among Title III's provisions are requirements that financial institutions covered by the act: Establish and maintain AML programs; Identify and verify the identity of customers who open accounts; Exercise due diligence and, in some cases, enhanced due diligence with respect to all private banking and correspondent accounts; Conduct enhanced scrutiny with respect to accounts maintained by or on behalf of foreign political figures or their families; and Share information relating to money laundering and terrorism with law enforcement authorities, regulatory authorities, and financial institutions. Title III also added activities that can be prosecuted as money laundering crimes and increased penalties for activities that were money laundering crimes prior to enactment of the USA PATRIOT Act. Examination procedures of the federal banking regulators are expected to conform to PATRIOT Act amendments to the BSA and regulations issued by the Treasury. In the last few years and as recently as last month, the federal banking regulators and the courts have taken actions against a number of depository institutions for significant BSA violations. In addition to deficiencies at the institutions themselves, issues raised in these cases included the timeliness of the identification of BSA violations and enforcement actions taken by the regulators. To illustrate, I will discuss three different cases at three different types of depository institutions. In the first case, a bank was charged with BSA violations of suspicious activity report requirements and received a deferred prosecution. In 2000, the U.S. Department of Justice (Justice) charged Banco Popular de Puerto Rico, a bank subsidiary of a diversified financial services company serving Puerto Rico, the United States, and Latin America, with failing to file SARs in a timely and complete manner--in violation of the BSA. According to Justice, from 1995 through 1998, an individual, who was later convicted of money laundering offenses, deposited approximately $21.6 million in cash into an account at Banco Popular. Justice indicated that a number of branch employees were aware of the suspicious activity, but that the bank failed to investigate the account for over 2 years from the date the account was opened, and also did not report the suspicious activity to FinCEN until 1998 as required by the BSA. Although the Federal Reserve Bank of New York (FRBNY) conducted four examinations of Banco Popular from 1995 through 1998, the examinations, based on procedures used at the time, did not contain any criticism of the bank's BSA compliance policies or procedures. In 1999, 4 years after the individual first began laundering an undetermined amount of money through Banco Popular, FRBNY expanded the scope of the bank's regularly scheduled safety and soundness examination as a result of information it received from a U.S. Customs Service drug investigation. Based on AML compliance problems identified during the examination, FRBNY developed a supervisory strategy that led to a written agreement containing numerous remedial actions. Banco Popular also entered into a deferred prosecution agreement with Justice, FinCEN, and the Federal Reserve; and agreed to a civil money penalty of over $20 million. In another instance, FinCEN assessed penalties against a credit union for currency transaction reporting violations. In January 2000, FinCEN assessed civil money penalties of $185,000 against the Polish and Slavic Federal Credit Union, located in Brooklyn, New York, for willful failure to file Currency Transaction Reports (CTR) and improperly granting an exemption from CTR filings in violation of the BSA. FinCEN determined that between 1989 and 1997, the Polish and Slavic Federal Credit Union willfully failed to file numerous CTRs for currency transactions in amounts greater than $10,000. FinCEN also reported that the credit union, through the actions of its former management and board of directors, improperly exempted one customer from CTR filings. The customer, the former chairman of the credit union's board of directors and owner of a travel agency and money remitter business, did not qualify for the CTR filing exemption, according to FinCEN. The remitter made over 1,000 currency deposits in excess of $10,000 but no CTRs were filed. FinCEN further reported that the credit union, through its former general manager and former board, failed to establish and maintain (1) an adequate level of internal controls for BSA compliance, (2) an effective BSA compliance program, (3) BSA training for credit union employees, and (4) an effective internal audit function. NCUA, the regulator of the Polish and Slavic Federal Credit Union, took a series of enforcement actions against the credit union beginning in January 1997 to compel compliance with the BSA. However, FinCEN's report also indicates that NCUA's enforcement actions began about 8 years after the violations began. In April 1999, NCUA removed the credit union's board of directors and imposed a conservatorship based on the credit union's failure to establish adequate internal controls, including controls for BSA compliance. Last month, OCC and FinCEN assessed a $25 million civil money penalty against Riggs Bank, N.A. for numerous BSA violations, including failure to maintain an effective BSA compliance program and to monitor and report transactions involving millions of dollars by the embassies of Saudi Arabia and Equatorial Guinea in Washington, D.C. Since 1987, OCC has required each bank under its supervision to establish and maintain an AML compliance program and specified four elements that banks were required to satisfy. However, FinCEN reported that Riggs was deficient in all four elements required by the AML regulation. FinCEN found that Riggs willfully violated the suspicious activity and currency transaction reporting requirements and the AML program requirements of the BSA. Specifically, Riggs failed to establish and maintain an effective BSA compliance program because it did not provide (1) an adequate system of internal controls to ensure ongoing BSA compliance, (2) an adequate system of independent testing for BSA compliance, (3) effective training for monitoring and detecting suspicious activity, and (4) effective monitoring of BSA compliance by the BSA officer. In July 2003, OCC entered into a consent order with Riggs, in which Riggs was directed to, among other things, correct AML internal control deficiencies and referred the Riggs case to FinCEN. According to a Riggs' filing with the Securities and Exchange Commission, in April 2004, OCC classified Riggs as being in a "troubled condition" for failing to fully comply with the July 2003 consent order. Due to additional BSA violations by Riggs National Corporation (the bank's holding company), in May, OCC and the Federal Reserve, respectively, issued a supplemental consent order and a cease and desist order, requiring extra corrective actions. OCC and FinCEN cited the corporation for deficiencies in risk management and internal controls. Although OCC deemed Riggs to be systemically deficient in 2003 and the bank entered into a consent order with OCC, Riggs was not in full compliance with the consent order in 2004 and was subsequently assessed the penalty. In addition to the three cases discussed above, published reports of BSA violations at other banks have increased concerns about bank noncompliance with the BSA and timely oversight and enforcement by the federal banking regulators. For example, in 2003, the Department of Homeland Security's Bureau of Immigration and Customs Enforcement (ICE) reported that the Delta National Bank & Trust Company pled guilty in U.S. District Court to charges that it failed to file a SAR in connection with a transaction made in 2000 between two accounts at the bank. As part of the plea agreement with the government, the bank agreed to forfeit $950,000. In 2002, Broadway National Bank pled guilty to three felony charges for failing to report suspicious banking activity in the 1990s, according to ICE. The prosecutors determined that more than $120 million was illegally moved through the bank. The bank was fined $4 million. Recent Treasury and FDIC IG reports assessing the regulators' examination work and enforcement activities have raised questions about potential gaps in the consistency and timeliness of the regulators' monitoring and follow-up on BSA violations. The Treasury's IG issued a report in 2003 on BSA violations at depository institutions and has a number of related audits in its fiscal year 2004 work plan. In September 2003, the Treasury IG issued a report on its review of OTS enforcement actions taken against thrifts with substantive BSA violations. Among its findings, the report stated that examiners found substantive BSA violations at 180 of the 986 thrifts examined from January 2000 through October 2002. OTS had issued written enforcement actions against 11 of the 180 thrifts; however, in 5 of these actions, the IG reported that enforcement actions did not address all substantive violations found, were not timely, or were ineffective in correcting the thrifts' BSA violations. The IG further reported that among 68 sampled cases, OTS relied on moral suasion and thrift management assurances to comply with the BSA. In 47 cases (69 percent), thrift management took the corrective actions, but in the other 21 cases (31 percent), thrift management was nonresponsive. BSA compliance worsened at some of the 21 thrifts, according to the IG. The IG made several recommendations including that OTS assess the need for additional clarification or guidance for examiners on when to initiate stronger supervisory action for substantive BSA violations and time frames for expecting corrective actions from thrifts. OTS concurred and stated that supplemental examiner guidance would be provided for the first quarter of 2004. The IG's fiscal year 2004 annual plan lists several related audit projects including an assessment of OTS' BSA examinations, including the new requirements under the USA PATRIOT Act. I am pleased to be on a panel with the FDIC Inspector General and would like to highlight some of his office's work to illustrate issues recently raised regarding BSA examinations and enforcement. For example, in March 2001, the IG reported on its review of the FDIC Division of Supervision and Consumer Protection assessment of financial institutions' compliance with the BSA. Among the IG's findings were that FDIC did not adequately document its BSA examinations work; as a result, the IG was unable to determine the extent to which examiners reviewed regulated institutions' compliance with the BSA during safety and soundness examinations. The IG made several recommendations, including that FDIC reemphasize to examiners and ensure that they follow (1) specific guidance related to the documentation requirements of scoping decisions, procedures, and conclusions reached during the pre-examination process when risk- focusing BSA examinations; and (2) policy and instructions on how to adequately document BSA examination decision factors and procedures. With regard to both recommendations, FDIC stated it would reemphasize its existing policies and guidance, specifically those policies requiring examiner responses to all of the BSA core decision factors at each examination. FDIC also stated that it had made revisions to its BSA examination module. In September 2003, the IG reported on its audit of FDIC's implementation of examination procedures to address financial institutions' compliance with provisions of Title III of the USA PATRIOT Act. The IG concluded that FDIC's existing BSA examination procedures covered the AML subject areas required by the act to some degree and that its Division of Supervision and Consumer Protection had advised FDIC-regulated institutions of the new requirements. However, the IG reported that, for a number of reasons, the division had not issued guidance to its examiners on the act's provisions that required new or revised examination procedures. One of the report's recommendations was that the division issue interim examination procedures for those sections of the USA PATRIOT Act for which Treasury had issued final rules. The division agreed with the recommendation. In March 2004, the IG issued a report on its work to determine whether the FDIC adequately followed up on BSA violations reported in examinations of FDIC-supervised financial institutions to ensure that they take appropriate corrective action. Among the IG's findings was that, in some cases, BSA violations were repeatedly identified in multiple examination reports before bank management took corrective action or FDIC took regulatory action to address the repeat violations. The IG concluded that FDIC needs to strengthen its follow-up processes for BSA violations and recommended that FDIC's Division of Supervision and Consumer Protection (1) reevaluate and update examination guidance to strengthen monitoring and follow-up processes for BSA violations and (2) review its implementation process for referring violations to Treasury. The IG noted that FDIC has initiatives underway to reassess and update its policies and procedures. Although it did not concur with all of the IG's findings, in its response, FDIC concurred with the recommendations. In recent years, we have done work addressing money laundering issues within the context of different activities and financial institutions such as securities broker-dealers, Russian entities, and private banking. We have also reviewed FinCEN's regulatory role. In 1998, we issued two reports regarding FinCEN's role in administering the BSA. In both of these reports, we discussed the Secretary of the Treasury's mandate to delegate the authority to assess civil penalties for BSA violations to federal banking regulatory agencies and noted that this delegation had not been made. One purpose of this work was to update information on civil penalties for BSA violations. We reported that one of the issues under discussion at the time was whether violations would be enforced under BSA provisions or under the banking regulators' general examination powers granted by Title 12 of the U.S. Code. At that time, FinCEN officials told us that they were concerned that the banking regulators might be less inclined to assess BSA penalties and instead use their non-BSA authorities under their own statutes. Also in 1998, we reported on the activities of Raul Salinas, the brother of the former President of Mexico. Mr. Salinas was allegedly involved in laundering money from Mexico, through Citibank, to accounts in Citibank affiliates in Switzerland and the United Kingdom. We determined that Mr. Salinas was able to transfer $90 - $100 million between 1992 and 1994 by using a private banking relationship structured through Citibank New York in 1992 and effectively disguise the funds' source and destination, thus breaking the funds' paper trail. The funds were transferred through Citibank Mexico and Citibank New York to private banking investment accounts at Citibank London and Citibank Switzerland. In October 2000, we reported on our work on suspicious banking activity indicating possible money laundering conducted by certain corporations that had been formed in the state of Delaware for unknown foreign individuals or entities. We first identified an agent that together with a related company created corporations for Russian brokers and established bank accounts for those corporations. We also reviewed SARs filed by three banks concerning transactions by corporations formed by this agent for Russian brokers. We then determined that from 1991 through early 2000, more than $1.4 billion in wire transfer transactions was deposited into over 230 accounts opened at two U.S. banks--Citibank and Commercial Bank. More than half of these funds were wired from foreign countries into accounts at Citibank and over 70 percent of the Citibank deposits for these accounts were wire-transferred to accounts in foreign countries. Further, both of these banks had violated BSA requirements regarding customer identification. We concluded that these transfers raised concerns that the U.S. banking system may have been used to launder money. In 2001, we issued a report on changes in BSA examination coverage for certain securities broker-dealers. At the time, there was no requirement that all broker-dealers file SARs; however, broker-dealer subsidiaries of depository institutions and their holding companies were required to file SARs and were examined by banking regulators for compliance. We determined that with the passage of the 1999 Gramm-Leach-Bliley Act, these broker-dealers were no longer being examined to assess their compliance with SAR requirements, although they were being examined for compliance with reporting currency transactions and other requirements Treasury had specifically placed on broker-dealers. However, with the passage of the USA PATRIOT Act and the issuance of a final rule that became effective on July 31, 2002, all broker-dealers were required to report such activity. In December 2003, the Chairman and Ranking Member of this Committee requested that we conduct a review of the regulators' BSA examination procedures and enforcement actions. In requesting this work, you cited the Treasury and FDIC IG work that I discussed above. Among the major questions you raised were: How do the regulators design, target, and conduct BSA compliance examinations, including for the added provisions of the USA PATRIOT Act? How many BSA violations have federal banking regulators identified and taken action on over a several year time period? What consequences do the regulators' risk-focused examinations have for identification and enforcement of BSA violations? What differences, if any, are there between enforcement of the BSA through the regulators' general safety and soundness authorities and enforcement of the BSA under the terms of the BSA itself? Are BSA violations consistently interpreted among the regulators, Treasury, and depository institutions? How do BSA violations come to the attention of the regulators and what other agencies are involved in resolving the violations? What is the relationship between Treasury and the banking regulators in shaping examination policy and subsequent enforcement actions? Do the regulators have adequate resources for conducting BSA compliance examinations, including the BSA provisions of the USA PATRIOT Act? We have begun doing this work for the Committee. In general, the major objectives of our review are to determine: 1. How do the regulators' risk-focused examinations of depository institutions assess BSA and AML program compliance? 2. To what extent do the banking regulators identify BSA and AML program violations and take supervisory actions for such violations? 3. How consistent are BSA examination procedures and interpretation of BSA violations across the banking regulators? 4. What resources do the federal banking regulators have for conducting examinations of BSA and PATRIOT Act compliance? As part of our review, and considering the IGs' findings, we are examining the relevant BSA amendments and banking statutes, regulations, and policies that address the authorities under which the regulators and Treasury take supervisory action for BSA violations and violations of their AML program rules. We are reviewing current examination guidance and procedures that the regulators use for determining compliance with the BSA, and related requirements used during their regular and targeted examinations. We will also try to ascertain the implications of "risk- focused" examinations for BSA compliance and to determine whether and to what extent the regulators curtail such compliance reviews in their examinations. We are reviewing the reliability of the data systems used by banking regulators to track bank examinations, including BSA compliance examinations. We plan to obtain information on the bank examinations performed by each banking regulator over the past 4 years and then select a random sample to determine whether and the extent to which a BSA review was conducted or curtailed and the bases for these decisions. We also are obtaining information from the banking regulators on the number of BSA examinations done over the past 4 years and the number and nature of violations they identified. We plan to select and analyze samples of their BSA examinations and supporting workpapers to secure, in part, information on violations identified and the areas of operation covered during the examinations. Additionally, we plan to track supervisory actions taken by the regulators to correct the violations they identified. Our analyses in this area will include assessing the regulators' examination procedures for BSA and AML compliance and the nature of violations and corresponding supervisory actions. We will also review the examinations in our sample to determine the extent to which the examinations reviewed policies and procedures and then tested transactions to see if the policies and procedures were implemented appropriately. We will also determine the extent to which banking regulators vary in the way they conduct their BSA examinations, cite banks for violations, and take enforcement actions. Key legal issues we will be examining are the ramifications, if any, of the lack of delegation of authority to assess BSA penalties by Treasury to the federal banking regulators, as mandated by statute in 1994. We will examine enforcement of the BSA through the regulators' general safety and soundness authority and enforcement under the terms of the BSA itself to see whether there are differences, including circumstances under which the regulators make referrals to Treasury and law enforcement agencies. In addition, we will meet with government officials at the federal and state levels and from the banking and credit union industries to gain their perspectives on the risk-focused BSA examination process and post- examination follow-up activities. We have finished our initial meetings with the federal banking regulators; and officials at the Departments of Homeland Security, Justice, and Treasury, including FinCEN. We will have follow-on meetings with them as well as with state banking supervisors, and representatives from depository institutions of various sizes to gain their views on the consistency of examiner interpretation of potential BSA-related deficiencies and the regulators' BSA examination procedures, and their own internal control activities. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Committee may have. For questions concerning this testimony, please call Davi M. D'Agostino at (202) 512-8678. Other key contributors to this statement were M'Baye Diagne, Toni Gillich, Barbara Keller, Kay Kuhlman, and Elizabeth Olivarez. 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. government's framework for preventing, detecting, and prosecuting money laundering has been expanding through additional pieces of legislation since its inception in 1970 with the Bank Secrecy Act (BSA). The purpose of the BSA is to prevent financial institutions from being used as intermediaries for the transfer or deposit of money derived from criminal activity and to provide a paper trail for law enforcement agencies in their investigations of possible money laundering. The most recent changes arose in October 2001 with the passage of the USA PATRIOT Act, which, among other things, extends antimoney laundering (AML) requirements to other financial service providers previously not covered under the BSA. GAO was asked to testify on its previous work and the ongoing work it is doing for the Senate Committee on Banking, Housing, and Urban Affairs on the depository institution regulators' BSA examination and enforcement process. In recent years, GAO has issued a number of reports dealing with regulatory oversight of anti-money laundering activities of financial institutions. In 1998, GAO issued a report regarding Treasury's Financial Crimes Enforcement Network's (FinCEN) role in administering the BSA, which updated information on civil penalties for BSA violations. One focus was the Secretary of the Treasury's 1994 mandate to delegate the authority to assess civil money penalties for BSA violations to federal banking regulatory agencies. GAO noted that this delegation had not been made and said that FinCEN was concerned that bank regulators may be less inclined to assess BSA penalties and may prefer to use their non-BSA authorities under their own statutes. Also in 1998, GAO reported on the activities of Raul Salinas, the brother of the former President of Mexico. Mr. Salinas was allegedly involved in laundering money from Mexico, through Citibank, to accounts in Citibank affiliates in Switzerland and the United Kingdom. GAO determined that Mr. Salinas was able to transfer $90 - $100 million between 1992 and 1994 by using a private banking relationship structured through Citibank New York in 1992 and effectively disguise the funds' source and destination, thus breaking the funds' paper trail. In 2001, GAO issued a report on changes in BSA examination coverage for certain securities broker-dealers. At the time, there was no requirement that all broker-dealers file Suspicious Activity Reports (SARs); however, brokerdealer subsidiaries of depository institutions and their holding companies were required to file SARs and were examined by banking regulators for compliance. GAO determined that with the passage of the 1999 Gramm-Leach-Bliley Act, these broker-dealers were no longer being examined to assess their compliance with SAR requirements. However, with the passage of the USA PATRIOT Act and the issuance of a final rule that was effective on July 31, 2002, all broker-dealers were required to report such activity. GAO is currently studying the depository institution regulators' BSA examination and enforcement process for the Senate Committee on Banking, Housing, and Urban Affairs. The objectives include determining how the regulators' risk-focused examinations assess BSA compliance, the extent to which the regulators identify BSA and AML violations and take supervisory actions, and the consistency of BSA compliance examination procedures and interpretation of violations across regulators. GAO plans to determine whether and to what extent regulators curtailed BSA compliance examinations and the bases for these decisions. GAO plans to track supervisory actions taken to correct violations identified. GAO will also examine the ramifications, if any, of the lack of delegation of authority to assess BSA compliance penalties by Treasury to the banking regulators, as mandated by statute. GAO will meet with government and industry officials to gain their perspective on the BSA compliance examination process.

In 1996, bonds, AIP, and passenger facility charges provided about $6.6 billion of the $7 billion in airport funding. State grants and airport revenue contributed the remaining funding for airports. Table 1 lists these sources of funding and their amounts in 1996. The amount and type of funding vary considerably by the type of airport. The nation's 71 largest (large and medium hub) airports, which accounted for almost 90 percent of all passenger traffic, had more than $5.5 billion in funding in 1996, while the 3,233 other national system airports had about $1.5 billion. As shown in figure 1, large and medium hub airports rely most heavily on airport bonds, which account for roughly 62 percent of their total funding. By contrast, the other 3,233 smaller national system airports obtained just 14 percent of their funding from bonds. For these smaller airports, AIP funding constitutes a much larger portion of their overall funding--about half. Airports' planned capital development over the next 5 years may total as much as $10 billion per year, or $3 billion more per year than their 1996 funding. Figure 2 compares airports' total capital development funding in 1996 with their annual planned development over the next 5 years. Funding for 1996 is shown by source. Planned spending for future years is shown by the relative priority of the projects, as follows: FAA's highest priorities (shown as reconstruction and mandates) total $1.4 billion per year and are for projects to meet safety, security, and environmental requirements, including noise mitigation, and for projects that maintain the existing infrastructure (reconstruction). Other high-priority projects--primarily, those adding capacity--add another $1.4 billion per year. Other projects of a relatively lower priority--such as those bringing airports up to FAA's design standards--add another $3.3 billion per year, for a total of $6.1 billion per year. Finally, airports anticipate another $3.9 billion per year in projects that are not eligible for AIP--such as those expanding commercial space in terminals and constructing parking garages. Although a sizable difference may exist in total, when a comparison of 1996 funding to planned future development is made, there is a much closer match if the comparison is restricted to comparing AIP funding and planned spending on FAA's highest-priority projects (reconstruction and mandates). In the aggregate, the $1.372 billion in AIP funding in 1996 roughly equates to the $1.414 billion in estimated development planned for the highest priority projects. However, because about one-third of AIP funds are awarded to airports on the basis of the number of passengers enplaned and not necessarily on the basis of the project's priority, the full amount of AIP funds may not be going to the highest-priority projects. The funding difference between current funding and planned development for smaller airports is bigger, in percentage terms, than for larger airports. Current funding at the 3,233 small, nonhub, other commercial service and at general aviation airports is a little over half of the estimated cost of their planned development, thus producing a difference of about $1.4 billion. (See fig. 3.) The difference might actually be even greater if it were not for $250 million in special facility bonding for a single cargo/general aviation airport. For this group of airports, the $782 million in 1996 AIP funding surpasses the annual estimate of $750 million for reconstruction, noise, and federally mandated projects. As a portion of total funding, the potential funding difference for the 71 large and medium hub airports is comparatively less than it is for their smaller counterparts. (See fig. 4.) However, because total expenditures for capital projects are so much greater for these airports, this potential dollar shortfall is $1.5 billion, or $87 million greater than other airports' collective shortfall. Figure 4 also indicates that $590 million in AIP funding falls $74 million short of the estimated cost to meet FAA's highest-priority development--meeting federal mandates and maintaining the current infrastructure. Evaluating the various proposals to provide additional funding for airport development involves the consideration of the trade-offs among the various funding types as well as the potential effect that each proposal would have on airports. Initiatives to increase funding for airport development include increasing AIP funding, raising the ceiling on PFCs, and other less conventional steps, such as FAA's innovative finance and privatization pilot programs. In addition, we examined the potential benefits of state-administered revolving funds. Choosing to increase one source of airport funding instead of another involves making trade-offs because the current funding sources differ in several key characteristics. For example, increasing AIP funding increases the extent to which the government can specify the recipient, the project, and the amount of funds that will be awarded. However, because grant programs in general are relatively costly to administer, increasing funding in this manner would increase administrative costs more than some other funding mechanisms. Conversely, increasing PFCs reduces the extent to which the government or airlines can specify how funds are used. Finally, compelling airports to raise more funding through the bond markets limits governmental control over investments. The funding mechanisms also differ with respect to who bears the cost of airport financing. These differences affect the extent to which beneficiaries pay in proportion to the benefits they receive. For example, grants are funded through AIP, which is, in turn, funded primarily by the ticket tax. Thus, users pay for grants to airports. In contrast, part of the cost of tax-exempt bonds is borne by nonusers of airports because the interest earned by bondholders is exempt from federal income taxation. As a result, more of the cost of bond financing is borne by nonusers of airports than in the case of grants. However, it is uncertain whether using bonds to increase funding would improve or worsen the overall efficiency and equity of airport financing because nonusers may benefit from the local economy stimulated by airport development. Increasing total AIP funding would proportionately help smaller airports more than large and medium hub airports under the existing distribution formula. Increasing the level of AIP under the existing distribution formula appears to provide a slightly increasing share of AIP funds to the smaller airports and a concomitant decrease for the larger airports. AIP funding for fiscal year 1998 stands at $1.7 billion; large and medium hub airports get nearly 40 percent of this amount, and all other airports get about 60 percent. We calculated how this percentage split would be affected at funding levels of $2 billion and $2.347 billion. The National Civil Aviation Review Commission and the Air Transport Association (ATA), the commercial airline trade association, have recommended that future AIP funding levels be stabilized at a minimum of $2 billion annually. The level of $2.347 billion, which is the maximum amount authorized for fiscal year 1998, is supported by the airport trade groups--American Association of Airport Executives and Airports Council International-North America. Table 2 shows the results. Under existing funding formulas, the proportion of AIP funds going to smaller airports would rise. While the ATA has recommended a minimum $2 billion funding level for AIP, they also recommended redefining airport categories and the distribution formulas for AIP. ATA proposes that national system airports be grouped into four categories and that a specified portion of AIP funds be distributed to airports in each category. Under ATA's proposal, a slightly higher portion of a $2 billion AIP would go to the larger airports and a slightly smaller portion to the smaller airports than under current categories and formulas. Increasing PFC-based funding would mainly help larger airports. Large and medium hub airports accounted for nearly 90 percent of all passengers in 1996. Large and medium hub airports are more likely to have an approved PFC in place. As of January 1, 1998, 264 commercial service airports--almost half of all such airports--imposed a PFC, but nearly three-quarters of the large and medium hub airports have a PFC. Finally, while the PFC program requires large and medium hub airports that impose a PFC to forgo a portion of their AIP funding so that these funds can be redirected to smaller airports, most of these larger airports are already returning their maximum amount, according to FAA officials, and, therefore, the amount returned would not appreciably increase if the PFC ceiling were raised or eliminated. If the airports currently charging PFCs were to increase them to $4, $5, or $6 per passenger instead of the current $3 limit, total collections would increase from the current $1.1 billion to $1.5 billion, $1.9 billion, and $2.2 billion, respectively, on the basis of 1996 enplanements and collection rates. The bulk of the increased collections would accrue to large and medium hub airports. Furthermore, if all 540 commercial service airports were to impose a PFC, collections could climb to as much as $2.9 billion, but again, most of this would accrue to large and medium airports. Increased PFC funding is likely to be applied differently than increased AIP funding. According to airport groups, airports require more PFC funding to reduce congestion at airports, especially for passengers trying to access the airport and moving through the terminal. For some airports, roadside and terminal congestion may be more severe than that on the airfield and harder to finance, according to airport groups, because airlines are not as supportive of nonairfield projects and because these projects are ineligible for or are a low priority for AIP funding. As a result, a majority of PFCs are dedicated to terminal and airport access projects and interest payments on debt. The outcome of two FAA experiments, while still uncertain, is not likely to be far reaching owing to the limited participation of airports. In recent years, FAA, with congressional urging and direction, has sought to expand airports' available capital funding through more innovative methods, including more flexible application of AIP funding and attracting more private capital. The 1996 Federal Aviation Reauthorization Act authorized FAA to test three innovative uses for AIP funding--(1) permitting greater percentages of local matching for AIP funding, (2) paying interest costs on debt, and (3) purchasing bond insurance--for up to 10 projects. In addition, another innovative mechanism--using AIP funding to help fund state airport revolving funds--is not currently permitted but may hold some promise. Finally, the 1996 act authorized a pilot to test the benefits of airport privatization. Thus far, FAA has received 30 applications and approved 5 projects totaling $15.36 million for its innovative finance pilot. All five projects test the first innovative use of AIP funding--allowing local contributions in excess of standard grant match amounts, which for most airports and projects is otherwise fixed at 10 percent. FAA and state aviation representatives generally support the concept of flexible matching because it means that projects that otherwise might not get under way because of a lack of FAA funding can get started sooner; in addition, flexible funding may ultimately increase funding to airports. Applicants, however, have shown less interest in the other two options, which according to FAA and investment banking officials, do not offer new or substantial benefits for airports. Another innovative concept, not currently permitted, would be to use AIP funding to help capitalize states' revolving loan funds. Currently, FAA cannot use AIP funds to capitalize a state's loan fund because AIP construction grants can go only to a designated airport and project. However, some federal transportation, state aviation, and airport bond rating and underwriting officials believe that state revolving loan funds would help smaller airports obtain additional financing. State revolving loan funds have been successfully employed to finance other types of infrastructure projects, such as waste water projects and, more recently, drinking water and surface transportation projects. While loan funds can be structured in various ways, basically they use federal and state moneys to capitalize the fund, from which loans are then made. Interest and principal payments are recycled to provide additional loans. Once established, a loan fund can expand by issuing bonds using the fund's capital and loan portfolio as collateral. These revolving funds do not create any contingent liability for the U.S. government because they would be under state control. Declining airport grants and broader government privatization efforts spurred interest in airport privatization as another innovative means to bring more capital to airport development, but thus far, efforts have shown only limited results. As we previously reported, the sale or lease of airports in the United States faces many hurdles, including legal and economic constraints. As a way to test privatization's potential, the Congress directed FAA to establish a limited pilot program under which some of these constraints would be eased. Starting December 1, 1997, FAA began accepting applications from airports to participate in the pilot program on a first-come, first-served basis for up to five airports. Thus far, two airports have applied to be part of the program. In summary, Mr. Chairman, I would like to reiterate a point that bears on whether the federal government should take action to increase or reallocate funding for airports. We believe the difference between the $10 billion in planned development and the $7 billion in current funding for airports is not as important as the disparity between larger and smaller airports' capacity to finance their development. As we have said, current funding for the 71 large and medium hub airports is more than three-fourths of their planned development. For the other 3,233 smaller national system airports, however, current funding is only about half of their planned development and even less for some categories of these airports. Moreover, these smaller airports have more limited access to bond financing and, therefore, mostly rely on federal and state grants. The Airport Improvement Program is a more significant source of funding for smaller airports than for larger ones. Therefore, a decision to increase PFCs to help finance the development of larger airports, by itself, does little to correct the imbalance between the financial capacity of larger and smaller airports. Such a move would need to be coupled with reallocating AIP funding in favor of smaller airports as well as considering other measures designed to help smaller airports, such as funding for state revolving funds. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or the members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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GAO discussed airport funding issues, focusing on: (1) how much airports are spending on capital development, and where the money is coming from; (2) whether current funding levels will be sufficient to meet airports' planned development; and (3) what effect will various proposals to increase airport funding have on airports' ability to fulfill capital development plans. GAO noted that: (1) in 1996, the 3,304 airports that make up the national airport system obtained about $7 billion for capital development; (2) more than 90 percent of this funding came from three sources: (a) airport and special facility bonds; (b) the Airport Improvement Program (AIP); and (c) passenger facility charges paid on each airline ticket; (3) the magnitude and type of funding varies with each airport's size; (4) the nation's 71 largest airports accounted for nearly 80 percent of this funding; (5) as a group, these airports received only about 10 percent of their funding from AIP; (6) by contrast, the remaining 3,233 smaller airports that complete the national system rely on AIP for half of their funding; (7) airports planned as much as $10 billion per year in development for the years 1997 through 2001, or $3 billion per year more than they spent in 1996; (8) about $1.4 billion per year of that development is planned for safety, security, environmental, and reconstruction projects--the Federal Aviation Administration's highest priorities; (9) another $1.4 billion per year of that development is planned for other high-priority projects, primarily adding airport capacity; (10) other projects of a relatively lower priority, such as bringing airports up to FAA's design standards, add another $3.3 billion per year; (11) airports anticipate another $3.9 billion per year for projects that are not eligible for funding from AIP, such as expanding commercial space in terminals and constructing parking garages; (12) the difference between current funding and planned development is especially acute for smaller commercial and general aviation airports; (13) their 1996 funding would cover only about half of their total planned development; (14) several proposals to increase airport funding have emerged in recent years; (15) these include increasing the amount of funding for AIP, raising or eliminating the ceiling on passenger facility charges, and better leveraging of existing funding sources; and (16) these proposals vary in the degree to which they help specific types of airports.

In July 1996, the USDA IG concluded that the Forest Service's financial statements for fiscal year 1995 were unreliable. The IG's report cited numerous shortcomings in the Forest Service's accounting and financial data and information systems that precluded the agency from presenting accurate and complete financial information. For example, in reporting its fiscal year 1995 financial results, the Forest Service could not determine for what purposes $215 million of its $3.4 billion in operating and program funds were spent. In December 1996, we reported on how the inaccuracy of the financial statement data precluded the agency and the Congress from using this financial data to help make informed decisions about future funding for the Forest Service and raised questions about the reliability of program performance measures and certain budget data. Forest Service officials determined that corrective actions could not be completed in time to improve the Forest Service's fiscal year 1996 financial data. As a result, the agency did not prepare financial statements for fiscal year 1996. Instead, the Forest Service agreed to a three-party effort (the Forest Service, USDA's Office of the Chief Financial Officer (OCFO), and the IG) to correct the problems identified in the fiscal year 1995 IG audit report. On December 23, 1994, the Office of the Chief Financial Officer purchased a new accounting system, the Foundation Financial Information System (FFIS), to implement USDA-wide. Because of the reported financial deficiencies at the Forest Service, it was decided that the Forest Service would be one of the first USDA agencies to implement FFIS. While the overall responsibility and oversight for implementing FFIS rests with the USDA OCFO, implementation at the Forest Service is a joint effort between the Forest Service and the USDA OCFO. Forest Service management is responsible for the other corrective measures that are required to achieve financial accountability. The Forest Service's goal was to correct some of the deficiencies during fiscal year 1997 and to achieve financial accountability by the end of fiscal year 1999. In August 1997, we reported to your Committee that it is doubtful that the Forest Service can achieve financial accountability by the end of fiscal year 1999 if management and staff commitment waver, planned tasks are not accomplished, and sufficient resources are not provided. Our objectives were to monitor and report on the Forest Service's (1) implementation of a new financial accounting system, (2) correction of certain accounting deficiencies, (3) resolution of key staffing and financial management organizational issues, and (4) commitment to achieving financial accountability. We reviewed steps taken by the Forest Service, USDA OCFO, and USDA IG to correct deficiencies in the Forest Service's accounting and financial data and systems since we last reported to you on August 29, 1997. To assess the status of the Forest Service's (1) effort to improve the reliability of its accounting and financial data and (2) its commitment to improvement, we reviewed the Forest Service's financial health monitoring reports, the Forest Service's Financial Management Strategy and Action Plan, project management plans, and other documents outlining improvement initiatives and their status. We also attended planning conferences where progress and critical tasks were identified, and interviewed regional and headquarters Forest Service officials. In addition, we reviewed two internal USDA assessments of FFIS implementation problems. We also interviewed IG officials and USDA's Acting CFO about the status of the Forest Service's corrective actions. We performed our review from September 1997 through February 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Special Assistant to the Chief, Forest Service; the Acting Deputy Chief of Operations, Forest Service; the Acting Director of Financial Management, Forest Service; the Acting Chief Financial Officer, USDA, and his staff; and staff from the IG's office. These comments are discussed in the "Agency Comments and Our Evaluation" section. The new accounting system, FFIS, being implemented at the Forest Service is designed to be a fully integrated financial accounting and reporting system that the Forest Service is counting on to correct many of the agency's current financial shortcomings. FFIS was piloted at the Forest Service in three units, representing about one-third of all Forest Service transactions, as scheduled on October 1, 1997. However, the pilot units experienced many problems, primarily related to transferring data from other feeder systems to the new FFIS system. For example: FFIS initially rejected 45 percent of the data transferred to it from the procurement system, and the data had to be re-entered. These rejects occurred for various reasons, including the two systems maintaining inconsistent vendor data such as different purchase order numbers for the same item. The timber sales system could not transfer data to FFIS; therefore, sales data had to be entered into FFIS manually. About 1,200 outstanding travel orders had to be rekeyed because the data in the new travel system could not be automatically transferred to FFIS. The agency is continuing to address these types of problems as they are identified during the implementation process. In addition, the agency's fiscal year 1998 first quarter budget execution reports that are required by the Office of Management and Budget contained estimated rather than actual amounts because FFIS could not generate actual information. Unforeseen problems also have precluded the pilot units from using FFIS to produce other critical budgetary and financial reports that the Congress and the agency need to track obligations, assets, liabilities, revenues, and costs. These problems occurred, in part, because budgetary information had not yet been brought forward from the old accounting system, which is no longer functional in the pilot units. Also, the FFIS system generates accounting information at the detailed transaction level, but is currently unable to produce summary-level data needed to carry prior year balances forward as well as to determine current balances. The Forest Service subsequently discovered that its reports contained errors in the logic used to compute summary balances. These errors are being corrected. The overall problems with the system implementation are reflective of the lack of complete integrated testing of the system, including its reporting capability, prior to implementation in the pilot units. Our prior work at other agencies has shown that the lack of adequate testing of systems before piloting and implementation is one of the primary causes of new systems implementation failures. As a result of the reporting problems, the OCFO and the Forest Service are revising the scheduled completion of FFIS implementation in the pilot units from February 23, 1998, to March 30, 1998. The Acting Director of Financial Management has a team, including region and forest-level staff, at the National Finance Center working on correcting the identified reporting deficiencies. According to the USDA Acting CFO, the team plans to initially focus on monthly and quarterly reporting requirements and will address year-end and other reporting demands later in the fiscal year. If these problems are not resolved, FFIS cannot be successfully implemented in the remaining units as scheduled on October 1, 1998. Further, the inability to produce budget and financial reports for the three pilot units subjects the assets of these units to a high level of risk and vulnerability to misuse. Another issue that must be addressed is to ensure that FFIS, as well as all other mission critical computer systems, is Year 2000 compliant. The Year 2000 problem is rooted in the way dates are recorded and calculated in many computer systems. For the past several decades, systems have typically used two digits to represent the year in order to conserve on electronic data storage and reduce operating costs. With this two-digit format, however, the year 2000 is indistinguishable from the year 1900. As a result, system or application programs that use dates to perform calculations, comparisons, or sorting may generate incorrect results when working with years after 1999. The version of FFIS purchased in 1994 and piloted in October 1997 is not Year 2000 compliant. Forest Service officials and the USDA Acting CFO told us that the FFIS pilot would have been delayed up to 1 year if the agency had waited for the vendor to release a Year 2000 compliant version of FFIS. We did not assess the decision-making process for procuring FFIS or the level of effort required to make the system Year 2000 compliant. The Office of Management and Budget reported that as of November 15, 1997, USDA had demonstrated insufficient evidence of adequate Year 2000 progress. However, the USDA Acting CFO said that USDA is taking steps to ensure that FFIS, as well as all other mission critical financial systems, becomes Year 2000 compliant before January 1, 2000. He further stated that FFIS will be Year 2000 compliant by the summer of 1998. We are initiating another assignment which will examine Year 2000 issues in USDA. The Forest Service has corrected some of the accounting deficiencies identified in the IG's fiscal year 1995 audit report, but many of the serious shortcomings that we reported on in December 1996 still remain. The agency has implemented procedures and begun cleaning up some of the erroneous data recorded in its old accounting system, such as amounts other agencies owe to the Forest Service for work performed on a reimbursable basis. This process should help ensure that invalid data are not transferred to the new FFIS system. However, the reported $7.8 billion in land, buildings, roads, and equipment is still questionable because reliable values and quantities for many of these assets have not been established. Therefore, as we reported in December 1996, the Forest Service continues to be exposed to mismanagement and misuse of these assets. Each region was scheduled to complete equipment inventories verifying that all items are accounted for by July 31, 1997. Written certifications were due from the units to Financial Management staff by September 30, 1997. However, one of the Forest Service's 10 regions did not complete its certification until February 12, 1998. The remaining inventories of land, buildings, and roads are to be completed and certified by June 30, 1998. Until these counts are completed and recorded in the accounting records, the correct quantities and costs of these assets will not be determinable. Therefore, the Congress cannot be assured that Forest Service requests for funds related to roads and buildings are fully warranted. In addition, the Forest Service still lacks supporting records (a subsidiary ledger system) to substantiate, at a detailed level, amounts the agency owes to others (accounts payable) or is owed by others (accounts receivable). Also, an IG official told us in February 1998 that the Forest Service still lacks adequate controls to ensure that all billings for timber sales and other revenue-generating activities are submitted and accurately recorded and recognized as income in a timely manner. Good internal controls over accounts payable and accounts receivable are critical to effective cash management. For example, if the Forest Service underbills a customer, does not bill a customer, or does not collect from a customer because of weak controls over its accounts receivable, it may have fewer funds to carry out its mission or it may require additional appropriations from the Congress. For fiscal year 1995, the Forest Service reported accounts receivable of $192 million and accounts payable of $298 million. Further, until the Forest Service completes its asset inventories and valuations and implements better controls over receivables and payables, Forest Service managers' ability to accurately report program performance measures as well as monitor revenue and spending levels will be hampered. The Forest Service has a designated staff person to direct Forest Service aspects of FFIS implementation activities on a full-time basis. This individual is responsible for working closely with the Forest Service, OCFO, and an outside contractor to oversee implementation of the new system. In addition, key vacant financial management positions have been advertised and job offers have been made to some applicants. However, the Director and Deputy Director positions for Financial Management in Washington, D.C., have been vacant since October 3, 1997, and January 1, 1998, respectively, due to retirements. A Regional Fiscal Director is currently serving as Acting Director until this Senior Executive Service position, which is not within the exclusive hiring authority of the Forest Service, is filled. These positions require staff possessing a strong financial management background, including experience in accounting, budgeting, and financial systems. These positions are important to the implementation of FFIS as well as continuation of day-to-day Forest Service operations. Forest Service officials said they anticipate that all key financial management vacancies will be filled by March 1998. The Forest Service still has not concluded its evaluation of the agency's overall financial management structure and workload requirements at all levels. Under the Forest Service's current financial management organizational structure, the budget office reports to the Deputy Chief for Programs and Legislation, while the financial management office reports to the Deputy Chief for Operations. An accounting firm is currently evaluating the financial management organizational structure, workload, and staffing levels for the Forest Service. According to the Acting Director of Financial Management, this firm is scheduled to issue its report in March 1998. As we reported in August 1997, until this evaluation is completed, the Forest Service cannot determine if its current overall financial management organizational structure and resources are sufficient to accomplish the remaining tasks required to achieve financial accountability within established time frames. Top management (Forest Service Chief, Special Assistant to the Chief, and Acting Deputy Chief of Operations) has taken several steps to make needed improvements. For example, Forest Service officials have dedicated resources to implement corrective measures, participated in numerous planning sessions where critical tasks were discussed and milestones were established, and emphasized to staff the need to establish financial accountability. In addition, top management has initiated bimonthly meetings with Fiscal Directors from the 10 Forest Service regions and 7 Research Stations to monitor the overall financial management improvement effort, including FFIS implementation activities, and ensure that (1) initiatives are implemented as planned and (2) obstacles are identified and removed. Further, management has continued to stress the importance of financial management by including it as a performance rating element for both Fiscal Directors and Regional Foresters. Fiscal Directors or other key fiscal staff from 9 of the 10 regions participated in a recent planning meeting where the three pilot units presented information on implementation problems and provided advice on how the remaining regions could better prepare for successful FFIS implementation. Participants also reviewed the agency's FFIS implementation plan, identified and discussed remaining activities, and discussed ways to address staff shortages. Given the importance of this meeting to the success of implementing FFIS agencywide, the absence of one region--which accounts for 12 percent of the Forest Service's budget--raises concern about the region's commitment and top management's ability to effectively lead this effort toward financial accountability. The Forest Service's autonomous structure may hinder top management's ability to get all Regional Fiscal Directors to participate. Regional Fiscal Directors are under the direct authority of their respective Regional Foresters, who report to the Chief of the Forest Service rather than to the Deputy Chief of Operations. The Deputy Chief of Operations, located in the national office, oversees implementation of FFIS for the Forest Service. We were told that the Fiscal Director from the one region--the same region that was about 5 months late certifying equipment inventories--was absent due to other priorities of the Regional Forester. Strong leadership in resolving the remaining obstacles and participation by all regions are required throughout the effort for the Forest Service to achieve and sustain financial accountability by the end of fiscal year 1999 and thereafter. While corrective measures are underway, few of the problems reported by the IG in the fiscal year 1995 audit report and that we analyzed in our initial report to you have been fully resolved. In addition, new hurdles such as FFIS' current inability to generate budgetary and financial reports and the need to satisfactorily resolve the Year 2000 issue must be addressed. It is not yet clear whether the Forest Service will be successful in its efforts to resolve these problems by the end of fiscal year 1999. Much work still remains to be done before this goal can be achieved. We received oral comments from the Special Assistant to the Chief, Forest Service; the Acting Deputy Chief of Operations, Forest Service; the Acting Director of Financial Management, Forest Service; the Acting Chief Financial Officer, USDA, and his staff; and staff from the IG's office. The following issues were raised during our discussion. Forest Service and OCFO officials stated that, as with any major system implementation, they anticipated problems with implementing FFIS in the pilot units and stated they are moving to deal with problems identified. Forest Service officials did not agree with our assessment of the agency's autonomous structure and how that might hinder top management's ability to ensure that all Regional Fiscal Directors participate in the financial management improvement effort. The Acting Deputy Chief of Operations said that the current structure does not prevent him from achieving his financial management goals because he works very closely with all the Regional Foresters on these issues. Also, he stated that discussions have been held with the Regional Forester and Fiscal Director of the region that has not fully participated in the financial improvement efforts. He added that this region will fully participate from now on. Forest Service and OCFO officials believed that more emphasis on the progress they have made in correcting the identified financial management deficiencies should have been included in the report. Regarding the first issue, the number and nature of problems encountered during the FFIS pilot indicate that additional testing was needed. Such testing should have identified many of these problems, which could have been resolved before FFIS was piloted. Second, we believe that for this effort to be successful the Deputy Chief for Operations must take whatever action is necessary to ensure that Regional Fiscal Directors focus their priorities on correcting the identified financial management deficiencies. Finally, we agree that some progress has been made in correcting financial management deficiencies and revised certain sections of the report to better reflect this. These officials also provided clarifying comments that we incorporated into our report as appropriate. We are sending copies of this report to the Ranking Minority Member of your Committee; the Secretary of Agriculture; the Chief of the Forest Service; the Special Assistant to the Chief; USDA's Acting Chief Financial Officer; the Acting Deputy Chief of Operations; the Acting Director of Financial Management; the Director of the Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. We will continue to monitor the Forest Service's effort and report to you. If you have any questions about this report, please call me at (202) 512-8341 or McCoy Williams, Assistant Director, at (202) 512-6906. Major contributors to this report are listed in appendix I. Anita Lenoir, Auditor-in-Charge Maria Rodriguez, Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed the Forest Service's efforts to correct the financial problems identified in the Department of Agriculture (USDA) Inspector General's (IG) audit report on its fiscal year (FY) 1995 financial statements, focusing on the Forest Service's: (1) implementation of a new financial accounting system; (2) correction of certain accounting deficiencies; (3) resolution of key staffing and financial management organizational issues; and (4) commitment to achieving financial accountability. GAO noted that: (1) the Forest Service has taken some positive steps to address the accounting deficiencies cited in the IG's FY 1995 audit report; (2) however, serious problems have been encountered in the initial implementation of the new financial accounting system; (3) while the Office of the Chief Financial Officer (OCFO) and the Forest Service piloted the Foundation Financial Information System (FFIS) in three units as scheduled on October 1, 1997, problems with FFIS processing data and transferring data between FFIS and other feeder systems have hampered the implementation efforts; (4) also, the pilot units have not been able to use FFIS to produce certain critical budgetary and accounting reports that track the Forest Service's obligations, assets, liabilities, revenues, and costs; (5) these problems occurred because: (a) while most individual components of the system were tested, a complete integrated test was not accomplished prior to implementation; (b) the FFIS reporting mechanism, which was not fully tested prior to implementation, was not functioning properly; (c) certain report specifications and calculations were incorrect; and (d) budget balances had not yet been brought forward from the old accounting system, which is no longer functional for the pilot units; (6) failure to correct these problems will jeopardize successful implementation of FFIS in the remaining Forest Service units; (7) the Forest Service's ability to produce reliable financial reports hinges on successful operation of the new system; (8) the version of FFIS purchased by the UDSA OCFO in December 1994 is not year 2000 compliant; (9) the Forest Service has corrected some of the accounting deficiencies cited in the IG's 1995 audit report, it continues to have certain accounting problems, in addition to those related to the FFIS system, that will hamper its ability to produce reliable financial information and could expose the agency to mismanagement and misuse of its assets; (10) the Forest Service still lacks supporting records to substantiate, at a detailed level, amounts the agency either owes or is owed by others; (11) the Forest Service has not yet completed an evaluation of its financial management structure and workload requirements at all levels; (12) the Forest Service's top management has taken some steps to correct the financial problems reported by the IG in the FY 1995 audit report; and (13) however, the Forest Service's autonomous organizational structure may hinder top management from making needed improvements by FY 1999.

Section 501(c) of the I.R.C. grants an exemption from federal income taxes to organizations that meet certain requirements. Exempt organization data provided by IRS indicated that nearly 1.8 million organizations in various classifications are currently recognized as being tax exempt. Charitable organizations (I.R.C. SS 501(c)3) constitute the largest classification, accounting for over 60 percent of all exempt organizations as of September 30, 2006. Other classifications of exempt organization include civic and business leagues, labor organizations, recreational clubs, domestic fraternal societies, and credit unions. Differences between the various classifications include whether donations to the exempt organization are tax deductible and whether the exempt organization has to submit an application to IRS for specific recognition of its tax exempt status. Specifically, donations to certain exempt organizations, such as charitable and religious organizations, certain veteran's organizations, and certain cemetery companies, are deductible on the donor's individual tax return. Donations to other organizations not specifically recognized as such are not deductible. Organizations that are qualified to receive deductible donations, with the exception of churches, are required to apply to IRS and receive a formal determination of their exempt status. Generally, each exempt organization is required to file an annual informational return that provides IRS with information about the organization and its operations, officers and directors, and whether it is required to obtain specific IRS recognition of its exempt status. An exempt organization's annual information return (Form 990) also provides the public with the primary or sole source of information about the organization. The determination of exempt status and monitoring of exempt organizations is the responsibility of the Tax Exempt and Government Entities Division (TE/GE) of IRS. The division's responsibilities include accepting applications for and determining whether organizations qualify as exempt under the I.R.C., monitoring exempt organizations for continued compliance with the I.R.C., and when appropriate, revoking the exempt status of an organization that no longer meets requirements for exemption. Like all other employers, exempt organizations with employees are required to pay payroll taxes that they withhold from employees' wages "in trust" for the federal government, as well as other applicable federal taxes. Payroll taxes withheld from employees consist of income taxes; Old Age, Survivors, and Disability Insurance (OASDI), commonly referred to as Social Security; and Medicare. OASDI is taxed at 6.2 percent on the first $94,200 of an employee's salary, and Medicare is taxed at 1.45 percent with no income cap. The employer is also taxed, at the same rate, for OASDI and Medicare on employee wages. To the extent that payroll taxes are withheld and not forwarded to IRS, individuals within the business (e.g., exempt organization officials) may be held personally liable for the withheld amounts not forwarded, and they can be assessed a civil monetary penalty known as a trust fund recovery penalty (TFRP). Willful failure to remit payroll taxes is a felony under U.S. law punishable by a fine, imprisonment, or both, and the failure to properly segregate payroll taxes can be a criminal misdemeanor offense. Within TE/GE, the Exempt Organization (EO) Examinations Office is charged with promoting compliance with the I.R.C. The EO Examinations Office's activities include analyzing the operational and financial activities of exempt organizations and developing other processes to identify areas of noncompliance, developing corrective strategies, and assisting other exempt organization functions in implementing these strategies. In the process of performing the analysis, the EO Examinations Office may assess exempt organizations' payroll or other taxes. If the EO Examinations Office assesses taxes and the taxpayer does not make payment, the matter is referred to IRS's Small Business / Self-Employed (SB/SE) Collections Office. SB/SE Collections Office becomes responsible for collecting the delinquent debt and may use means such as federal tax liens, levies, and seizures, and may assess a TFRP against an organization's officials. A federal grant is an award of financial assistance from a federal agency to an organization to carry out an agreed-upon public purpose. As such, federal grants are not used for the direct acquisition of goods or services for the federal government. Based on our analysis of fiscal year 2004 and 2005 data from FAADS, federal agencies collectively awarded grants of approximately $300 billion annually. Further analysis of the FAADS data indicates that approximately 80 percent of all federal grants are pass- through grants, that is, they are federal grants provided to the state and local governments, which, in turn, disburse the grants to the ultimate recipients. Consequently, only about 20 percent of grants are provided directly from the federal government to the organization that ultimately spends the money. Grant applicants that apply directly to the federal government are required to complete Standard Form (SF) 424. The SF 424 requires grant applicants to certify whether they are delinquent on any federal debt, including federal tax debt. As of September 2006, nearly 55,000 exempt organizations had nearly $1 billion in unpaid payroll and other federal taxes. The amount of taxes owed by exempt organizations ranged from $101 to $16 million, and the number of delinquent tax periods ranged from a single period to more than 80 tax periods. However, the dollar amount of federal taxes owed by exempt organizations is understated because some organizations underreport their tax liability or fail to file returns altogether. Further, we excluded certain classifications of exempt organizations, tax debts for current periods, and disputed tax debts. As shown in figure 1, about 71 percent of the nearly $1 billion in unpaid federal taxes comprised payroll taxes and related penalties and interest. About 19 percent, or over $180 million, related to annual reporting penalties. IRS imposes reporting penalties on entities that fail to file annual returns at all or in a timely manner or that file inaccurate returns. The remaining 10 percent of the nearly $1 billion in delinquent taxes consisted of unrelated business income, excise, and other types of taxes. A significant amount of the unpaid federal taxes by exempt organizations has been outstanding for several years. As reflected in figure 2, while the majority of the nearly $1 billion in unpaid federal taxes was from tax periods 2001 through 2005, over a quarter of the unpaid taxes are for tax periods prior to 2001. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amount owed decreases. This is, in part, because of the continued accrual of interest and penalties on the outstanding tax debt. Similarly, tax problems such as the tax gap are aggravated over time if not addressed early on. Our analysis of IRS data found that nearly 1,500 of the almost 55,000 delinquent exempt organizations owed in total over $600 million of the nearly $1 billion in unpaid federal taxes of exempt organizations we identified. All of these nearly 1,500 exempt organizations owed over $100,000 each, with some owing more than $10 million. Another 8,400 owed from $10,000 to $100,000 each. Although the largest group--nearly 45,000--owed less than $10,000 in delinquent taxes, the majority of the debt in this group of exempt organizations is related to payroll taxes withheld from employees and not remitted to the federal government and annual reporting penalties. Further, many exempt organizations in this group repeatedly failed to remit taxes in multiple tax periods. Although the nearly $1 billion in unpaid federal taxes we identified that were owed by exempt organizations as of September 30, 2006, is a significant amount, it understates the full extent of unpaid taxes. This amount does not include amounts due IRS from exempt organizations that did not file payroll taxes (nonfilers) or underreported payroll tax liability (underreporters). Also, we did not include exempt organization tax debt from 2006 tax periods, tax debt for entities owing $100 or less, or tax debt for certain entities listed in IRS's database of exempt organizations. Limiting our ability to more fully estimate the extent of exempt organizations with unpaid federal taxes is the fact that IRS's tax database reflects only the amount of unpaid taxes reported by the exempt organization on a tax return or assessed by IRS through various enforcement programs. IRS's tax database does not reflect amounts owed by exempt organizations that have not filed tax returns and for which IRS has not assessed tax amounts due. Additionally, our analysis did not account for exempt organizations that underreported payroll taxes and had not been identified by IRS. As reported previously and as indicated in our case study investigations, some exempt organizations underreported payroll taxes or failed to file returns. IRS estimates that underreporting accounts for more than 80 percent of the gross tax gap. We also took a number of steps in determining the amount of tax debt owed by exempt organizations to avoid overestimation. For example, some recently assessed tax debts that appear as unpaid taxes through a matching of IRS unpaid tax and exempt organization records may involve matters that are routinely resolved between the exempt organization and IRS, with the taxes paid, abated, or both within a short period. We eliminated these types of debt by including only unpaid federal taxes for tax periods prior to calendar year 2006. Further, we did not include exempt organizations with tax debt of $100 or less because these small debts likely do not represent abusive behavior. We also eliminated all tax debt IRS identified as not agreed to by the exempt organization. Further, the amount of exempt organization tax debt excludes amounts owed by exempt organizations for which the statutory collection period expired. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if exempt organizations owe federal taxes beyond the 10- year statutory collection period, the older tax debt may have been removed from IRS's records. We were unable to determine the amount of tax debt that had been removed. For all 25 cases involving exempt organizations with delinquent tax debts that we audited and investigated, we found abusive activity, potentially criminal activity, or both related to the federal tax system. These cases reiterate the need for IRS to improve its enforcement of tax laws as previously noted by GAO. The amount of unpaid taxes associated with these cases ranged from over $300,000 to nearly $30 million. All 25 exempt organizations had unpaid payroll taxes, some dating as far back as the late 1980s. In one instance, an exempt organization had not remitted payroll taxes to IRS for 14 years, thereby accumulating unpaid federal taxes of nearly $8 million at the time of our audit. Rather than fulfill their role as "trustees" of this money and forward it to IRS as required by law, the officials responsible for these exempt organizations diverted the money to fund the organizations' operations, which sometimes included millions of dollars in management fees to related entities, or for personal benefits, such as their own salaries. At the time of our audit, IRS had completed TFRP assessments on officials of 15 of the 25 exempt organizations. However, as we have previously reported, collections of TFRP assessments are generally minimal. Further, available data show that IRS has taken some collection action and placed liens on the assets of 23 of the 25 entities or their officials. However, IRS initiated actions to seize assets of only 1 of the 25 exempt organizations in our case studies. Our investigations revealed that despite owing substantial amounts of federal taxes to IRS, top officials of some exempt organizations received substantial salaries--often in the six-figure range and in one case in excess of $1 million--and had substantial personal assets, including multimillion- dollar homes and luxury cars. Our investigations found that 3 of these exempt organizations are related to other exempt organizations, for-profit entities, or both that are also tax delinquent. The related entities were primarily discovered because of common top officials. Combined, the 3 exempt organizations and their related entities owed nearly $40 million in delinquent taxes. Further, 4 of the 25 case study organizations we investigated had key officials and other employees who were convicted of criminal activities, including tax evasion and operating an illegal gambling establishment, at the same time the organizations continued to benefit from a tax exempt status. One entity was fined by a state for employing convicted felons in positions of trust. Table 1 highlights 10 of the 25 organizations with unpaid taxes that we investigated. Appendix II provides a summary of the other 15 cases we examined. We are referring all 25 cases we examined to IRS for further collection activity and criminal investigation, if warranted. The following provide illustrative detailed information on several of these cases: Case 1: This exempt organization is related to several for-profit entities that provide health care and other services, all of which have tax debts. The related entities appear to be set up under complex forms of ownership designed to shield income and assets, such as limited liability companies and offshore entities. Combined, these entities owe nearly $30 million in federal taxes, of which more than $10 million is attributable to the exempt organization. The exempt organization in particular had not paid federal taxes since the late 1990s, despite receiving millions in federal payments. At the same time, the exempt organization paid millions in management fees to a contractor that, according to available public records, is affiliated with the exempt organization. IRS has not placed a TFRP on any individual with respect to this exempt organization's tax debt. Case 2: This industry association owes more than $6 million in tax debt dating back to the late 1990s. A top official of the association admitted that he intentionally failed to remit payroll taxes in order to fund operations, which in a recent year included providing more than 10 officials with six- figure salaries, with one receiving a salary in excess of $500,000. At the same time, another top officer owned a multimillion-dollar luxury estate and purchased luxury vehicles. IRS has assessed a multimillion-dollar TFRP against an officer of the organization. Case 3: This health care organization owes more than $15 million in tax debt dating back to the early 2000s. While not paying its payroll taxes, the organization paid several employees large amounts of annual compensation, including a total compensation package for a top official in excess of $1 million annually, and several other employees with combined compensation of over $1 million. The top official also made several hundred thousand dollars in cash transactions at banks and casinos while the organization owed millions in unpaid taxes. Despite holding the organization's top office and earning seven-figure compensation, this official told IRS that he was not responsible for the exempt organization's unpaid taxes. Case 5: This children's services organization owes more than $500,000 primarily related to payroll taxes dating back to the late 1980s. The top official of this exempt organization was convicted of attempting to bribe an IRS employee. Other organization employees have criminal records, including records for violent crimes. Further, organization officials allegedly requested that some payments to it be made in cash. Case 6: This community services organization owes almost $3 million in tax debt dating from the late 1990s. The organization was fined for employing convicted felons in positions responsible for public safety. In addition, an organization employee was engaged in criminal activity at one of the organization's job sites. To date, IRS has not assessed a TFRP against organization officials. The organization has been replaced by a related entity that is operating out of the same facility. Many of the contracts awarded to the exempt organization have been transferred to this entity. Despite continuing to abuse the federal tax system, all of the 25 case study organizations continued to retain their tax exempt status. Existing federal statutes do not authorize IRS to revoke exempt status based on an organization's tax delinquency. However, the I.R.C. provides IRS with the authority to approve and monitor exempt organizations and also stipulates the circumstances under which IRS can revoke an organization's tax exempt status. Specifically, IRS can revoke exempt status when it determines the organization has ceased to operate in a manner consistent with the purpose for which it was granted the tax exempt status. For example, if an organization was granted tax exempt status because it was established to provide employment or other services to underprivileged individuals, and it ceases to do so, IRS can revoke the organization's tax exempt status. In addition, if an organization engages in excess benefit behavior, IRS has the authority to assess a tax against the individual who received the benefit. The I.R.C. provides IRS authority to revoke an organization's tax exempt status if it repeatedly engages in excess benefits behavior, including excess compensation. However, the I.R.C. does not provide IRS the authority to revoke tax exempt status based on failure to pay taxes. According to IRS officials, organizations whose exempt status is revoked may have delinquent debts, but that was not the criteria for revocation. IRS officials also informed us that revocation is an action of last resort, arrived at after evaluation of many factors and after imposing intermediate sanctions to try and correct the problem. Similarly, in cases of excess compensation, IRS generally tried to impose a tax on the individual who received the excess benefits, rather than revoke the exempt status of the organization. Based on analysis of limited grant payment data, we found that exempt organizations with unpaid federal taxes received over $14 billion in direct federal grant payments from three federal agency disbursement systems in fiscal years 2005 and 2006. Grant applicants are required to self-certify on the grant application whether they are delinquent on any federal debt, including federal taxes. Our audit of six case study organizations with delinquent taxes that also received federal grants found that five of the six appear to have violated the False Statements Act because they did not declare their delinquent federal taxes on their grant applications. Based on our analysis, we determined that of the nearly 55,000 exempt organizations with federal tax debt, more than 1,200 received over $14 billion in federal grants from HHS, Education, the Department of Energy, the National Aeronautics and Space Administration, and other federal agencies in fiscal years 2005 and 2006. The more than 1,200 exempt organizations owed over $70 million in tax debt yet received substantial amounts in federal grants. However, our estimate of over $14 billion in federal grants received by exempt organizations with federal tax debt is likely understated. First, because our analysis was limited to data from the three federal grant payment systems, our analysis did not include all federal grant disbursements. Further, our analysis included only data on direct recipients of federal grant payments, that is, payments provided directly by the federal government to the end user. Based on our analysis of data from FAADS, we estimated that these grants account for only about 20 percent of the total grants awarded by the federal government. The remaining 80 percent of federal grants are provided to states and local governments, which, in turn, disburse them to end users. Organizations that are applying for federal grants complete SF 424s to provide granting agencies with entity information, such as name, employer identification number, address, and a descriptive title of the project for which the grant will be used. The SF 424 also requires that the grant applicant provide information as to whether the applicant has any delinquent federal debts. The instructions that accompany the SF 424 define federal debt to include taxes owed. The applicant is required to certify that the information provided on the SF 424 is true and correct. We examined information provided on the SF 424 for six of our case study tax exempt organizations that received grants, all of which had substantial tax debts outstanding. We found that five of the six that received federal grants failed to disclose that they had federal tax debts on the SF 424s filed with the granting agencies. The six entities applied for and received over $13 million in total grant payments in fiscal years 2005 and 2006. In a recent 3-year time span, one of the exempt organizations we audited applied for multiple grants to provide community services. Even though the entity had an outstanding balance of unpaid federal taxes, the entity did not disclose its tax liability on the SF 424s. The organization subsequently received several million dollars in grant payments during 2 recent fiscal years. Figure 3 provides excerpts of an SF 424 for this organization where the applicant appears to have violated the False Statements Act by not disclosing its delinquent tax debt. Appendix IV contains a copy of the entire SF 424. We found that while granting agencies can ask prospective grantees for consent to verify federal tax debt information with IRS, granting agencies do so only in a few cases where the grant applicant discloses having federal debts. Agencies do not confirm with IRS the accuracy of applicant information related to federal tax debts because of strict taxpayer privacy laws. Officials at three granting agencies informed us that procedurally, if tax debt is declared on the SF 424, the agencies would request further information to determine if any action needs to be taken. Without accurate debt information, granting agencies are limited in their ability to fully evaluate whether the grantee is a responsible party, the grantee should receive the grant, additional action needs to be taken, or a combination of these. The majority of exempt organizations appear to pay their federal taxes. However, our work has shown that tens of thousands of exempt organizations and their officers have taken advantage of the opportunity to avoid paying their federal taxes, in part because IRS does not have the authority to revoke exempt status for failure to pay taxes. In many cases, officers of these delinquent organizations are responsible for diversion of payroll tax money--a felony offense--to pay their substantial salaries and accumulate substantial personal wealth. It is likely that many of these exempt organizations have provided significant and positive services to those in need; but it is also important that they comply with federal tax law. We have referred all 25 of the cases we investigated to IRS for collection and criminal investigation. We provided a draft of this report to the Commissioner of IRS for review and comment on April 6, 2007. Officials in IRS's TE/GE provided oral comments on the draft on April 24, 2007. The oral comments highlighted several planned actions to enhance exempt organizations' tax compliance efforts. The planned actions cited included analyzing discrepancies between payroll data reported to the Social Security Administration and data reported to IRS, and piloting a new modeling program to identify exempt organizations with a high risk of employment tax noncompliance. In its oral comments, IRS also agreed with the draft report's finding that IRS does not have authority to revoke an organization's exempt status for nonpayment of employment taxes, except under extraordinary circumstances which rarely occur. IRS planned actions, if implemented effectively, should help IRS avoid additional payroll and other tax compliance issues by exempt organizations. For IRS to ensure that tax exempt organizations comply with tax law it will be important to use the full range of available enforcement tools and hold tax exempt organizations and associated key officials accountable for noncompliance. As discussed in the body of this report, we identified a number of exempt organizations and their officials that were delinquent in paying significant dollar amounts in federal payroll and other taxes. As agreed with your office, unless you announce the contents of this report earlier, we will not distribute it until 30 days after its date. At that time, we will send copies to the Secretary of the Treasury, the Commissioner of the Financial Management Service, the Commissioner of Internal Revenue, and interested congressional committees and members. 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. Please contact me at (202) 512-9505 or [email protected] if you or your staff have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Our objectives were to determine whether and, if so, to what extent (1) exempt organizations have unpaid federal taxes, including payroll taxes; (2) selected case study organizations and their executives are involved in abusive or potentially criminal activity; and (3) exempt organizations with unpaid federal taxes received direct grants from certain federal agencies. To determine whether and to what extent exempt organizations have unpaid payroll and other federal taxes, we first identified the population of exempt organizations to be included in our analysis. These organizations include those that either received a formal determination of their exempt status or met basic criteria to be considered exempt. To perform this step, we obtained the exempt organization business master file from the Internal Revenue Service (IRS) as of September 30, 2006. This database contained information on over 2.5 million entities, each with a code indicating the most recent "exempt" status. In consultation with IRS, we identified nearly 1.8 million entities with status codes indicating that they are currently tax exempt. To identify exempt organizations with unpaid federal taxes, we obtained IRS's September 30, 2006, unpaid assessments file and matched it to the 1.8 million entities we identified as currently tax exempt using taxpayer identification numbers (TIN). To avoid overstating the amount owed by exempt organizations with unpaid federal tax debts and to capture only significant tax debt, we excluded tax debts meeting specific criteria. The criteria we used to exclude tax debts are as follows: tax debts IRS classified as compliance assessments or memo accounts for financial reporting, tax debts from calendar year 2006 tax periods, and exempt organizations with total unpaid taxes of $100 or less. The criteria above were used to exclude tax debts that might be under dispute or generally duplicative or invalid and tax debts that are recently incurred. Specifically, compliance assessments or memo accounts were excluded because these taxes have neither been agreed to by the taxpayers nor affirmed by the court, or these taxes could be invalid or duplicative of other taxes already reported. We excluded tax debts from calendar year 2006 tax periods to eliminate tax debt that may involve matters that are routinely resolved between the taxpayers and IRS, with the taxes paid or abated within a short period. We also excluded tax debts of $100 or less because they are insignificant for the purpose of determining the extent of taxes owed by exempt organizations. To prepare case studies of selected exempt organizations and their directors or senior officers for abuse of the federal tax system, we selected 25 exempt organizations using a nonrepresentative selection approach based on data-mining results, our judgment, and a number of other criteria, including the amount of unpaid taxes, number of unpaid tax periods, amount of payments reported by IRS, and indications that key officials might be involved in multiple entities with tax debts. We obtained copies of automated tax transcripts and other tax records (for example, revenue officers' notes) from IRS as of September 30, 2006, and reviewed these records to exclude exempt organizations that had recently paid off their unpaid tax balances and considered other factors before reducing the selection of exempt organizations to 25 case studies. For the selected 25 cases, we performed searches of criminal, financial, and public records. Our investigators contacted several of the exempt organizations and performed interviews. To determine whether and to what extent exempt organizations with tax debt received federal grants, we obtained and analyzed federal grant payment databases from the Department of Education's (Education) Grant Administration and Payment System (GAPS), the Department of the Treasury Financial Management Service's (FMS) Automated Standard Application Payment system (ASAP), and the Department of Health and Human Services' (HHS) Payment Management System (PMS) for fiscal years 2005 and 2006. These three agencies process grants on behalf of many other federal agencies and, in fiscal years 2005 and 2006, processed the majority of direct and pass-through grants, excluding Medicare and Medicaid. We then matched the grant payment data to the exempt organizations with federal tax debt using the TINs. Of the 25 case studies of exempt organizations with unpaid federal taxes, 6 submitted grant application forms related to grant payments made during fiscal years 2005 and 2006. We requested and reviewed the grant application forms for all 6 entities. We also interviewed officials from HHS, Education, and the Department of Agriculture on whether tax debts are considered in their decisions on whether to provide grants to particular grant applicants. We conducted our audit work from August 2006 through March 2007 in accordance with U.S. generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President's Council on Integrity and Efficiency. For IRS unpaid assessments data, we relied on the work we performed during our annual audits of IRS's financial statements. While our financial statement audits have identified some data reliability problems associated with the coding of some of the fields in IRS's tax records, including errors and delays in recording taxpayer information and payments, we determined that the data were sufficiently reliable to address our report's objectives. Our financial audit procedures, including the reconciliation of the value of unpaid taxes recorded in IRS's master file to IRS's general ledger, identified no material differences. To help ensure reliability of the exempt organization data, we interviewed IRS officials concerning the reliability of the data provided to us. In addition, we performed electronic testing of specific data elements in the database that we used to perform our work. For the GAPS, ASAP, and PMS data, we interviewed officials from Education, FMS, and HHS responsible for the databases. In addition, we performed electronic testing of specific data elements that we used to perform our work. Based on our discussions with agency officials, our review of agency documents, and our own testing, we concluded that the data elements used for this report were sufficiently reliable for our purposes. We briefed IRS officials on March 27, 2007, on the details of our audit, including our findings and their implications. On April 6, 2007, we requested comments on a draft of this report from the Commissioner of IRS. We received oral comments from the Tax Exempt and Government Entities Division of IRS on April 24, 2007, and have summarized these comments in the Agency Comments and Our Evaluation section of this report. Table 1 provides data on 10 detailed case studies. Table 2 provides details of the remaining 15 exempt organizations we selected as case studies. As with the 10 cases discussed in the body of this report, we also found abuse, potential criminal activity, or both related to the federal tax system during our audit and investigations of these 15 case studies. The case studies primarily involved exempt organizations with unpaid payroll taxes, one for as many as 14 years. Section 501(c) of the Internal Revenue Code (I.R.C.) lists several types of organizations that qualify for exemption from federal income taxes. The types of exempt organizations are summarized in table 3. Phone Number (give area code) Fax Number (give area code) 8. TYPE OF APPLICATION: 7. TYPE OF APPLICANT: (See back of form for Application Types) If Revision, enter appropriate letter(s) in box(es) (See back of form for description of letters.) Other (specify) Other (specify) TITLE (Name of Program): 12. AREAS AFFECTED BY PROJECT (Cities, Counties, States, etc.): 14. CONGRESSIONAL DISTRICTS OF: a. Applicant 15. ESTIMATED FUNDING: 16. IS APPLICATION SUBJECT TO REVIEW BY STATE EXECUTIVE ORDER 12372 PROCESS? . a. Yes. THIS PREAPPLICATION/APPLICATION WAS MADE . AVAILABLE TO THE STATE EXECUTIVE ORDER 12372 PROCESS FOR REVIEW ON .. b. No. PROGRAM IS NOT COVERED BY E. O. 12372 . OR PROGRAM HAS NOT BEEN SELECTED BY STATE . 17. IS THE APPLICANT DELINQUENT ON ANY FEDERAL DEBT? . Yes If "Yes" attach an explanation. 18. TO THE BEST OF MY KNOWLEDGE AND BELIEF, ALL DATA IN THIS APPLICATION/PREAPPLICATION ARE TRUE AND CORRECT. THE DOCUMENT HAS BEEN DULY AUTHORIZED BY THE GOVERNING BODY OF THE APPLICANT AND THE APPLICANT WILL COMPLY WITH THE ATTACHED ASSURANCES IF THE ASSISTANCE IS AWARDED. a. Authorized Representative Prefix Middle Name First Name c. Telephone Number (give area code) In addition to the contact named above, the following individuals made major contributions to this report: Tuyet-Quan Thai, Assistant Director; Gary Bianchi; Ray Bush; Shafee Carnegie; William Cordrey; Jessica Gray; Ken Hill; Aaron Holling; Leslie Jones; Shirley Jones; Jason Kelly; John Kelly; Rick Kusman; Barbara Lewis; Andrew McIntosh; Aaron Piazza; John Ryan; Barry Shillito; and Michael Zola.

As of September 2006, nearly 1.8 million entities were recognized as tax exempt organizations by the Internal Revenue Service (IRS). As such, they do not have to pay federal income taxes. Exempt organizations are still required to remit amounts withheld from employees' wages for federal income tax, Social Security and Medicare, as well as other taxes. Previous GAO work identified numerous government contractors, Medicare providers, and charities participating in the Combined Federal Campaign (CFC) with billions in unpaid federal taxes. To follow up on the CFC work, the subcommittee requested that GAO determine whether and to what extent (1) exempt organizations have unpaid federal taxes, including payroll taxes; (2) selected case study organizations and their executives are involved in abusive or potentially criminal activity; and (3) exempt organizations with unpaid federal taxes received direct grants from certain federal agencies. GAO reviewed unpaid taxes and exempt organization data from IRS and selected 25 case studies for audit and investigation. GAO also reviewed data from 3 major grant disbursement systems. GAO referred all 25 cases to IRS for collection activity and criminal investigation, if warranted. In its oral comments on a draft of this report, IRS noted several actions it is taking to enhance exempt organizations' tax compliance. Nearly 55,000 exempt organizations had almost $1 billion in unpaid federal taxes as of September 30, 2006. About 1,500 of these entities each had over $100,000 in federal tax debts with some owing tens of millions of dollars. The majority of this debt represented payroll taxes and associated penalties and interest dating as far back as the early 1980s. Willful failure to remit payroll taxes is a felony under U.S. tax law. The $1 billion figure is understated because some exempt organizations have understated tax liabilities or did not file tax returns. GAO selected 25 exempt organizations for investigation based primarily on amount of tax debt and number of periods delinquent. For the 25 cases investigated GAO found abusive and potentially criminal activity, including repeated failure to remit payroll taxes withheld from employees. Officials diverted the money to fund their operations, including paying themselves large salaries ranging from hundreds of thousands of dollars to over $1 million. Many of the 25 case studies accumulated substantial assets, such as million-dollar homes and luxury vehicles. Key officials and employees at 4 exempt organizations were engaged in criminal activities, including attempted bribery of an IRS official and illegal gambling. Despite repeatedly abusing the federal tax system, these entities continued to retain their exempt status. IRS does not have the authority to revoke an organization's exempt status because of unpaid federal taxes. Over 1,200 of these exempt organizations with unpaid federal taxes received over $14 billion in federal grants in fiscal years 2005 and 2006. Six of the 25 exempt organizations GAO investigated received grants; of those 6 entities, 5 appear to have violated the False Statement Act by not disclosing their tax debt as required. For example, one entity that received millions of dollars in grants did not disclose unpaid taxes on multiple applications. Taxpayer privacy statutes prevent granting agencies from verifying an applicant's tax status with IRS unless the taxpayer authorizes such disclosure.

During Operation Desert Storm, the Army deployed all or nearly all of certain support units such as transportation and military police units. As threats to U.S. security interests evolve and defense budgets shrink, it is important that the Army accurately identify the support forces it requires. TAA is the Army's biennial process to determine required support units and recommend the type and number of support units that the Army should include in its budget. The requirements generated in this process are dependent on a variety of inputs and guidance, including scenarios derived from the Defense Planning Guidance, wargaming assumptions, and logistical data that are developed for use in the computer modeling. For purposes of this report, logistical data include planning factors, consumption rates, and other data. Planning factors cover 9 of the Department of Defense's (DOD) 10 classes of supply; for modeling purposes, these factors are usually expressed in pounds per person per day. Consumption rates include such factors as the number of soldiers admitted to a hospital per day and the number of prisoners captured per day. An example of other logistical data would be the amount of support that allies can provide to offset U.S. requirements. While planning scenarios are largely given to the Army, logistical data must be developed by the Army. These data are compiled in the Army Force Planning Data and Assumptions document (AFPDA). Once the data are finalized--during TAA force structure conferences--the Concepts Analysis Agency conducts the computer modeling, which generates unit requirements based on a set of rules that determine the number of support units needed. After requirements are determined, additional force structure conferences are held where Army officials decide which units can be filled within the projected resource levels. Figure 1 highlights key elements of the TAA process for developing requirements and making force resourcing decisions. The Army's Deputy Chief of Staff for Logistics (DCSLOG) is responsible for developing the logistics data in the AFPDA. In practice, some of this responsibility has been delegated to the Combined Arms Support Command (CASCOM), which is the Army's integrator for some combat service support issues. Biennially, DCSLOG and CASCOM update the logistics portions of the AFPDA by tasking the major commands, Army component commands, and schools to validate the logistical data related to their areas of expertise. For example, school representatives are tasked to validate data based on their perspectives on doctrine; component commands are tasked to provide their perspectives on unique data and issues related to their theater. The logistical data are presented to workshops to gain group acceptance. They are then sent forward to the TAA force structure conference, where the data are approved. Army documents describe the AFPDA update as a systematic review and validation of key data used in TAA. However, Army regulations related to TAA primarily focused on the validation and management of planning factors. Effective May 1994, the Army broadened its regulation to include additional logistical data found in the AFPDA. This change should help to improve the validity of logistical data, but additional procedures are needed to correct the problems we found with the AFPDA update process. Before May 1994, Army regulation 700-8 specified responsibilities for the development and management of logistics planning factors. The Army Logistics Center, CASCOM's predecessor, was responsible for managing the development, validation, and collection of planning factors, and was to recommend factors to DCSLOG for approval. However, DCSLOG and CASCOM officials did not believe that the development and management of other logistical data for use in the AFPDA, such as theater specific data provided by component commanders, were covered in this or any other regulation prior to May 1994. In 1993, the Army Audit Agency found the Army's management of planning factors to be inadequate, and recommended changes to the process. The recommended changes included tasking responsible activities to (1) update planning factors periodically and (2) validate methodologies and assumptions used to develop planning factors. In 1994, the Army revised its regulations to improve the management of planning factors. These revisions included specifying time frames for updates to take place and incorporating internal control responsibilities to guide the development of planning factors. The regulation was also changed to include other logistical data and to link the development of logistical data to the AFPDA. While the regulation gave DCSLOG the overall responsibility for logistical data management, the day-to-day management for logistical data was delegated to CASCOM. The Army's TAA process relied heavily on commands and schools to review and validate the accuracy of logistics data. Commands and schools were requested prior to the TAA workshops to review and validate logistics data. However, we found that some data had not been validated, were outdated, or were not supported by documented studies. Because the process was poorly documented, we could not determine how widespread these problems were. Further, no organization was responsible for ensuring that the data validations occurred and were derived from consistent and sound methodological studies. Our review of available documentation for several past TAAs showed that some data had not been validated in several years. Although some school officials believed the AFPDA contained outdated data, actions were not undertaken to validate or change the data. For instance, officials with the ordnance school, which develops doctrine for maintenance units, expressed concern in 1989 that rates for equipment that is expected to be abandoned and the rates for vehicles expected to be damaged in combat had not been updated in 4 years and, thus, were unlikely to be accurate. These rates primarily affect the number of maintenance units. In another instance, the Army engineers submitted workload factors that were outdated and had not been validated prior to the January 1992 TAA workshop. These factors measured the number of hours it takes to construct such structures as railroads, bridges, and pipelines. A new study was done only after concerns were raised about the validity of these factors during the AFPDA workshops. We found data that were not supported by documentation. At the U.S. Army Central Command (ARCENT), for example, officials that provided data for TAA in 1992 had not maintained documentation that would show how the data were developed. This lack of documentation reduces assurance that the data are valid and can cause problems during future updates if key personnel change. For example, U.S. Army, Korea, officials told us that they did not know how data on the Korean theater had been developed because there were no files or individuals who could explain the prior year's validation process. We found that while the Army sought consistency and accuracy in the logistical data update process, no organization ensured that a reasonable methodology was used by the commands and schools nor that studies or supporting models used to develop the data were valid. We found that neither CASCOM nor DCSLOG had overseen the validation process. According to a DCSLOG official, DCSLOG has not routinely reviewed the methodology used by various proponents who submit factors and data to the process. This official stated that only if a factor looked unusual would it generate an inquiry back to the proponent to ask how that factor was developed. CASCOM officials stated that they had no regulatory requirement to review the methodology of proponents who developed logistical data. The Army's revised regulation governing the development and validation of logistical data for the TAA process is an improvement. The revised regulation requires CASCOM to examine the AFPDA to ensure data consistency, adherence to doctrine, necessity, identification of sources, and rationale of methodology. It also specifies time frames for the AFPDA updates, thus putting the commands and schools on notice when the data validation will be required. CASCOM officials stated that they have not yet defined their role regarding overseeing the update of AFPDA data. Therefore, CASCOM had not told the commands and schools what will be required of them. We believe that CASCOM should establish procedures that would specify how commands and schools are to validate and maintain all logistical data in the AFPDA. Specifically, major commands, Army component commands, and schools should be directed to ensure that their data are based on sound analytical studies and assumptions and that the methodological bases for those data and assumptions are documented. Moreover, CASCOM's guidance should specify what CASCOM will require from commands and schools to exercise its oversight responsibility. According to DOD, CASCOM is already developing procedures to improve the update process and should complete a review of the adequacy of existing data by the end of 1996. According to Army regulations, theater-specific data are best obtained from Army components most familiar with the region and involved in the theater war-planning process. However, we found that the current level of participation by Army component commanders does not ensure that data and assumptions used by TAA are similar to data that component commands use to develop their war plans. The result is that the required force structure developed in TAA does not agree with theater war plans. Army component commands should have an important role in the TAA process. During development of the AFPDA, Army regulations instruct the Army components to review, revalidate, and submit theater-unique logistics data. Specifically, they are to provide data such as support provided by allies, theater stockage policies, and theater consumption factors. Also, as part of the TAA process, Army components identify theater-unique requirements that may be different from current doctrinal rules. This identification is required because the Army recognizes that each theater is unique and that the Army component commands are the most familiar with their area. In practice, however, Army components sometimes believe that their role in the process is insufficient to affect the process. Thus, Army component officials said they don't always consider developing data for TAA as a priority. Therefore, some commands do not always send representatives to workshops where data are discussed and adopted. In other instances, component command representatives at the workshops have not challenged data that is inconsistent with their plans. TAA requirements for military theaters sometimes differ from those in theater war plans. Some differences can be attributed to the fact that TAA provides a longer-term force structure outlook than theater war plans.Other differences, however, result from TAA and war plans being derived from different assumptions, logistical data, and computing methods. For example, according to U.S. Army, Europe, officials, TAA requirements developed in 1992 did not match planning efforts in the European theater because the two processes used different scenarios. TAA modeled a northern region scenario for Europe, whereas U.S. Army, Europe, used a southern region scenario in its war plans. The TAA's northern region scenario was based on the Defense Planning Guidance. U.S. Army, Europe, officials believe that TAA-generated requirements are based on an unrealistic scenario. U.S. Army, Europe, officials told us that conflicts in the southern region are more probable than the northern region; and thus, believe establishing requirements for that region is prudent. Further, force structure requirements for the southern region are more challenging than for the northern region because of the more mountainous terrain, lack of infrastructure, and the lack of host nation capability. As a result, U.S. Army, Europe's, requirements and the TAA requirements for Europe differed greatly. U.S. Army, Europe, officials stated that these difference still exist in the current TAA update cycle. In another example, we compared TAA support requirements developed in 1992 for Southwest Asia with ARCENT's operational requirements. The analysis showed that some support areas, such as medical, maintenance, and military police differed significantly. Table 1 summarizes some of the differences between ARCENT requirements based on TAA and war plans. As shown in the table, ARCENT plans require 31 combat support hospitals, which would require 18,817 positions, and TAA requires 18 hospitals, which would require 10,908 positions--a difference of 13 hospitals and 7,909 positions. The ARCENT medical planner believes TAA uses disease and non-battle injury rate much below what the Command believes are likely in its region, resulting in lower patient estimates and fewer hospitals. A CASCOM official responsible for medical units was unaware that ARCENT used a different method to determine requirements for combat support hospitals. However, this official believes that the TAA method is more precise. The table also shows that TAA has about 8,260 general support maintenance positions, while ARCENT plans envision 2,767 positions--a difference of 5,493 positions. TAA requirements were developed in response to a protracted Central European scenario that involves equipment overhaul in theater. Because ARCENT does not envision a protracted conflict in the Southwest Asia region, ARCENT plans to perform most major repairs in U.S. depots. ARCENT officials said that they have not yet been successful in convincing TAA decisionmakers to adopt the ARCENT concept. However, a CASCOM official familiar with maintenance unit issues said that ARCENT has not surfaced this issue in TAA workshops or conferences. The table also shows differences between TAA and ARCENT war plans for combat support military police companies. ARCENT plans require 107 of these companies, whereas TAA requires 77 companies--a difference of 30 companies and 5,280 positions. The ARCENT Military Police planner stated that requirements are different because TAA modeling does not adequately reflect theater geography and concentration of troops in determining requirements for these police companies. CASCOM officials stated that TAA has not addressed these issues because ARCENT has not raised them at workshops and conferences. We recommend that the Secretary of the Army take the following actions: Require CASCOM to establish procedures that specify (1) how major commands, Army component commands and schools should validate and maintain data for the AFPDA and (2) what CASCOM will require to exercise its oversight responsibility. Establish procedures and identify the differences in theater planning requirements and TAA requirements to ensure that there are valid reasons for differences or make adjustments to requirements. DOD generally concurred with our findings and our recommendation that procedures are needed to ensure that data are valid. DOD noted that CASCOM is in the process of establishing procedures to improve the validation of data used in TAA. DOD disagreed with our recommendation that the Army identify differences between theater planning and TAA requirements to ensure that the reasons for the differences are valid. DOD believes that the two processes were designed for different purposes and yield different but consistent results. We recognize that there are differences between the process used to compute requirements for the TAA and theater commands. These differences largely result because TAA computes requirements further in the future than do theater commands, which may result in different assumptions such as the level of unit modernization, threat, and budget levels. However, the examples we have cited are not related to these factors. Rather, the differences result from fundamentally different views about how certain functions will be performed or at what rate events will occur. Thus, we continue to believe that differences between the two processes should be identified to determine if they are valid. We conducted this review from July 1993 to September 1994 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of the Defense; the Secretary of the Army; the Director, Office of Management and Budget; and interested congressional committees and individuals. Copies will be sent to other interested parties upon request. Please contact me at (202) 512-3504, if you or your staff have any questions concerning this report. Major contributors to this report are Robert Pelletier, Rodell Anderson, and Blake Ainsworth. To determine how Army assumptions and data used in the TAA process were developed, we reviewed available documentation from past TAAs and interviewed officials at the Department of the Army Headquarters, Washington D.C; Concepts Analysis Agency, Bethesda, Maryland; U.S. Forces Command, Fort McPherson, Georgia; Combined Arms Support Command and Quartermaster School, Fort Lee, Virginia; Transportation School, Fort Eustis, Virginia; Engineer School and Center, Fort Leonard Wood, Missouri; and the Medical School and Center, Fort Sam Houston, Texas. To gain a perspective on Army component commands' participation in TAA and the relationship between TAA and operational planning, we interviewed personnel and reviewed related documents at the U.S. Central Command at MacDill Air Force Base, Florida; U.S. Army, Central Command at Fort McPherson, Georgia; the U.S. European Command at Stuttgart, Germany; U.S. Army, Europe, at Heidelberg, Germany; and Forces Command at Fort McPherson, Georgia. We also discussed 8th U.S. Army's role in TAA with logistics planners in Seoul, Korea. To assess TAA and theater requirements for Southwest Asia, we reviewed ARCENT's major operations plan and troop list for the region and compared it with TAA modeling results and other TAA-related requirements and resourcing documents. The following are GAO's comments on the Department of Defense's (DOD) letter dated December 19, 1994. 1. We continue to believe that the Army's Total Army Analysis (TAA) process did not ensure valid data, based on the problems we found with the process. DOD describes improvements made during the current TAA; we did not review the improvements, and thus, we cannot comment on them. However, as DOD acknowledges in its response, additional procedures are needed to ensure that data are validated. 2. Our information is based on numerous discussions with theater command representatives at Army Central Command and U.S. Army, Europe. These individuals indicated that theater command participation is not comprehensive and conscientious enough to ensure that theater perspectives are considered in the process. 3. We recognize that there are differences between the process used to compute requirements for the TAA and theater commands. These differences largely result because TAA computes requirements further in the future than do theater commands, which may result in different assumptions, such as the level of unit modernization, threat, and budget levels. However, the examples we have cited are not related to these factors. While DOD believes that the TAA process includes sufficient open forums in which force requirements are reviewed by representatives of theater commanders, many theater representatives believe their perspectives are not always included in the TAA process. Because we did not have access to these debates, we could not ascertain to what degree theater perspectives are raised or how differences are resolved. Therefore, we continue to believe that differences between the two processes should be identified to determine if they are valid. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed the Army's Total Army Analysis (TAA) process, focusing on whether its results are based on valid logistical data assumptions. GAO found that: (1) the Army lacks adequate procedures to govern the development and review of logistical data used in the TAA process; (2) until recently, Army regulations only focused on the management and validation of planning factors, and those regulations were not followed; (3) the Army has revised its regulations to require that all logistical TAA data be validated and that the process be centrally managed, but further guidance is needed to ensure the validity of all data and sufficient oversight of the process; and (4) Army programmers sometimes use data and assumptions in the TAA process that differ from what Army component planners use for war plans, which can result in vastly different requirements.

Medicare, Medicaid, and CHIP beneficiaries receive health care from a variety of providers and in different settings. When suspected cases of fraud emerge, many agencies are involved in investigating and prosecuting these cases and they rely on multiple statutes. Medicare, Medicaid, and CHIP beneficiaries receive health care from a variety of providers--including physicians, nurses, dentists, and other medical professionals--in many different settings, such as hospitals, medical practices, clinics, and health centers. Additionally, beneficiaries may receive care and assistance from home health agencies and aides, durable medical equipment suppliers, and medical transportation companies. In 2010, about $478 billion in federal Medicare, Medicaid, and CHIP spending was attributable to hospital care (41.3 percent of total spending) and physician and clinical services (18.3 percent of total spending) based on National Health Expenditure Account data from CMS. Expenditures for prescription drugs accounted for 9.3 percent of spending in these programs, and nursing home care accounted for 7.8 percent. Many other categories of providers accounted for the remaining 23.4 percent. Several agencies are involved in investigating and prosecuting health care fraud cases, including the HHS-OIG; DOJ's Civil and Criminal divisions; the 94 USAOs; the FBI; and state MFCUs. The HHS-OIG and FBI primarily conduct investigations of health care fraud, and DOJ's divisions typically prosecute or litigate those cases.additional information about the role of each agency in fraud investigations and prosecutions. These agencies often work together to investigate and prosecute health care fraud cases. For example, HHS-OIG may open a fraud case, work with the FBI during the investigation, and then refer the case to a USAO for prosecution. Additionally, HHS-OIG, the FBI, a USAO, and DOJ's Criminal Division work jointly on health care fraud cases handled by Medicare Strike Force teams. Health care fraud cases are opened by the agencies either when they receive information about suspected fraudulent activity from a source--which can include program beneficiaries and CMS and its contractors--or if they proactively identify possible fraudulent behavior through data analysis. Additionally, in civil cases known as qui tam cases, individuals--referred to as relators--with evidence of fraud can file a civil suit under the False Claims Act (FCA). These qui tam cases are handled by a USAO or DOJ's Civil Division, though they may receive assistance in the investigation from HHS-OIG or the FBI. In other fraud cases, if a fraud case is opened by HHS-OIG, the agency typically conducts its investigation, determines whether the case has merit, and refers the case to DOJ for criminal prosecution or civil litigation. Alternatively, HHS-OIG may find that the case does not have merit and may close the case. HHS-OIG also has authority to impose civil monetary penalties or exclude the provider from participating in federal health care Similarly, DOJ's divisions may choose not to pursue a fraud programs.case for a number of reasons, including a lack of evidence or insufficient evidence to support the charges, or a lack of resources for investigation or prosecution. MFCUs investigate and typically prosecute health care fraud cases in the state's Medicaid program under state laws, and frequently coordinate with HHS-OIG and DOJ on the investigation and prosecution of certain fraud cases. Many MFCUs have authority to prosecute cases of fraud, but not all MFCUs are able to do so and refer cases to other agencies for prosecution. For example, Texas' MFCU does not have the authority to prosecute cases and refers cases to another agency or office, such as the U.S. Attorney's Office or the state's District Attorney, for prosecution. Several statutes concern health care fraud.following: Civil monetary penalty provisions of the Social Security Act are applicable to certain enumerated activities, such as knowingly presenting a claim for medical services that is known to be false and fraudulent. The Social Security Act also provides for criminal penalties for knowing and willful false statements in applications for payment. In addition, providers may be excluded on a mandatory or permissive basis from participating in federal health care programs for engaging in certain fraudulent activities. The Anti-Kickback statute makes it a criminal offense for anyone to knowingly and willfully solicit, receive, offer, or pay any remuneration in return for or to induce referrals of items or services reimbursable under a federal health care program, subject to statutory exceptions and regulatory safe harbors. For example, a payment program under which a hospital paid physicians who referred patients for admission would implicate the anti-kickback statute. The Stark law and its implementing regulations prohibit physicians from making "self-referrals"--certain referrals for "designated health services" paid for by Medicare to entities with which the physician (or immediate family) has a financial relationship. The Stark law also prohibits these entities that perform the "designated health services" from presenting claims to Medicare or billing for these services. The Federal Food, Drug, and Cosmetic Act makes it unlawful to, among other things, introduce an adulterated or misbranded pharmaceutical product or device into interstate commerce. The False Claims Act (FCA) is often used by the federal government in health care fraud cases.including the knowing presentation of a false claim for payment by the federal government. Claims that are submitted in violation of certain other statutes may also be considered false claims and, as a result, create additional liability under the FCA. Many health care fraud cases pursued under the FCA are for billing for goods or services not rendered, billing for unnecessary health care goods or services, or billing for goods or services at a higher rate than what was provided. Under the FCA, civil cases can be brought by the U.S. government or by a private citizen. The FCA prohibits certain actions, The outcome of a fraud case can depend on whether the case is civil or criminal, and if the case is prosecuted or litigated, the penalties authorized under the relevant statutes. For example, civil cases that are litigated may result in judgments imposed by a court or settlements reached by the subjects and litigators of the fraud case. In criminal cases, outcomes can include incarceration, probation, and fines. HHS-OIG may also impose civil monetary penalties on providers for committing fraud, and may exclude providers from participating in federal health care programs. In some cases, a subject may receive both civil and criminal penalties, and be excluded. According to 2010 data, 10,187 subjects were investigated for health care fraud. Medical facilities (such as medical centers, clinics, and medical practices) and durable medical equipment suppliers were the most frequent subjects of criminal fraud cases in 2010. Hospitals and medical facilities were the most frequent subjects of civil fraud cases, including cases that resulted in judgments or settlements. Nearly 2,200 individuals were excluded from program participation by HHS-OIG, about 60 percent of whom were in the nursing profession. According to 2010 data, 10,187 subjects were investigated for health care fraud--of which, 7,848 were subjects of criminal fraud cases, and 2,339 were subjects of civil fraud cases. Data from 2010 shows that HHS-OIG investigated health care fraud cases for nearly 8,900 subjects, many more than were opened by the USAOs and DOJ's Civil Division. Table 2 contains information on health care fraud subjects by agency, reflecting the work of each agency in 2010. To fully reflect the work of each agency, data on subjects that were included in more than one agency database were included in the top portion of the table. The duplicate cases were removed to arrive at the unique count of subjects and were not included in our other analyses. Data comparing cases handled in 2005 and 2010 show that HHS-OIG investigated cases for nearly 2,800 more subjects in 2010 than it did in 2005, while the USAOs and DOJ's Civil Division handled cases for approximately the same number of subjects. According to 2010 HHS-OIG data, most of the subjects involved in fraud cases were referred to HHS-OIG by federal law enforcement agencies-- such as the FBI--(38 percent), or state or local law enforcement agencies (10 percent). Case subjects were also referred to HHS-OIG by CMS contractors tasked with program integrity (14 percent), current or former employees of providers (9 percent), or individuals (9 percent), and the remainder were from other sources. (See table 3 for additional information on the source of health care fraud cases referred to HHS- OIG.) About 49 percent of criminal health care fraud subjects were, or were affiliated with, medical facilities (such as medical practices, clinics, or centers), durable medical equipment suppliers, and home health agencies. Of the 7,848 subjects associated with criminal cases, about 1,100 were charged, and 85 percent of those charged were found guilty or pled guilty or no contest. Of those subjects who were found guilty or pled guilty or no contest, about 37 percent were medical facilities and durable medical equipment suppliers. According to 2010 data, many different types of providers--including medical facilities and hospitals, or individuals affiliated with these entities--were suspected of health care fraud. Specifically, about one- quarter of subjects investigated in criminal health care fraud cases were medical facilities or were affiliated with these facilities. Additionally, about 16 percent of subjects were durable medical equipment suppliers. Over 19 percent were subjects for which we could not determine an affiliation. See table 4 for additional information on the subjects of criminal health care fraud cases by provider type for 2010. Among the 7,848 subjects in 2010 criminal cases, nearly 50 percent were the entities themselves, rather than individuals affiliated with those entities. See table 5 for more detailed information on the types of providers that were subjects in 2010 criminal cases. Of the 3,864 subjects that were entities, most were durable medical equipment suppliers (819), home health agencies (507), medical centers or clinics (506), or medical practices (486). Additionally, more than 15 percent were physicians, and about 14 percent were management employees--such as owners, operators, or managers. Our data show that 2010 criminal cases involved 2,300 more subjects than 2005 cases. Additionally, some provider types had particularly large increases in 2010 compared to the number of subjects investigated in criminal cases in 2005. For example, cases where pharmacies were the subjects increased from 99 subjects in 2005 to 321 in 2010 (an increase of 224 percent), and the number of home health agency subjects increased from 284 to 639 (an increase of 125 percent). The 2005 data show that medical facilities and durable medical equipment suppliers were the provider types with the most subjects investigated in cases, as was also the case with 2010 data. In 2005, medical facilities represented 23 percent of all subjects in criminal cases, and durable medical equipment suppliers accounted for 18 percent. Similarly, in 2010, medical facilities accounted for 24 percent of all subjects in criminal cases, and durable medical equipment suppliers accounted for 16 percent. Most of the 7,848 subjects who were investigated for criminal fraud in 2010 were not pursued--meaning that HHS-OIG did not refer the subject's case to DOJ for prosecution. Most subjects--about 85 percent--were investigated in criminal cases that were not pursued for a variety of reasons, mainly due to lack of resources or insufficient evidence. The 2010 data indicated that 1,086 subjects were charged in criminal fraud cases, which represented about 14 percent of all criminal case subjects. Additionally, nearly 1 percent of subjects were involved in criminal case appeals, most of which were decided favorably for the U.S. government. See table 6 for additional information about the number of subjects in criminal cases by outcome. Among the 1,086 subjects that were charged, over 85 percent (925 subjects) were found guilty, pled guilty, or pled no contest to some or all of the criminal charges against them. For the remaining 15 percent of subjects, charges were dismissed (9.4 percent), subjects were found not guilty (1.2 percent), or had another outcome (4.2 percent). Of the 925 subjects who were found guilty or pled guilty or no contest, about 19 percent were from medical facilities--including medical centers, clinics, or practices. Although 2010 Medicare, Medicaid, and CHIP expenditures on durable medical equipment services was 1.3 percent of total spending in those programs, approximately 19 percent of subjects that were found guilty or pled guilty or no contest were durable medical equipment suppliers. Many different provider types were among the remaining subjects found guilty or that pled guilty or no contest. We could not identify the affiliation of nearly one-third of the subjects, including both health care providers and individuals. See table 7 for additional information on these subjects in 2010 criminal cases by provider type. Of the 925 subjects who were found guilty or pled guilty or no contest, 60 percent were sentenced to incarceration, and 73 percent were sentenced to probation. Nearly 26 percent of those sentenced to incarceration were subjects affiliated with durable medical equipment suppliers, and 21 percent were affiliated with medical facilities. Similarly, both durable medical equipment suppliers and medical facilities each represented 17 percent of subjects sentenced to probation. The average length of a sentence to incarceration was about 3.5 years, and the maximum sentence received was a life sentence. Nearly 60 percent of subjects sentenced to incarceration received sentences between 2 and 5 years, while nearly 21 percent received a term of 1 year or less. More than 13 percent received sentences between 6 and 10 years and about 5 percent received sentences of more than 10 years of incarceration. The average probation term was 2.8 years, and the maximum term was 10 years. Nearly 78 percent of subjects sentenced to probation received a probation term between 2 and 5 years. Subjects of criminal fraud cases could also be sentenced to home detention, public service, or their sentences could be suspended. Additionally, subjects could also be ordered to pay fines and restitution. Data from HHS-OIG contained information on these types of penalties, but data we received from the USAOs did not. According to 2010 data from HHS-OIG 56 subjects were sentenced to home detention terms; 75 subjects were sentenced to complete public service; 31 subjects received suspended sentences; 440 subjects were required to pay a fine; and 307 subjects were required to pay restitution. Among those subjects that were required to pay fines or restitution, or both, the average amounts required were $898,361 in fines, and $1.8 million in restitution. In total, subjects were ordered to pay nearly $960 million in combined fines and restitution. According to 2010 civil case data for health care fraud, 2,339 subjects were investigated in civil cases. Hospitals represented nearly 20 percent of these subjects, and medical facilities about 18 percent. Civil cases involving approximately 1,100 subjects were pursued--meaning that the USAOs or DOJ's Civil Division received the cases and took some sort of action, such as litigating the case; and of those, 55 percent resulted in a judgment for the government or in a settlement. For those cases that resulted in a judgment or settlement, or both, about 44 percent of the subjects were hospitals and medical facilities. According to 2010 data, hospitals were nearly 20 percent of the subjects of civil fraud cases, and medical facilities were also frequently the subjects of civil cases, making up about 18 percent of the subjects. We were unable to determine the provider type or their affiliation for about 18 percent of the subjects of civil cases. (See table 8 for additional information on the subjects of civil health care fraud cases by provider type for 2010.) As previously mentioned, individuals can bring civil health care fraud suits, known as qui tam cases, under the FCA. According to 2010 data from the USAOs and DOJ's Civil Division, 88 percent of subjects investigated in civil cases were investigated in qui tam cases. Nearly 61 percent of the subjects investigated in 2010 civil cases were entities themselves, rather than individuals affiliated with those entities. Most of these entities were hospitals, medical centers or clinics, medical practices, or pharmaceutical manufacturers or suppliers. Additionally, physicians represented 12 percent of the subjects; and management employees, such as owners, operators, or managers, represented 8 percent of the civil case subjects. (See table 9 for more-detailed information on the types of providers that were subjects in 2010 civil cases.) In 2010, over 600 more subjects were investigated in civil cases than in 2005, about a 35 percent total increase. Changes in provider types for civil cases are not reported here because we were unable to identify provider types for about 31 percent of the subjects in the 2005 data. In the 2010 data, we were unable to identify the provider type for about 18 percent of subjects. Because of this limitation, the percentage increases in certain provider types investigated in civil fraud cases may not be an accurate reflection of the actual increases in provider types of civil fraud cases. Not all of the subjects investigated in 2010 civil cases were pursued-- meaning that the USAOs or DOJ's Civil Division received the case and took some sort of action. According to the data we received, 1,087 subjects were involved in civil cases that were pursued, representing nearly 47 percent of all civil case subjects. Among other subjects of civil cases, more than 53 percent were not pursued for numerous reasons, including a lack of resources or insufficient evidence. Additionally, less than 1 percent of subjects were involved in civil appeals cases. (See table 10 for additional information about the number of subjects involved in civil cases by outcome.) According to data from the USAOs and DOJ's Civil Division, most qui tam cases did not result in a judgment or settlement. For example, 52 percent of subjects in qui tam cases were either voluntarily dismissed by the relator (34 percent) or were declined by the USAOs or DOJ's Civil Division (18 percent). Nearly 24 percent of qui tam cases were settled and in 8 percent of qui tam cases there was a judgment for the government. For the 602 subjects for which cases resulted in a settlement or judgment for the government or for the relator, 27 percent of the subjects were hospitals and about 17 percent were medical facilities. For nearly 16 percent of subjects, we were unable to determine the affiliation of the provider or individual. (See table 11 for information on provider types for subjects where the case resulted in a settlement or judgment for the government or relator.) According to data from HHS-OIG, of those subjects investigated in cases with a judgment or settlement, 275 subjects were to pay restitution as a result of the judgment or settlement and 89 subjects were to pay fines. Approximately 38 percent of the subjects that were to pay restitution were hospitals; 17 percent were medical facilities; and 11 percent were physicians whose affiliation we were unable to determine. Among those subjects that were to pay fines or restitution, or both, the average amounts were about $7.1 million in fines and about $5.4 million in restitution. In total, subjects were to pay over $2.1 billion in combined fines and restitution as a result of the judgments or settlements. HHS-OIG excluded individuals and entities from participating in federal health care programs for a variety of reasons in 2010. These reasons included convictions for health care fraud as well as reasons other than for health care fraud, such as patient abuse or neglect. When individuals or entities are excluded, their provider enrollment is revoked According to 2010 and they are not eligible to bill for services provided.exclusion data we received from HHS-OIG, 2,190 individuals and entities were excluded. About 60 percent of the individuals and entities excluded were those in the nursing profession, such as nurses and nurses' aides. The next-largest provider type excluded was pharmacies or individuals affiliated with pharmacies, though they only represented about 7 percent of the 2010 exclusions. (See table 12 for additional information on the types of providers excluded.) There were a number of reasons why the 2,190 individuals and entities were excluded; about 42 percent were excluded for license revocation, suspension, or surrender; over 28 percent were for program-related convictions; and about 10 percent were for felony health care fraud convictions. Most of those excluded because of revoked, suspended, or surrendered licenses were in the nursing profession. (See table 13 for additional information on the reasons for excluding individuals in 2010.) Data we received from 10 state MFCUs show that more than 40 percent of the fraud subjects were home health care providers, and health care practitioners. Home health care providers also accounted for nearly 40 percent of criminal convictions and about 45 percent of subjects sentenced in 2010. In 2010, pharmaceutical manufacturers were to pay more than 60 percent of the total amount of civil judgments and settlements. Of the 2,742 subjects of health care fraud in Medicaid and CHIP referred to MFCUs for investigation, more than 40 percent were affiliated with two provider categories: home health care providers (26.6 percent) and health care practitioners (14.8 percent). Home health care providers and pharmaceutical manufacturers are the two provider categories that experienced the highest increases when comparing 2005 and 2010 data. For example, the number of home health care providers suspected of fraud increased significantly from 2005 to 2010, from 357 subjects to 730, a 104 percent increase. This was primarily driven by an increase in fraud cases among health care aides, which increased from 79 subjects in 2005 to 324 in 2010. Similarly, the number of pharmaceutical manufacturers in fraud cases increased significantly from 71 in 2005 to 296 in 2010. (See table 14, below, for additional information on provider types referred to MFCUs in fraud investigations.) Over half of the MFCUs' subjects of fraud cases in 2010 were referred by the states' Medicaid agencies (30.9 percent) and private citizens (25.1 percent). MFCUs do not pursue all cases of health care fraud that are referred to them. In 2010, 692 subjects were indicted or charged in criminal health care fraud cases handled by 10 MFCUs; of those, nearly 40 percent were home health care providers--which includes home health care agencies, and home health care aides. Home health care providers also accounted for nearly 40 percent of criminal fraud convictions in 2010; health care practitioners--physicians, doctors of osteopathy, nurses, physician assistants, and nurse practitioners--had the second-highest percentage of criminal convictions in 2010 with approximately 16 percent. The number of home health care providers convicted in criminal cases more than doubled from 79 convictions in 2005 to 192 convictions in 2010, and health care practitioners had an increase of 11 convictions compared to 2005. (See table 15 for additional information about criminal case outcomes and prosecutions of subjects by provider type for cases handled by 10 MFCUs.) According to 2010 data for cases handled by the 10 MFCUs, home health care providers had the largest number of subjects sentenced to incarceration, probation, or other criminal case outcomes, accounting for nearly 45 percent of the total number of subjects. Durable medical equipment suppliers accounted for the largest monetary penalties, yet had relatively few subjects sentenced to incarceration, probation, or other criminal case outcomes, such as deferred sentences. Of all of the subjects sentenced, 42 percent were sentenced to probation, 32 percent were sentenced to incarceration, and 26 percent received other criminal case outcomes.outcomes.) GAO provided a draft of the report to DOJ and HHS. DOJ provided technical comments, which have been incorporated as appropriate. HHS did not comment on the draft. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Health and Human Services and Justice, the Inspector General of HHS, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To identify subjects of health care fraud cases in Medicare, Medicaid, and the Children's Health Insurance Program (CHIP)--including referrals, investigations, prosecutions, and outcomes--by provider type, and to examine changes in the distribution of provider types in 2005 and 2010, we obtained data on health care fraud cases from the Department of Health and Human Services' Office of Inspector General (HHS-OIG), the Department of Justice's (DOJ) Executive Office of U.S. Attorneys (EOUSA)--which provides administrative support for the 94 U.S. Attorney's Offices (USAO)--and DOJ's Civil Division. We obtained data on fraud cases involving Medicare, Medicaid, and CHIP that were closed in calendar year 2005 or 2010. We collected data for closed cases only-- meaning that the agencies were no longer actively investigating or prosecuting a case--to avoid concerns about analyzing or reporting information about open cases. We obtained data from HHS-OIG's Investigative Reporting and Information System, which contains information on health care fraud cases received or investigated by HHS-OIG. The data we received contained information on civil and criminal health care fraud cases closed in calendar years 2005 or 2010, as well as exclusions from program participation. The HHS-OIG data included information about the subjects, sources of the cases, outcomes of the investigations and prosecutions (if the cases were pursued), and the reasons for which the cases were closed (such as lack of evidence). The data we received from HHS-OIG also contained information on the provider types of the subjects. Additionally, we obtained data from two divisions within DOJ--EOUSA and the Civil Division. The data we received from EOUSA was from the Legal Information Office Network System and contained information about the subjects of the fraud cases, outcomes of the prosecutions, and the reasons for which the cases were closed. Provider type is not a required field in the USAOs database; consequently the USAOs do not consistently have provider type information. DOJ's Civil Division provided us data from the CASES database. The data received contained information about the subjects, outcomes of the fraud cases, and reasons the cases were closed. The DOJ Civil Division does not collect information on the subject's provider type. The data we received from HHS-OIG pertained only to health care fraud in Medicare, Medicaid, and CHIP; however, data we received from the USAOs and DOJ's Civil Division may have also included other federal health care program fraud as well as fraud in the private sector as the databases used to track fraud cases do not capture fraud exclusively in Medicare, Medicaid, and CHIP. Many fraud cases are handled jointly with HHS-OIG, USAOs, and DOJ's Civil Division, and are entered separately into each agency's database that tracks fraud cases. As a result, the data we received contains duplicate information on health care fraud cases and subjects. In order to minimize the duplication across the data we received, we identified fraud case subjects that were in more than one data set we received by comparing subject information to the extent possible. We then excluded the duplicate data that we identified so that each subject was only included once. However, it is possible that our analysis still includes some duplication in fraud cases and subjects. For cases and subjects that we identified as a match, we used the information in the HHS-OIG data instead of either the USAO data or DOJ's Civil Division data because the HHS-OIG data contained information on the subject's provider type. Among the data involving criminal cases, we identified 590 subjects--291 subjects in the 2005 data and 299 subjects in the 2010 data--that were matches between the HHS-OIG data and the USAO data. For civil case data, we identified 423 subjects--166 subjects in the 2005 data and 257 subjects in the 2010 data--that were matches between data we received from HHS-OIG, the USAOs, or DOJ's Civil Division. We removed the duplicate subjects we identified from parts of our analysis. In the USAO and Civil Division data, there were 2,470 subjects--1,484 of which were investigated in civil cases, and 986 that were investigated in criminal cases--for which we did not identify a duplicate case in the HHS- OIG data, and did not contain information on the provider type. To identify the type of provider for these subjects, we obtained information from court records using the Public Access to Court Electronic Records (PACER). We reviewed court documents, such as indictments and plea agreements, to obtain information on the subject's provider type. We reviewed information we found using PACER and categorized it into one of the provider categories in our analysis. However, our analysis of the changes in the types of providers in 2005 and 2010 is limited since the percentage of subjects for which we were unable to determine the provider type was substantially higher in 2005 for civil case subjects. One of the reasons we could not determine the provider type was because many of the court records for 2005 were not available in PACER. After we identified the provider types for data we received from USAOs and DOJ's Civil Division, and after reviewing the data on provider types in the HHS-OIG data, we created categories of providers in order to analyze the data. We assigned the subjects categories: the entity in which health care was provided, and the subject's role in providing care (if care was provided). For example, an owner of a durable medical equipment supply company was categorized into an entity (durable medical equipment supplier) and a role (management employee); a physician employed by a hospital would be categorized as hospital for the entity and physician for the role. Table 18 provides additional details about the categories we developed for our analysis. To assess the reliability of the data we received from HHS-OIG, USAOs, and DOJ's Civil Division, we interviewed officials from each of those agencies about the quality of the data, reviewed relevant documentation, and examined the data for reasonableness and internal consistency. We found these data were sufficiently reliable for the purposes of our report. To identify subjects of Medicaid and Children's Health Insurance Program (CHIP) fraud cases investigated or prosecuted, or both, by Medicaid Fraud Control Units (MFCU) by provider type, and to examine changes in the distribution of provider types investigated and prosecuted for fraud in 2005 and 2010, we collected data from 10 state MFCUs. Using data about MFCUs collected by the Department of Health and Human Services' Office of Inspector General (HHS-OIG), we selected the 10 state MFCUs that collectively accounted for the majority of open fraud investigations, fraud indictments or charges, fraud convictions, MFCU grant expenditures, and number of MFCU staff for all MFCUs in fiscal year 2010. The state MFCUs we selected also represented over 40 percent of the civil settlements and judgments--though we were not able to analyze fraud-specific civil settlements and judgments because the HHS-OIG data available do not separate out fraud settlements and judgments from abuse and neglect case settlements and judgments. The 10 selected MFCUs were in California, Florida, Illinois, Indiana, Louisiana, Massachusetts, New York, Ohio, Texas, and Virginia. The 10 selected MFCUs accounted for 66 percent of MFCU grant expenditures. (See table 19 for additional information about the MFCUs.) We collected data from the state MFCUs by developing a standardized data-collection instrument based on the HHS-OIG's Quarterly Statistical MFCU Report Template and accompanying definitions. (See table 20 for additional information about the definitions for the categories of provider types.) Before finalizing the data-collection instrument, we asked officials from two MFCUs to review the instrument to determine if the instrument would elicit appropriate responses, and to identify any data that would be particularly challenging for a MFCU to provide. We also interviewed officials from the Centers for Medicare & Medicaid Services, the HHS- OIG's Office of Evaluation and Inspections, and the National Association of MFCUs to obtain information on fraud cases handled by the MFCUs. We collected data for closed health care fraud cases only--meaning that agencies were no longer actively investigating or prosecuting a case--to avoid concerns about analyzing or reporting information about open cases. We requested data from the state MFCUs for any actions--such as indictments, convictions, or penalties--that occurred on a subject's fraud case in 2005 or 2010. For example, if a subject was indicted in 2004 and sentenced in 2005, the MFCU data would only include information about the subject's sentencing in 2005, because the indictment occurred in a year outside of our data request. We requested aggregate subject- level data, rather than case-level data, from the MFCUs using a standardized data-collection instrument. The MFCUs reported information on the total number of fraud subjects they investigated and prosecuted, and did not provide detailed information for each instance of fraud. Because the state MFCUs may work together on certain cases that cross state lines, it is possible that duplicate data are included in our analysis. We relied on the data as reported by the 10 MFCUs and did not independently verify these data. However, we reviewed the data for reasonableness and followed up with state officials for clarification when necessary. We found that these data were sufficiently reliable for the purposes of our report. In addition to the contact named above, key contributors to this report were Martin T. Gahart, Assistant Director; Christie Enders; Jawaria Gilani; Dan Lee; Drew Long; Dawn Nelson; and Monica Perez-Nelson.

GAO has designated Medicare and Medicaid--which are administered by the Centers for Medicare & Medicaid Services (CMS), an agency of HHS--as high-risk programs partly because their size and complexity make them vulnerable to fraud. Several federal agencies conduct health care fraud investigations and related activities, including HHS-OIG and DOJ's Civil Division, and the 93 U.S. Attorney's Offices (USAO). In fiscal year 2011, the federal government devoted at least $608 million to conduct such activities. Additionally, state MFCUs investigate health care fraud in their state's Medicaid and CHIP programs. GAO was asked to provide information on the types of providers that are the subjects of fraud cases. This report identifies provider types who were the subjects of fraud cases in (1) Medicare, Medicaid, and CHIP that were handled by federal agencies, and changes in the types of providers in 2005 and 2010; and (2) Medicaid and CHIP fraud cases that were handled by MFCUs. To identify subjects of fraud cases handled by federal agencies, GAO combined data from three agency databases--HHS-OIG, USAOs, and DOJ's Civil Division--and removed duplicate subject data. GAO also reviewed public court records, such as indictments, to identify subjects' provider types because the USAOs and DOJ Civil Division data did not consistently include provider type. To describe providers involved in fraud cases handled by the MFCUs, GAO collected aggregate data from 10 state MFCUs, which represented the majority of fraud investigations, indictments, and convictions nationwide. According to 2010 data from the Department of Health and Human Services' Office of the Inspector General (HHS-OIG) and the Department of Justice (DOJ), 10,187 subjects--individuals and entities involved in fraud cases--were investigated for health care fraud, including fraud in Medicare, Medicaid, and the Children's Health Insurance Program (CHIP). These subjects included different types of providers and suppliers--such as physicians, hospitals, durable medical equipment suppliers, home health agencies, and pharmacies--that serve Medicare, Medicaid, and CHIP beneficiaries. For criminal cases in 2010, medical facilities--including medical centers, clinics, or practices--and durable medical equipment suppliers were the most-frequent subjects investigated. Hospitals and medical facilities were the most-frequent subjects investigated in civil fraud cases, including cases that resulted in judgments or settlements. Subjects of criminal cases: Many of the 7,848 criminal subjects in 2010 were medical facilities or durable medical equipment suppliers, representing about 40 percent of subjects of criminal cases. Similarly, in 2005, medical facilities and durable medical equipment suppliers accounted for 41 percent of criminal case subjects. Data from 2010 show that most of the subjects were in cases that were not referred by HHS-OIG to DOJ for prosecution (85 percent). Of the subjects whose cases were pursued, most were found guilty or pled guilty or no contest. Subjects of civil cases: Over one-third of the 2,339 subjects of civil cases in 2010 were hospitals and medical facilities. In 2010, about 35 percent more subjects were investigated in civil fraud cases than in 2005. Nearly half of the subjects of 2010 cases were pursued. Among the subjects whose cases were pursued, 55 percent resulted in judgments or settlements. Additionally, data from HHS-OIG show that nearly 2,200 individuals and entities were excluded from program participation for health care fraud convictions and other reasons, including license revocation and program-related convictions. About 60 percent of those individuals and entities excluded were in the nursing profession. Pharmacies or individuals affiliated with pharmacies were the next-largest provider type excluded, representing about 7 percent of those excluded. According to data GAO collected from 10 state Medicaid Fraud Control Units (MFCU), over 40 percent of the 2,742 subjects investigated for health care fraud in Medicaid and CHIP in 2010 were home health care providers and health care practitioners. Of the criminal cases pursued by these MFCUs, home health care providers comprised nearly 40 percent of criminal convictions and 45 percent of subjects sentenced in 2010. Civil health care fraud cases pursued by these MFCUs in 2010 resulted in judgments and settlements totaling nearly $829 million. Pharmaceutical manufacturers were to pay more than 60 percent ($509 million) of the total amount of civil judgments and settlements. GAO provided a draft of the report to DOJ and HHS. DOJ provided technical comments, which have been incorporated as appropriate.

SEC is an independent agency created to protect investors; maintain fair, honest, and efficient securities markets; and facilitate capital formation. SEC's five-member Commission oversees SEC's operations and provides final approval of SEC's interpretation of federal securities laws, proposals for new or amended rules to govern securities markets, and enforcement activities. Enforcement staff located in headquarters and 11 regional offices conduct investigations through informal inquiries, interviews of witnesses, examination of brokerage records, reviews of trading data, and other methods. At the request of Enforcement staff, the Commission may issue a formal order of investigation, which allows the division's staff to compel witnesses by subpoena to testify and produce books, records, and other documents. Following an investigation, SEC staff present their findings to the Commission for its review, recommending Commission action either in a federal court or before an administrative law judge. On finding that a defendant has violated securities laws, the court or the administrative law judge can issue a judgment ordering remedies, such as civil monetary penalties and disgorgement. In many cases, the Commission and the party charged decide to settle a matter without trial. In these instances, Enforcement staff negotiates settlements on behalf of the Commission. Total Enforcement staffing has declined 4.4 percent, from a peak of 1,169 positions in fiscal year 2005 to 1,117 positions in fiscal year 2008. While overall Enforcement resources and activities have remained relatively level in recent years, the number of non-supervisory investigative attorneys, who have primary responsibility for developing enforcement cases, decreased by 11.5 percent, from a peak of 566 in fiscal year 2004 to 501 in fiscal year 2008. Enforcement management attributed this greater decline to several factors: promotion of staff attorneys into management during a hiring freeze, which left their former positions vacant; diversion of investigative positions to other functions; and reduction of opportunities for non-attorney support staff to move to positions outside the agency. At the same time, staff turnover has decreased and staff tenure increased. The majority of Enforcement's non-supervisory attorney workforce has 10 years of experience or less, but the distribution of experience in this category has reversed in recent years. The portion with less than 3 years of experience has declined by about 50 percent, and the portion with 3 to less than 10 years of experience has increased by about 55 percent. The portion with 10 to less than 15 years, while small overall, has grown by about 14 percent. Enforcement management welcomed these trends, but believed they resulted from a weaker private-sector job market for attorneys. They felt that had market conditions been better recently, departures would have been more numerous, which would have depressed the experience level. Measured by the number of enforcement cases opened and number of enforcement actions brought annually, Enforcement activity has been relatively level in recent years. Case backlog has declined somewhat as the division has made case closings a greater priority. Nevertheless, Enforcement management and investigative attorneys agreed that resource challenges have affected their ability to bring enforcement actions effectively and efficiently. Enforcement management told us that the current level of resources has not prevented the division from continuing to bring cases across a range of violations. But management and staff acknowledged that current staffing levels mean some worthwhile leads cannot be pursued, and some cases are closed without action earlier than they otherwise would have been. More specifically, investigative attorneys cited the low level of administrative, paralegal, and information technology support, unavailability of specialized services and expertise, and a burdensome system for internal case review as causing significant delays in bringing cases, reducing the number of cases that can be brought, and potentially undermining the quality of cases. Enforcement management concurred with the staff's observations that resource challenges undercut enforcement efforts. Effective and efficient use of resources is important to accomplishing Enforcement's mission. SEC's strategic plan calls for targeting resources strategically, examining whether positions are deployed effectively, and exploring how to improve program design and organizational structure. Some attorneys with whom we spoke estimated that they spend as much as a third to 40 percent of their time on the internal review process. Recently, Enforcement management has begun efforts that seek to streamline the case review process. The initiative focuses on process, but our review suggests that organizational culture issues, such as risk aversion and incentives to drop cases or narrow their scope, are also present. If the division does not consider such issues in its initiative, it may not be as successful as it otherwise could be. Enforcement staff consider a number of factors when determining the dollar amounts of penalties and disgorgements, which in total have declined in recent years. To determine a penalty in an individual case, Enforcement staff consider factors such as the nature of the violation, egregiousness of conduct, cooperation by the defendant, remedial actions taken, and ability to pay. Disgorgement is intended to recover ill-gotten gains made, or losses avoided, through a defendant's actions. In 2006 and 2007, the Commission articulated certain policies for determining the appropriateness and size of corporate penalties. The 2006 policy--which the Commission said was based in part on the legislative history of a 1990 act that provided SEC with civil penalty authority--established nine factors for evaluating imposition of corporate penalties, but said two were of primary importance: (1) direct benefit to the corporation and (2) additional harm to shareholders. The 2007 policy, now discontinued, required Enforcement staff, when contemplating a corporate penalty, to obtain Commission approval of a penalty range before settlement discussions could begin. Cases that subsequently were settled within the range specified by the Commission were eligible for approval on an expedited basis. At the same time the Commission provided the settlement range, it also granted Enforcement staff authority to sue. According to Enforcement staff and former commissioners with whom we spoke, and as stated by the then-Chairman, the purpose of the policy, also known as the "pilot program," was to: provide earlier Commission involvement in the penalty process; strengthen Enforcement staff's negotiating position; and maintain consistency, accountability, and due process. Setting aside the effect of the implementation of any policy, the total amount of penalties and disgorgement ordered on an annual basis can vary according to the type and magnitude of cases concluded in a given period. As shown in figure 1, since reaching peaks in fiscal years 2005 and 2006, total annual penalty and disgorgement amounts have declined. While both penalties and disgorgements fell in recent years, penalties have been declining at an accelerating rate, falling 39 percent in fiscal year 2006, another 48 percent in fiscal year 2007, and then 49 percent in fiscal year 2008. Also, penalties declined in the aggregate by a greater amount than disgorgements. In particular, penalties fell 84 percent, from a peak of $1.59 billion in fiscal year 2005 to $256 million in fiscal year 2008. Disgorgements fell 68 percent, from a peak of $2.4 billion in fiscal year 2006 to $774.2 million in fiscal year 2008. Compared to fiscal year 2006, SEC brought more corporate penalty cases in fiscal 2007, but for smaller amounts. In 2007, SEC brought 10 cases, compared to 6 in 2006. Four of the six cases in 2006 resulted in penalties of $50 million or more, with the two largest, American International Group, Inc. and Fannie Mae, totaling $100 million and $400 million, respectively. In contrast, in the fiscal year 2007 cases, only two issuers, MBIA, Inc., and Freddie Mac, were assessed penalties of at least $50 million. The distribution of enforcement actions by type of case generally has been consistent in recent years. Enforcement management said that the division has met its goal that a single category of cases not account for more than 40 percent of all actions. We found that Enforcement management, investigative attorneys, and others concurred that the 2006 and 2007 penalty policies, as applied, have delayed cases and produced fewer and smaller corporate penalties. On their face, the penalty policies are neutral, in that they neither encourage nor discourage corporate penalties. However, Enforcement management and many investigative attorneys and others said that Commission handling of cases under the policies both transmitted a message that corporate penalties were highly disfavored and caused there to be fewer and smaller corporate penalties. According to a number of Enforcement attorneys and division managers, investigative attorneys began avoiding recommendations for corporate penalties. For example, when the question of whether to seek a corporate penalty is a close one, the staff will default to avoiding the penalty. Or, if investigative staff decides to seek a penalty, they will change their focus from pursuing what they otherwise would recommend as most appropriate to tailoring recommendations to what they believe the Commission will find acceptable. According to many investigative attorneys, the penalty policies contributed to an adversarial relationship between Enforcement and the Commission, where some investigative attorneys came to see the Commission less as an ally and instead more as a barrier to bringing enforcement actions. Enforcement management told us they concurred with these observations about the effect of the application of the penalty policies. Although the Commission never directed there be fewer or smaller penalties, the officials said this has been the practical effect because Commission handling of cases made obtaining corporate penalties more difficult. Over time, the officials said they struggled with implementation and were unable to provide guidance to the staff, because they saw the Commission's application of the penalty factors as inconsistent. Furthermore, the widely held view in Enforcement was that the unstated purpose of the 2006 policy was to scale back corporate penalties. Our review identified several other concerns voiced by Enforcement staff and others: That the policies have had the effect of making penalties less punitive in nature--by conditioning corporate penalties in large part on whether a corporation benefited from improper practices, penalties effectively become more like disgorgement. That the 2007 policy (Commission pre-approval of a settlement range) could have led to less-informed decisions about corporate penalties. That is, the Commission would decide on a penalty range in advance of settlement discussions, when settlement discussions themselves can reveal relevant information about the conduct of the wrongdoer. That the policies have reduced incentives for subjects of enforcement actions to cooperate with the agency, because of the perception that SEC has retreated on penalties. That it became more difficult to obtain formal orders of investigation, which allow issuance of subpoenas to compel testimony and produce books. Since fiscal year 2005, the number of formal orders approved by the Commission has decreased 14 percent. Our review also showed that in adopting and implementing the 2006 and 2007 corporate penalty policies, the Commission did not act in concert with agency strategic goals calling for broad communication with, and involvement of, the staff. In particular, Enforcement, which is responsible for implementing the policies, had only limited input into their development. According to Enforcement management, the broad Enforcement staff had no input into either policy. Senior division management did have input into the 2006 policy, but none into the 2007 policy. As a result, Enforcement attorneys say there has been frustration and uncertainty about application of the penalty policies. 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 on this testimony, please contact Orice M. Williams at (202) 512-8678 or [email protected], or Richard J. Hillman at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Karen Tremba, Assistant Director and Christopher Schmitt. 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 recent years, questions have been raised about the capacity of the Securities and Exchange Commission's (SEC) Division of Enforcement (Enforcement) to manage its resources and fulfill its law enforcement and investor protection responsibilities. This testimony focuses on (1) the extent to which Enforcement has an appropriate mix of resources; (2) considerations affecting penalty determinations, and recent trends in penalties and disgorgements ordered; and (3) the adoption, implementation, and effects of recent penalty policies. The testimony is based on the GAO report, Securities and Exchange Commission: Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement ( GAO-09-358 , March 31, 2009). For this work, GAO analyzed information on resources, enforcement actions, and penalties; and interviewed current and former SEC officials and staff, and others. Recent overall Enforcement resources and activities have been relatively level, but the number of investigative attorneys decreased 11.5 percent over fiscal years 2004 and 2008. Enforcement management said resource levels have allowed them to continue to bring cases across a range of violations, but both management and staff said resource challenges have delayed cases, reduced the number of cases that can be brought, and potentially undermined the quality of some cases. Specifically, investigative attorneys cited the low level of administrative, paralegal, and information technology support, and unavailability of specialized services and expertise, as challenges to bringing actions. Also, Enforcement staff said a burdensome system for internal case review has slowed cases and created a risk-averse culture. SEC's strategic plan calls for targeting resources strategically, examining whether positions are deployed effectively, and improving program design and organizational structure. Enforcement management has begun examining ways to streamline case review, but the focus is process-oriented and does not give consideration to assessing organizational culture issues. A number of factors can affect the amount of a penalty or disgorgement that Enforcement staff seek in any individual enforcement action, such as nature of the violation, egregiousness of conduct, cooperation by the defendant, remedial actions taken, and ability to pay. In 2006, the Commission adopted a policy that focuses on two factors for determining corporate penalties: the economic benefit derived from wrongdoing and the effect a penalty might have on shareholders. In 2007, the Commission adopted a policy, now discontinued, that required Commission approval of penalty ranges before settlement discussions. Setting aside the effect of any policies, total penalty and disgorgement amounts can vary on an annual basis based on the mix of cases concluded in a particular period. Overall, penalties and disgorgements ordered have declined significantly since the 2005-2006 period. Total annual penalties fell 84 percent, from a peak of $1.59 billion in fiscal year 2005 to $256 million in fiscal year 2008. Disgorgements fell 68 percent, from a peak of $2.4 billion in fiscal year 2006 to $774.2 million in fiscal year 2008. Enforcement management, investigative attorneys, and others agreed that the two recent corporate penalty polices--on factors for imposing penalties, and Commission pre-approval of a settlement range--have delayed cases and produced fewer, smaller penalties. GAO also identified other concerns, including the perception that SEC had "retreated" on penalties, and made it more difficult for investigative staff to obtain "formal orders of investigation," which allow issuance of subpoenas for testimony and records. Our review also showed that in adopting and implementing the penalty policies, the Commission did not act in concert with agency strategic goals calling for broad communication with, and involvement of, the staff. In particular, Enforcement had limited input into the policies the division would be responsible for implementing. As a result, Enforcement attorneys reported frustration and uncertainty in application of the penalty policies.

In their efforts to modernize their health information systems and share medical information, VA and DOD begin from different positions. As shown in table 1, VA has one integrated medical information system, VistA (Veterans Health Information Systems and Technology Architecture), which uses all electronic records. All 128 VA medical sites thus have access to all VistA information. (Table 1 also shows, for completeness, VA's planned modernized system and its associated data repository.) In contrast, DOD has multiple medical information systems (see table 2). DOD's various systems are not integrated, and its 138 sites do not necessarily communicate with each other. In addition, not all of DOD's medical information is electronic: some records are paper- based. For almost a decade, VA and DOD have been pursuing ways to share data in their health information systems and create comprehensive electronic records. However, the departments have faced considerable challenges, leading to repeated changes in the focus of their initiatives and target dates for accomplishment. As shown in figure 1, the departments' efforts have involved a number of distinct initiatives, both long-term initiatives to develop future modernized solutions, and short-term initiatives to respond to more immediate needs to share information in existing systems. As the figure shows, these initiatives often proceeded in parallel. The departments' first initiative, known as the Government Computer-Based Patient Record (GCPR) project, aimed to develop an electronic interface that would let physicians and other authorized users at VA and DOD health facilities access data from each other's health information systems. The interface was expected to compile requested patient information in a virtual record (that is, electronic as opposed to paper) that could be displayed on a user's computer screen. In 2001 and 2002, we reviewed the GCPR project and noted disappointing progress, exacerbated in large part by inadequate accountability and poor planning and oversight, which raised doubts about the departments' ability to achieve a virtual medical record. We determined that the lack of a lead entity, clear mission, and detailed planning to achieve that mission made it difficult to monitor progress, identify project risks, and develop appropriate contingency plans. We made recommendations in both years that the departments enhance the project's overall management and accountability. In particular, we recommended that the departments designate a lead entity and a clear line of authority for the project; create comprehensive and coordinated plans that include an agreed- upon mission and clear goals, objectives, and performance measures; revise the project's original goals and objectives to align with the current strategy; commit the executive support necessary to adequately manage the project; and ensure that it followed sound project management principles. In response, the two departments revised their strategy in July 2002, refocusing the project and dividing it into two initiatives. A short- term initiative (the Federal Health Information Exchange or FHIE) was to enable DOD, when service members left the military, to electronically transfer their health information to VA. VA was designated as the lead entity for implementing FHIE, which was successfully completed in 2004. A longer term initiative was to develop a common health information architecture that would allow the two-way exchange of health information. The common architecture is to include standardized, computable data, communications, security, and high-performance health information systems (these systems, DOD's CHCS II and VA's HealtheVet VistA, were already in development, as shown in the figure). The departments' modernized systems are to store information (in standardized, computable form) in separate data repositories: DOD's Clinical Data Repository (CDR) and VA's Health Data Repository (HDR). The two repositories are to exchange information through an interface named CHDR. In March 2004, the departments began to develop the CHDR interface, and they planned to begin implementation by October 2005. However, implementation of the first release of the interface (at one site) occurred in September 2006, almost a year later. In a review in June 2004, we identified a number of management weaknesses that could have contributed to this delay and made a number of recommendations, including creation of a comprehensive and coordinated project management plan. In response, the departments agreed to our recommendations and improved the management of the CHDR program by designating a lead entity with final decision-making authority and establishing a project management structure. As we noted in later testimony, however, the program did not develop a project management plan that would give a detailed description of the technical and managerial processes necessary to satisfy project requirements (including a work breakdown structure and schedule for all development, testing, and implementation tasks), as we had recommended. In October 2004, the two departments established two more short- term initiatives in response to a congressional mandate. These were two demonstration projects: the Laboratory Data Sharing Interface, aimed at allowing VA and DOD facilities to share laboratory resources, and the Bidirectional Health Information Exchange (BHIE), aimed at allowing both departments' clinicians access to records on shared patients (that is, those who receive care from both departments). As demonstration projects, both initiatives were limited in scope, with the intention of providing interim solutions to the departments' need for more immediate health information sharing. However, because BHIE provided access to up-to-date information, the departments' clinicians expressed strong interest in increasing its use. As a result, the departments began planning to broaden BHIE's capabilities and expand its implementation considerably. Until the departments' modernized systems are fully developed and implemented, extending BHIE connectivity could provide each department with access to most data in the other's legacy systems. According to a VA/DOD annual report and program officials, the departments now consider BHIE an interim step in their overall strategy to create a two-way exchange of electronic medical records. Most recently, the departments have announced a further change to their information-sharing strategy. In January 2007, they announced their intention to jointly develop a new inpatient medical record system. According to the departments, adopting this joint solution will facilitate the seamless transition of active-duty service members to veteran status, as well as making inpatient healthcare data on shared patients immediately accessible to both DOD and VA. In addition, the departments consider that a joint development effort could allow them to realize significant cost savings. We have not evaluated the departments' plans or strategy in this area. Throughout the history of these initiatives, evaluations beyond ours have also found deficiencies in the departments' efforts, especially with regard to the need for comprehensive planning. For example, in fiscal year 2006, the Congress did not provide all the funding requested for HealtheVet VistA because it did not consider that the funding had been adequately justified. In addition, a recent presidential task force identified the need for VA and DOD to improve their long-term planning. This task force, reporting on gaps in services provided to returning veterans, noted problems with regard to sharing information on wounded service members, including the inability of VA providers to access paper DOD inpatient health records. According to the report, although significant progress has been made on sharing electronic information, more needs to be done. The task force recommended that VA and DOD continue to identify long-term initiatives and define scope and elements of a joint inpatient electronic health record. VA and DOD have made progress in both their long-term and short- term initiatives to share health information. In the long-term project to develop modernized health information systems, the departments have begun to implement the first release of the interface between their modernized data repositories, among other things. The two departments have also made progress in their short-term projects to share information in existing systems, having completed two initiatives and making important progress on another. In addition, the two departments have undertaken ad hoc activities to accelerate the transmission of health information on severely wounded patients from DOD to VA's four polytrauma centers. However, despite the progress made and the sharing achieved, the tasks remaining to achieve the goal of a shared electronic medical record remain substantial. In their long-term effort to share health information, VA and DOD have completed the development of their modernized data repositories, agreed on standards for various types of data, and begun to populate the repositories with these data. In addition, they have now implemented the first release of the CHDR interface, which links the two departments' repositories, at seven sites. The first release has enabled the seven sites to share limited medical information: specifically, computable outpatient pharmacy and drug allergy information for shared patients. According to DOD officials, in the third quarter of 2007 the department will send out instructions to its remaining sites so that they can all begin using CHDR. According to VA officials, the interface will be available across the department when necessary software updates are released, which is expected this July. Besides being a milestone in the development of the departments' modernized systems, the interface implementation provides benefits to the departments' current systems. Data transmitted by CHDR are permanently stored in the modernized data repositories, CDR and HDR. Once in the repositories, these computable data can be used by DOD and VA at all sites through their existing systems. CHDR also provides terminology mediation (translation of one agency's terminology into the other's). VA and DOD plans call for developing the capability to exchange computable laboratory results data through CHDR during fiscal year 2008. Although implementing this interface is an important accomplishment, the departments are still a long way from completion of the modernized health information systems and comprehensive longitudinal health records. While DOD and VA had originally projected completion dates for their modernized systems of 2011 and 2012, respectively, department officials told us that there is currently no scheduled completion date for either system. Further, both departments have still to identify the next types of data to be stored in the repositories. The two departments will then have to populate the repositories with the standardized data, which involves different tasks for each department. Specifically, although VA's medical records are already electronic, it still has to convert these into the interoperable format appropriate for its repository. DOD, in addition to converting current records from its multiple systems, must also address medical records that are not automated. As pointed out by a recent Army Inspector General's report, some DOD facilities are having problems with hard-copy records. In the same report, inaccurate and incomplete health data were identified as a problem to be addressed. Before the departments can achieve the long-term goal of seamless sharing of medical information, all these tasks and challenges will have to be addressed. Consequently, it is essential for the departments to develop a comprehensive project plan to guide these efforts to completion, as we have previously recommended. In addition to the long-term effort described above, the two departments have made some progress in meeting immediate needs to share information in their respective legacy systems by setting up short-term projects, as mentioned earlier, which are in various stages of completion. In addition, the departments have set up special processes to transfer data from DOD facilities to VA's polytrauma centers, which treat traumatic brain injuries and other especially severe injuries. DOD has been using FHIE to transfer information to VA since 2002. According to department officials, over 184 million clinical messages on more than 3.8 million veterans have been transferred to the FHIE data repository as of March 2007. Data elements transferred are laboratory results, radiology results, outpatient pharmacy data, allergy information, consultation reports, elements of the standard ambulatory data record, and demographic data. Further, since July 2005, FHIE has been used to transfer pre- and post-deployment health assessment and reassessment data; as of March 2007, VA has access to data for more than 681,000 separated service members and demobilized Reserve and National Guard members who had been deployed. Transfers are done in batches once a month, or weekly for veterans who have been referred to VA treatment facilities. According to a joint DOD/VA report, FHIE has made a significant contribution to the delivery and continuity of care of separated service members as they transition to veteran status, as well as to the adjudication of disability claims. One of the departments' demonstration projects, the Laboratory Data Sharing Interface (LDSI), is now fully operational and is deployed when local agencies have a business case for its use and sign an agreement. It requires customization for each locality and is currently deployed at nine locations. LDSI currently supports a variety of chemistry and hematology tests, and work is under way to include microbiology and anatomic pathology. Once LDSI is implemented at a facility, the only nonautomated action needed for a laboratory test is transporting the specimens. If a test is not performed at a VA or DOD doctor's home facility, the doctor can order the test, the order is transmitted electronically to the appropriate lab (the other department's facility or in some cases a local commercial lab), and the results are returned electronically. Among the benefits of LDSI, according to VA and DOD, are increased speed in receiving laboratory results and decreased errors from manual entry of orders. The LDSI project manager in San Antonio stated that another benefit of the project is the time saved by eliminating the need to rekey orders at processing labs to input the information into the laboratories' systems. Additionally, the San Antonio VA facility no longer has to contract out some of its laboratory work to private companies, but instead uses the DOD laboratory. Developed under a second demonstration project, the BHIE interface is now available throughout VA and partially deployed at DOD. It is currently deployed at 25 DOD sites, providing access to 15 medical centers, 18 hospitals, and over 190 outpatient clinics associated with these sites. DOD plans to make current BHIE capabilities available departmentwide by June 2007. The interface permits a medical care provider to query patient data from all VA sites and any DOD site where it is installed and to view that data onscreen almost immediately. It not only allows DOD and VA to view each other's information, it also allows DOD sites to see previously inaccessible data at other DOD sites. As initially developed, the BHIE interface provides access to information in VA's VistA and DOD's CHCS, but it is currently being expanded to query data in other DOD databases (in addition to CHCS). In particular, DOD has developed an interface to the Clinical Information System (CIS), an inpatient system used by many DOD facilities, which will provide bidirectional views of discharge summaries. The BHIE-CIS interface is currently deployed at five DOD sites and planned for eight others. Further, interfaces to two additional systems are planned for June and July 2007: An interface to DOD's modernized data repository, CDR, will give access to outpatient data from combat theaters. An interface to another DOD database, the Theater Medical Data Store, will give access to inpatient information from combat theaters. The departments also plan to make more data elements available. Currently, BHIE enables text-only viewing of patient identification, outpatient pharmacy, microbiology, cytology, radiology, laboratory orders, and allergy data from its interface with DOD's CHCS. Where it interfaces with CIS, it also allows viewing of discharge summaries from VA and the five DOD sites. DOD staff told us that in early fiscal year 2008, they plan to add provider notes, procedures, and problem lists. Later in fiscal year 2008, they plan to add vital signs, scanned images and documents, family history, social history, and other history questionnaires. In addition, at the VA/DOD site in El Paso, a trial is under way of a process for exchanging radiological images using the BHIE/FHIE infrastructure. Some images have successfully been exchanged. Through their efforts on these long- and near-term initiatives, VA and DOD are achieving exchanges of various types of health information (see attachment 1 for a summary of all the types of data currently being shared and those planned for the future, as well as cost data on the initiatives). However, these exchanges are as yet limited, and significant work remains to be done to expand the data shared and integrate the various initiatives. In addition to the information technology initiatives described, DOD and VA have set up special activities to transfer medical information to VA's four polytrauma centers, which are treating active-duty service members severely wounded in combat. Polytrauma centers care for veterans and returning service members with injuries to more than one physical region or organ system, one of which may be life threatening, and which results in physical, cognitive, psychological, or psychosocial impairments and functional disability. Some examples of polytrauma include traumatic brain injury (TBI), amputations, and loss of hearing or vision. When service members are seriously injured in a combat theater overseas, they are first treated locally. They are then generally evacuated to Landstuhl Medical Center in Germany, after which they are transferred to a military treatment facility in the United States, usually Walter Reed Army Medical Center in Washington, D.C.; the National Naval Medical Center in Bethesda, Maryland; or Brooke Army Medical Center, at Fort Sam Houston, Texas. From these facilities, service members suffering from polytrauma may be transferred to one of VA's four polytrauma centers for treatment. At each of these locations, the injured service members will accumulate medical records, in addition to medical records already in existence before they were injured. However, the DOD medical information is currently collected in many different systems and is not easily accessible to VA polytrauma centers. Specifically: 1. In the combat theater, electronic medical information may be collected for a variety of reasons, including routine outpatient care, as well as serious injuries. These data are stored in the Theater Medical Data Store, which can be accessed by unit commanders and others. (As mentioned earlier, the departments have plans to develop a BHIE interface to this system by July 2007. Until then, VA cannot access these data.) In addition, both inpatient and outpatient medical data for patients who are evacuated are entered into the Joint Patient Tracking Application. (A few VA polytrauma center staff have been given access to this application.) 2. At Landstuhl, inpatient medical records are paper-based (except for discharge summaries). The paper records are sent with a patient as the individual is transferred for treatment in the United States. 3. At the DOD treatment facility (Walter Reed, Bethesda, or Brooke), additional information will be recorded in CIS and CHCS/CDR. When service members are transferred to a VA polytrauma center, VA and DOD have several ad hoc processes in place to electronically transfer the patients' medical information: * DOD has set up secure links to enable a limited number of clinicians at the polytrauma centers to log directly into CIS at Walter Reed and Bethesda Naval Hospital to access patient data. * Staff at Walter Reed collect paper records, print records from CIS, scan all these, and transmit the scanned data to three of the four polytrauma centers. DOD staff said that they are working on establishing this capability at the Brooke and Bethesda medical centers, as well as the fourth VA polytrauma center. According to VA staff, although the initiative began several months ago, it has only recently begun running smoothly as the contractor became more skilled at assembling the records. DOD staff also pointed out that this laborious process is feasible only because the number of polytrauma patients is small (about 350 in all to date); it would not be practical on a large scale. * Staff at Walter Reed and Bethesda are transmitting radiology images electronically to three polytrauma centers. (A fourth has this capability, but at this time no radiology images have been transferred there.) Access to radiology images is a high priority for polytrauma center doctors, but like scanning paper records, transmitting these images requires manual intervention: when each image is received at VA, it must be individually uploaded to VistA's imagery viewing capability. This process would not be practical for large volumes of images. * VA has access to outpatient data (via BHIE) from 25 DOD sites, including Landstuhl. Although these various efforts to transfer medical information on seriously wounded patients are working, and the departments are to be commended on their efforts, the multiple processes and laborious manual tasks illustrate the effects of the lack of in health information systems and the difficulties of exchanging information in their absence. In conclusion, through the long- and short-term initiatives described, as well as efforts such as those at the polytrauma centers, VA and DOD are achieving exchanges of health information. However, the exchanges are as yet limited, and significant work remains to be done to fully achieve the goal of exchanging interoperable, computable data, including agreeing to standards for the rem aining categories of medical information, populating the data repositories with all this information, completing the development of HealtheVet VistA and AHLTA, and transitioning from the legacy systems. To complete these tasks, a detailed project management plan continu to be of vital importance to the ultimate success of the effort to develop a lifelong virtual medical record. We have previously recommended that the departments develop a clearly defined project management plan that describes the technical and managerial processes necessary to satisfy project requirem including a work breakdown structure and schedule for all development, testing, and implementation tasks. Without a p sufficient detail, VA and DOD increase the risk that the long-time project will not deliver the planned capabilities in the time and at the cost expected. Further, it is not clear how all the initiatives we have described today are to be incorporated into an overall strategytoward achieving the departments' goal of comprehensive, seamless exchange of health information. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the subcommittee may have. If you have any questions concerning this testimony, please contact Valerie C. Melvin, Director, Human Capital and Management Information Systems Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions to this testimony include Barbara Oliver, Assistant Director; Barbara Collier; and Glenn Spiegel. Table 3 summarizes the types of health data currently shared through the long- and near-term initiatives we have described, as well as types of data that are currently planned for addition. While this gives some indication of the scale of the tasks involved in sharing medical information, it does not depict the full extent of information that is currently being captured in health information systems and that remains to be addressed. Table 4 shows costs expended on these information sharing initiatives since their inception. Computer-Based Patient Records: Better Planning and Oversight by VA, DOD, and IHS Would Enhance Health Data Sharing. GAO- 01-459. Washington, D.C.: April 30, 2001. Veterans Affairs: Sustained Management Attention Is Key to Achieving Information Technology Results. GAO-02-703. Washington, D.C.: June 12, 2002. Computer-Based Patient Records: Short-Term Progress Made, but Much Work Remains to Achieve a Two-Way Data Exchange Between VA and DOD Health Systems. GAO-04-271T. Washington, D.C.: November 19, 2003. Computer-Based Patient Records: Sound Planning and Project Management Are Needed to Achieve a Two-Way Exchange of VA and DOD Health Data. GAO-04-402T. Washington, D.C.: March 17, 2004. Computer-Based Patient Records: VA and DOD Efforts to Exchange Health Data Could Benefit from Improved Planning and Project Management. GAO-04-687. Washington, D.C.: June 7, 2004. Computer-Based Patient Records: VA and DOD Made Progress, but Much Work Remains to Fully Share Medical Information. GAO-05- 1051T. Washington, D.C.: September 28, 2005. Information Technology: VA and DOD Face Challenges in Completing Key Efforts. GAO-06-905T. Washington, D.C.: June 22, 2006. DOD and VA Exchange of Computable Pharmacy Data. GAO-07- 554R. Washington, D.C.: April 30, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Veterans Affairs (VA) and the Department of Defense (DOD) are engaged in ongoing efforts to share medical information, which is important in helping to ensure high-quality health care for active-duty military personnel and veterans. These efforts include a long-term program to develop modernized health information systems based on computable data: that is, data in a format that a computer application can act on--for example, to provide alerts to clinicians of drug allergies. In addition, the departments are engaged in near-term initiatives involving existing systems. GAO was asked to testify on the history and current status of these long- and near-term efforts to share health information. To develop this testimony, GAO reviewed its previous work, analyzed documents, and interviewed VA and DOD officials about current status and future plans. For almost a decade, VA and DOD have been pursuing ways to share health information and create comprehensive electronic medical records. However, they have faced considerable challenges in these efforts, leading to repeated changes in the focus of their initiatives and target dates. Currently, the two departments are pursuing both long- and short-term initiatives to share health information. Under their long-term initiative, the modern health information systems being developed by each department are to share standardized computable data through an interface between data repositories associated with each system. The repositories have now been developed, and the departments have begun to populate them with limited types of health information. In addition, the interface between the repositories has been implemented at seven VA and DOD sites, allowing computable outpatient pharmacy and drug allergy data to be exchanged. Implementing this interface is a milestone toward the departments' long-term goal, but more remains to be done. Besides extending the current capability throughout VA and DOD, the departments must still agree to standards for the remaining categories of medical information, populate the data repositories with this information, complete the development of the two modernized health information systems, and transition from their existing systems. While pursuing their long-term effort to develop modernized systems, the two departments have also been working to share information in their existing systems. Among various near-term initiatives are a completed effort to allow the one-way transfer of health information from DOD to VA when service members leave the military, as well as ongoing demonstration projects to exchange limited data at selected sites. One of these projects, building on the one-way transfer capability, developed an interface between certain existing systems that allows a two-way view of current data on patients receiving care from both departments. VA and DOD are now working to link other systems via this interface and extend its capabilities. The departments have also established ad hoc processes to meet the immediate need to provide data on severely wounded service members to VA's polytrauma centers, which specialize in treating such patients. These processes include manual workarounds (such as scanning paper records) that are generally feasible only because the number of polytrauma patients is small. These multiple initiatives and ad hoc processes highlight the need for continued efforts to integrate information systems and automate information exchange. In addition, it is not clear how all the initiatives are to be incorporated into an overall strategy focused on achieving the departments' goal of comprehensive, seamless exchange of health information.

As part of our audit of the fiscal years 2008 and 2007 CFS, we evaluated the federal government's financial reporting procedures and related internal control. Also, we determined the status of corrective actions by Treasury and OMB to address open recommendations relating to the processes used to prepare the CFS detailed in our previous reports. In our audit report on the fiscal year 2008 CFS, which is included in the fiscal year 2008 Financial Report of the United States Government (Financial Report), 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 identified during the fiscal year 2008 audit that relate to the processes used to prepare the CFS and our recommendations to correct these weaknesses, as well as the status of corrective actions by Treasury and OMB to address recommendations from 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 summarized in the Agency Comments and Our Evaluation section of this report. Treasury's comments are reprinted in appendix II and are also summarized in the Agency Comments section. Treasury did not establish policies and procedures to provide assurance that federal agencies' intragovernmental payroll tax amounts are identified and eliminated at the governmentwide level when compiling the CFS. Consolidated financial statements are intended to present the results of operations and financial position of all of the components that make up the reporting entity as if the entity were a single enterprise. Therefore, when preparing the CFS, Treasury should ensure that intragovernmental activity and balances between federal agencies are eliminated. Federal agencies, as well as other employers, are required to pay, among other taxes, a matching amount of Social Security and Medicare taxes for their employees (payroll taxes). Federal agencies' payments of payroll taxes to the Internal Revenue Service represent intragovernmental transactions. If these amounts are not eliminated at the governmentwide level when compiling the CFS, revenues and expenses become overstated in the CFS. However, in disclosing the types of revenues included in the Statement of Operations and Changes in Net Position in the draft CFS, Treasury's description stated that "individual income tax and tax withholdings include....payroll taxes collected from other agencies." We inquired of Treasury as to why these amounts would be included in the CFS and not eliminated during the preparation process. Treasury subsequently deleted the language regarding the inclusion of federal agency payroll taxes from the CFS. However, Treasury was unable to provide any documentation demonstrating that these amounts were appropriately classified as intragovernmental transactions and eliminated from the CFS. Without adequate policies and procedures to accurately identify and eliminate intragovernmental payroll tax amounts in the process used to prepare the CFS, the federal government's ability to determine the impact of these amounts on the CFS is impaired and, consequently, the CFS may be misstated. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to design, document, and implement policies and procedures to identify and eliminate intragovernmental payroll tax amounts at the governmentwide level when compiling the CFS. Treasury, in coordination with OMB, did not take the steps necessary to help assure that certain key information related to significant financial events and conditions were consistent and accurately presented throughout the fiscal year 2008 Financial Report. Specifically, Treasury, in coordination with OMB, has not fully established an effective process for preparing and reviewing information included in the Management's Discussion and Analysis (MD&A), and "The Federal Government's Financial Health: A Citizen's Guide to the Financial Report of the United States Government" (Citizen's Guide) sections of the Financial Report. According to Statement of Federal Financial Accounting Standards No. 15, Management's Discussion and Analysis, the MD&A should highlight key information and increase the understanding and usefulness of the Financial Report. Similarly, the Citizen's Guide is intended to provide readers with a brief, high-level summary of key financial information from the Financial Report on our nation's current fiscal condition and the long- term sustainability. Further, data presented in both the MD&A and Citizen's Guide must be consistent with related data in the CFS. Treasury, in coordination with OMB, performed certain procedures to prepare and review the MD&A and Citizen's Guide. However, these procedures were not effective in helping assure that (1) information was consistently reported in the CFS and these related sections of the Financial Report and (2) information reported in the MD&A and Citizen's Guide was consistent, complete, and accurate. During our comparison of information reported in draft versions of the MD&A and Citizen's Guide with information reported in the fiscal year 2008 draft CFS, we identified (1) several inconsistencies and (2) numerous instances in which information was omitted from, or incorrectly reported in, these draft sections of the Financial Report that were not detected by Treasury's review process. For example, information in the draft MD&A and Citizen's Guide regarding certain federal actions for addressing the financial crisis was incomplete or incorrectly reported. In addition, the $339 billion change in veterans benefit liability in fiscal year 2008 reported in the draft CFS was incorrectly reported as $365 billion in the draft versions of the MD&A and Citizen's Guide. We communicated our findings to Treasury officials who corrected the data presented in the MD&A and Citizen's Guide sections of the final Financial Report. Without effective procedures for preparing and reviewing the MD&A and Citizen's Guide to ensure that the information is complete, accurate, and consistent with the information reported in the CFS, Treasury is at risk that information provided in these key sections of the Financial Report will not be reliable. A contributing factor to the reporting errors and inconsistencies we detected is that Treasury does not have documented procedures for preparing and reviewing the MD&A and Citizen's Guide sections of the Financial Report in comparison with data presented in the CFS. As preparer of the Financial Report, Treasury management, in coordination with OMB, is responsible for developing and documenting detailed policies, procedures, and practices and for ensuring that internal control is built into and is an integral part of operations to ensure that information is consistent and accurate throughout the Financial Report. GAO's Standards for Internal Control in the Federal Government calls for clear documentation of policies and procedures. Although, Treasury has documented policies and procedures used to compile the CFS in its Standard Operating Procedures (SOP) entitled "Preparing the Financial Report of the U.S. Government," the SOP does not provide procedures for preparing and reviewing the MD&A and Citizen's Guide--two key report sections providing information to the Congress and the public regarding the fiscal condition of the U.S. government--to help assure they are consistent and accurate in comparison with related information presented elsewhere in the Financial Report. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB, to develop, document, and implement processes and procedures for preparing and reviewing the MD&A and Citizen's Guide sections of the Financial Report to help assure that information reported in these sections is complete, accurate, and consistent with related information reported elsewhere in the Financial Report. Treasury, in coordination with OMB, has not established and documented criteria for identifying which federal entities are significant to the CFS for purposes of verifying and validating the information submitted by federal entities for inclusion in the CFS. Treasury, through the Treasury Financial Manual (TFM), identified 35 significant federal agencies and entities, referred to as "verifying agencies." Those agencies are required to perform a number of procedures to provide audit assurance over the information submitted to Treasury for the CFS. However, Treasury and OMB have not (1) established and documented criteria for designating federal entities as "verifying agencies" significant to the CFS, and (2) established policies and procedures for assessing and documenting, on an annual basis, which entities meet the criteria. Treasury, in coordination with OMB, is required to prepare the CFS. According to the Federal Accounting Standards Advisory Board's Statement of Federal Financial Accounting Concepts No. 4, Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government, the consolidated financial report should be a general purpose report that is aggregated from federal agencies' and other federal entities' financial reports. The TFM provides policies and procedures on how federal agencies are to provide their financial data to Treasury for consolidation. In accordance with the TFM, verifying agencies are required to submit their financial data to Treasury using a Closing Package. The verifying agency's Chief Financial Officer must certify the accuracy of the data in the Closing Package and have the Closing Package audited by the agency's Inspector General. In addition, the Closing Package process requires verifying agencies to reclassify their audited financial statements to the Closing Package "special purpose financial statements." Verifying agencies must also identify trading partners and enter certain financial statement notes. The special purpose financial statements are audited to obtain reasonable assurance about whether the financial statements are (1) free of material misstatements, (2) in conformity with accounting principles generally accepted in the United States, and (3) presented pursuant to the requirements of the TFM. Because the Closing Package process requires verifying agencies to verify and validate the information in the special purpose financial statements with their audited information and receive an audit opinion, Treasury is provided a level of assurance that it is compiling the CFS with audited financial information. All other federal entities that contribute financial information to the CFS are classified by Treasury as "nonverifying agencies." Over 100 nonverifying federal agencies and entities submitted data for fiscal year 2008. Currently these entities are only required to submit adjusted trial balance data to Treasury instead of an audited Closing Package. Because of a lack of criteria for determining an entity's significance to the CFS, it is unclear whether any of these "nonverifying agencies" should be classified as "verifying agencies." One of Treasury's and OMB's goals for preparing the CFS is to link the agencies' audited financial statements to the CFS. To accomplish this goal, Treasury needs an appropriate level of assurance that it compiles the CFS using audited Closing Packages from the federal entities contributing the most significant amounts of financial information. However, without establishing the criteria for identifying federal entities as significant to the CFS and establishing related policies and procedures to assess, on an annual basis, which entities meet such criteria, Treasury and OMB cannot obtain this level of assurance. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB, to (1) establish and document criteria to be used in identifying federal entities as significant to the CFS for purposes of obtaining assurance over the information being submitted by those entities for the CFS and (2) develop and implement policies and procedures for assessing and documenting, on an annual basis, which entities met such criteria. These actions will help provide Treasury and OMB with assurance that the information being used to prepare the CFS is consistent with the audited financial statements of the federal agencies, in all material respects. During fiscal year 2008, Treasury enhanced its SOP entitled "Preparing the Financial Report of the U.S. Government" to require an overall analysis of the consolidated numbers in the financial statements to include a review for reasonableness of changes from the prior year to the current year. However, because of a lack of details on the objectives of the analysis and the procedures to be performed, the overall analysis did not detect significant errors in amounts used to prepare the Statements of Net Cost (SNC). Internal control should provide, among other things, reasonable assurance that financial reporting is reliable. GAO's Standards for Internal Control in the Federal Government defines the minimum level of quality acceptable for internal control in the federal government and provides the standards against which internal control is to be evaluated. These standards state that internal controls should include, among other items, reviews by management at the functional or activity level. Treasury categorizes and allocates costs in the SNC by agency. For example, most of the costs associated with pension and health benefits that are reported by the Office of Personnel Management (OPM) in its financial statements are allocated to the costs of OPM's federal user agencies for governmentwide federal reporting purposes. Treasury uses head count figures reported by OPM in its Closing Package to perform the allocation of pension and health benefit costs across all user federal agencies. However, we found that Treasury did not detect a significant variance in head count between certain federal entities from 2007 to 2008, which resulted in significant errors in the draft SNC. Specifically, we found that, in fiscal year 2007, the head count used for the Department of Defense (DOD) was 497,724, and the head count used for "all other entities" was 92,566. In fiscal year 2008, we found that the head counts were erroneously reversed. The head count used for DOD was 95,157, while the head count used for "all other entities" was 495,673. Treasury's review process and overall analysis did not detect this error. As a result, Treasury's draft SNC understated DOD's reported costs on the fiscal year 2008 SNC by approximately $10 billion and costs for the "all other entities" line item was equally overstated. Without sufficiently detailed procedures including guidance for performing the analysis and review of data used in the allocation process for compiling the SNC, significant errors could occur in the SNC and not be detected. We reaffirm our recommendation that the Secretary of the Treasury direct the Fiscal Assistant Secretary to further enhance the SOP entitled "Standard Operating Procedures for Preparing the Financial Report of the U.S. Government" to better ensure that CFS compilation practices are proper, complete, and can be consistently applied, including detailed procedures for conducting reviews and documenting reasonableness of data used in the process for compiling the CFS. In oral comments on a draft of this report, OMB stated that it generally concurred with the new findings and related recommendations in this report. In addition, OMB provided technical comments, which we have incorporated as appropriate. In its April 15, 2009, written comments on a draft of this report, which are reprinted in appendix II, Treasury stated that it concurs with the new recommendations and expects to implement them by the end of fiscal year 2009. We will evaluate the actions taken to address our recommendations as part of our fiscal year 2009 CFS audit. This report contains recommendations to the Secretary of the Treasury. 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 Chairman and Ranking Member of the Senate Committee on Homeland Security and Governmental Affairs and its Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security and the Chairman and Ranking Member of the House Committee on Oversight and Government Reform and its Subcommittee on Government Management, Organization, and Procurement. In addition, we are sending copies to the Fiscal Assistant Secretary of the Treasury, the Director of OMB, the Deputy Director for Management of OMB, and the Acting Controller of OMB's Office of Federal Financial Management. 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 (202) 512-3406 or [email protected]. Key contributors to this report are listed in appendix III. This appendix includes the status of recommendations from the following six reports that were open at the beginning of our fiscal year 2008 audit: 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); 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); and Financial Audit: Material Weaknesses in Internal Control over the Processes Used to Prepare the Consolidated Financial Statements of the U.S. Government, GAO-08-748 (Washington, D.C.: June 17, 2008). Recommendations from these reports that were closed in prior years are not included in this appendix. This appendix includes the status of the 56 remaining open 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 our assessment of the status of a recommendation. We will continue to monitor Treasury's and OMB's progress in addressing GAO's recommendations. Of the 56 recommendations relating to the processes used to prepare the consolidated financial statements of the U.S. government (CFS) that are listed in this appendix, 16 were closed and 40 remained open as of December 9, 2008, the date of our report on the audit of the fiscal year 2008 CFS. In addition to the above contact, the following individuals made key contributions to this report: Louise DiBenedetto, Assistant Director; Lynda Downing, Assistant Director; Cole Haase; Dragan Matic; Maria Morton; Thanomsri Piyapongroj; and Taya Tasse.

Since GAO's first audit of the fiscal year 1997 consolidated financial statements of the U.S. government (CFS), material weaknesses in internal control and other limitations on the scope of our work have prevented GAO from expressing an opinion on the accrual basis CFS. Certain of those material weaknesses relate to inadequate systems, controls, and procedures to properly prepare the CFS. The purpose of this report is to (1) provide details of the continuing material weaknesses related to the preparation of the CFS, (2) recommend improvements, and (3) provide the status of corrective actions taken to address the 56 open recommendations GAO reported for this area in June 2008. During its audit of the fiscal year 2008 CFS, GAO identified continuing and new control deficiencies in the federal government's processes used to prepare the CFS. These control deficiencies contribute to material weaknesses in internal control over the federal government's ability 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 between 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 involved: (1) establishing and documenting policies and procedures for identifying and eliminating federal agencies' intragovernmental payroll tax amounts when compiling the CFS, (2) establishing and documenting policies and procedures for preparing and reviewing information included in key sections of the Financial Report of the U.S. Government, (3) establishing criteria for identifying federal entities' significance to the CFS and annually assessing which entities meet such criteria, (4) enhancing procedures for analyzing and reviewing data used when compiling the Statements of Net Cost, and (5) various other control deficiencies identified in previous years' audits. Of the 56 open recommendations GAO reported in June 2008, 16 were closed and 40 remained open as of December 9, 2008, the date of GAO's report on its audit of the fiscal year 2008 CFS. GAO will continue to monitor the status of corrective actions taken to address the 4 new recommendations as well as the 40 open recommendations from prior years.

Passenger screening is a process by which screeners inspect individuals and their property to deter and prevent an act of violence or air piracy, such as the carrying of any unauthorized explosive, incendiary, weapon, or other prohibited item on board an aircraft or into a sterile area. Screeners inspect individuals for prohibited items at designated screening locations. TSA developed standard operating procedures for screening passengers at airport checkpoints. Primary screening is conducted on all airline passengers before they enter the sterile area of an airport and involves passengers walking through a metal detector and carry-on items being subjected to X-ray screening. Passengers who alarm the walk-through metal detector or are designated as selectees--that is, passengers selected for additional screening--must then undergo secondary screening, as well as passengers whose carry-on items have been identified by the X-ray machine as potentially containing prohibited items. Secondary screening involves additional means for screening passengers, such as by hand- wand; physical pat-down; or, at certain airport locations, an explosives trace portal (ETP), which is used to detect traces of explosives on passengers by using puffs of air to dislodge particles from their bodies and clothing into an analyzer. Selectees' carry-on items are also physically searched or screened for explosives, such as by using explosives trace detection machines. Federal agencies--particularly NCTC and the FBI--submit to TSC nominations of individuals to be included on the consolidated watchlist. For example, NCTC receives terrorist-related information from executive branch departments and agencies, such as the Department of State, the Central Intelligence Agency, and the FBI, and catalogs this information in its Terrorist Identities Datamart Environment database, commonly known as the TIDE database. This database serves as the U.S. government's central classified database with information on known or suspected international terrorists. According to NCTC, agencies submit watchlist nomination reports to the center, but are not required to specify individual screening systems that they believe should receive the watchlist record, such as the No Fly list of individuals who are to be denied boarding an aircraft. NCTC is to presume that agency nominations are valid unless it has other information in its possession to rebut that position. To decide if a person poses enough of a threat to be placed on the watchlist, agencies are to follow Homeland Security Presidential Directive (HSPD) 6, which states that the watchlist is to contain information about individuals "known or appropriately suspected to be or have been engaged in conduct constituting, in preparation for, in aid of, or related to terrorism." HSPD-24 definitively established the "reasonable suspicion" standard for watchlisting by providing that agencies are to make available to other agencies all biometric information associated with "persons for whom there is an articulable and reasonable basis for suspicion that they pose a threat to national security." NCTC is to consider information from all available sources and databases to determine if there is a reasonable suspicion of links to terrorism that warrants a nomination, which can involve some level of subjectivity. The guidance on determining reasonable suspicion, which TSC most recently updated in February 2009, contains specific examples of the types of terrorism-related conduct that may make an individual appropriate for inclusion on the watchlist. The White House's review of the December 25 attempted terrorist attack noted that Mr. Abdulmutallab's father met with U.S. Embassy officers in Abuja, Nigeria, to discuss his concerns that his son may have come under the influence of unidentified extremists and had planned to travel to Yemen. However, according to NCTC, the information in the State Department's nomination report did not meet the criteria for watchlisting in TSC's consolidated terrorist screening database per the government's established and approved nomination standards. NCTC also noted that the State Department cable nominating Mr. Abdulmutallab had no indication that the father was the source of the information. According to the White House review of the December 25 attempted attack, the U.S. government had sufficient information to have uncovered and potentially disrupted the attack--including by placing Mr. Abdulmutallab on the No Fly list--but analysts within the intelligence community failed to connect the dots that could have identified and warned of the specific threat. After receiving the results of the White House's review of the December 25 attempted attack, the President called for members of the intelligence community to undertake a number of corrective actions--such as clarifying intelligence agency roles, responsibilities, and accountabilities to document, share, and analyze all sources of intelligence and threat threads related to terrorism, and accelerating information technology enhancements that will help with information correlation and analysis. The House Committee on Oversight and Government Reform has asked us, among other things, to assess government efforts to revise the watchlist process, including actions taken related to the December 25 attempted attack. As part of our monitoring of high-risk issues, we also have ongoing work-- at the request of the Senate Committee on Homeland Security and Governmental Affairs--that is assessing agency efforts to create the Information Sharing Environment, which is intended to break down barriers to sharing terrorism-related information, especially across federal agencies. Our work is designed to help ensure that federal agencies have a road map that defines roles, responsibilities, actions, and time frames for removing barriers, as well as a system to hold agencies accountable to the Congress and the public for making progress on these efforts. Among other things, this road map can be helpful in removing cultural, technological, and other barriers that lead to agencies maintaining information in stove-piped systems so that it is not easily accessible, similar to those problems that the December 25 attempted attack exposed. We expect to issue the results of this work later this year. Following the December 25 attempted terrorist attack, questions were raised as to what could have happened if Mr. Abdulmutallab had been on TSC's consolidated terrorist screening database. We created several scenarios to help explain how the watchlist process is intended to work and what opportunities agencies could have had to identify him if he was on the watchlist. For example, according to TSC, if a record from the terrorist screening database is sent to the State Department's system and the individual in that record holds a valid visa, TSC would compare the identifying information in the watchlist record against identifying information in the visa and forward positive matches to the State Department for possible visa revocation. If an individual's visa is revoked, under existing procedures, this information is to be entered into the database CBP uses to screen airline passengers prior to their boarding, which we describe below. According to CBP, when the individual checks in for a flight, the on-site CBP Immigration Advisory Program officers already would have been apprised of the visa revocation by CBP and they would have checked the person's travel documents to verify that the individual was a match to the visa revocation record. Once the positive match was established, the officers would have recommended that he not be allowed to board the flight. Under another scenario, if an individual is on TSC's terrorist screening database, existing processes provide CBP with the opportunity to identify the subject of a watchlist record as part of the checks CBP is to conduct to see if airline passengers are eligible to be admitted into the country. Specifically, for international flights departing to or from the United States (but not for domestic flights), CBP is to receive information on passengers obtained, for example, when their travel document is swiped. CBP is to check this passenger information against a number of databases to see if there are any persons who have immigration violations, criminal histories, or any other reason for being denied entry to the country, in accordance with the agency's mission. According to CBP, when it identifies a U.S. bound passenger who is on the watchlist, it coordinates with other federal agencies to evaluate the totality of available information to see what action is appropriate. In foreign airports where there is a CBP Immigration Advisory Program presence, the information on a watchlisted subject is forwarded by CBP to program officers onsite. The officers would then intercept the subject prior to boarding the aircraft and confirm that the individual is watchlisted, and when appropriate based on the derogatory information, request that the passenger be denied boarding. In a third scenario, if an individual is on the watchlist and is also placed on the No Fly or Selectee list, when the person checks in for a flight, the individual's identifying information is to be checked against these lists. Individuals matched to the No Fly list are to be denied boarding. If the individual is matched to the Selectee list, the person is to be subject to further screening, which could include physical screening, such as a pat- down. The criteria in general that are used to place someone on either of these two lists include the following: Persons who are deemed to be a threat to civil aviation or national security and should be precluded from boarding an aircraft are put on the No Fly list. Persons who are deemed to be a threat to civil aviation or national security but do not meet the criteria of the No Fly list are placed on the Selectee list and are to receive additional security screening prior to being permitted to board an aircraft. The White House Homeland Security Council devised these more stringent sets of criteria for the No Fly and Selectee lists in part because these lists are not intended as investigative or information-gathering tools or tracking mechanisms, and TSA is a screening but not an intelligence agency. Rather, the lists are intended to help ensure the safe transport of passengers and facilitate the flow of commerce. However, the White House's review of the December 25 attempted terrorist attack raised questions about the effectiveness of the criteria, and the President tasked the FBI and TSC with developing recommendations for any needed changes to the nominations guidance and criteria. Weighing and responding to the potential impacts that changes to the nominations guidance and criteria could have on the traveling public and the airlines will be important considerations in developing such recommendations. In September 2006, we reported that tens of thousands of individuals who had similar names to persons on the watchlist were being misidentified and subjected to additional screening, and in some cases delayed so long as to miss their flights. We also reported that resolving these misidentifications can take time and, therefore, affect air carriers and commerce. If changes in criteria result in more individuals being added to the lists, this could also increase the number of individuals who are misidentified, exacerbating these negative effects. In addition, we explained that individuals who believe that they have been inappropriately matched to the watchlist can petition the government for action and the relevant agencies must conduct research and work to resolve these issues. If more people are misidentified, more people may trigger this redress process, increasing the need for resources. Finally, any changes to the criteria or process would have to ensure that watchlist records are used in a manner that safeguards legal rights, including freedoms, civil liberties, and information privacy guaranteed by federal law. In reacting to the December 25 attempted terrorist attack, determining whether there were potential vulnerabilities related to the use of watchlist records when screening--not only individuals who fly into the country but also, for example, those who cross land borders--are important considerations. Screening agencies whose missions most frequently and directly involve interactions with travelers generally do not check against all records in the consolidated terrorist watchlist. In our October 2007 report, we noted that this is because screening against certain records may not be needed to support a respective agency's mission or may not be possible because of computer system limitations, among other things. For example, CBP's mission is to determine if any traveler is eligible to enter the country or is to be denied entry because of immigration or criminal violations. As such, CBP's computer system accepts all records from the consolidated watchlist database that have either a first name or a last name and one other identifier, such as a date of birth. Therefore, TSC sends CBP the greatest number of records from the consolidated watchlist database for its screening. In contrast, one of the State Department's missions is to approve requests for visas. Since only non-U.S. citizens and nonlawful permanent residents apply for visas, TSC does not send the department records on citizens or lawful permanent residents for screening visa applicants. Also, the FBI database that state and local law enforcement agencies use for their missions in checking individuals for criminal histories, for example, also receives a smaller portion of the watchlist. According to the FBI, its computer system requires a full first name, last name, and other identifier, typically a date of birth. The FBI noted that this is because having these identifiers helps to reduce the number of times an individual is misidentified as being someone on the list, and the computer system would not be effective in making matches without this information. Finally, the No Fly and Selectee lists collectively contain the lowest percentage of watchlist records because the remaining ones either do not meet the nominating criteria, as described above, or do not meet system requirements--that is, include full names and dates of birth, which TSA stated are required to minimize misidentifications. TSA is implementing a new screening program that the agency states will have the capability to screen an individual against the entire watchlist. Under this program, called Secure Flight, TSA will assume from air carriers the responsibility of comparing passenger information against the No Fly and Selectee lists. According to the program's final rule, in general, Secure Flight is to compare passenger information only to the No Fly and Selectee lists. The supplementary information accompanying the rule notes that this will be satisfactory to counter the security threat during normal security circumstances. However, the rule provides that TSA may use the larger set of watchlist records when warranted by security considerations, such as if TSA learns that flights on a particular route may pose increased risks. TSA emphasized that use of the full terrorist screening database is not routine. Rather, TSA noted that its use is limited to circumstances in which there is information concerning an increased risk to transportation security, and the decision to use the full watchlist database will be based on circumstances at the time. According to TSA, as of January 2010, the agency was developing administrative procedures for utilizing the full watchlist when warranted. In late January 2009, TSA began to assume from airlines the watchlist matching function for a limited number of domestic flights, and has since phased in additional flights and airlines. TSA expects to assume the watchlist matching function for all domestic and international flights departing to and from the United States by December 2010. It is important to note that under the Secure Flight program, TSA requires airlines to provide the agency with each passenger's full name and date of birth to facilitate the watchlist matching process, which should reduce the number of individuals who are misidentified as the subject of a watchlist record. We continue to monitor the Secure Flight program at the Congress's request. In our October 2007 watchlist report, we recommended that the FBI and DHS assess the extent to which security risks exist by not screening against certain watchlist records and what actions, if any, should be taken in response. The agencies generally agreed with our recommendations but noted that the risks related to not screening against all watchlist records needs to be balanced with the impact of screening against all records, especially those records without a full name and other identifiers. For example, more individuals could be misidentified, law enforcement would be put in the position of detaining more individuals until their identities could be resolved, and administrative costs could increase, without knowing what measurable increase in security is achieved. While we acknowledge these tradeoffs and potential impacts, we maintain that assessing whether vulnerabilities exist by not screening against all watchlist records--and if there are ways to limit impacts--is critical and could be a relevant component of the government's ongoing review of the watchlist process. Therefore, we believe that our recommendation continues to have merit. As we reported in October 2007, the federal government has made progress in using the consolidated terrorist watchlist for screening purposes, but has additional opportunities to use the list. For example, DHS uses the list to screen employees in some critical infrastructure components of the private sector, including certain individuals who have access to vital areas of nuclear power plants or transport hazardous materials. However, many critical infrastructure components are not using watchlist records, and DHS has not finalized guidelines to support such private sector screening, as HSPD-6 mandated and we previously recommended. In that same report, we noted that HSPD-11 tasked the Secretary of Homeland Security with coordinating across other federal departments to develop (1) a strategy for a comprehensive and coordinated watchlisting and screening approach and (2) a prioritized implementation and investment plan that describes the scope, governance, principles, outcomes, milestones, training objectives, metrics, costs, and schedule of necessary activities. We reported that without such a strategy, the government could not provide accountability and a basis for monitoring to ensure that (1) the intended goals for, and expected results of, terrorist screening are being achieved and (2) use of the watchlist is consistent with privacy and civil liberties. We recommended that DHS develop a current interagency strategy and related plans. According to DHS's Screening Coordination Office, during the fall of 2007, the office led an interagency effort to provide the President with an updated report, entitled, HSPD-11, An Updated Strategy for Comprehensive Terrorist-Related Screening Procedures. The office noted that the report was formally submitted to the Executive Office of the President through the Homeland Security Council and reviewed by the President on January 25, 2008. Further, the office noted that it also provided a sensitive version of the report to the Congress in October 2008. DHS provided us an excerpt of that report to review, stating that it did not have the authority to share excerpts provided by other agencies, and we were unable to obtain a copy of the full report. The information we reviewed only discussed DHS's own efforts for coordinating watchlist screening across the department. Therefore, we were not able to determine whether the HSPD-11 report submitted to the President addressed all of the components called for in the directive or what action, if any, was taken as a result. We maintain that a comprehensive strategy, as well as related implementation and investment plans, as called for by HSPD-11, continue to be important to ensure effective governmentwide use of the watchlist process. In addition, in our October 2007 report, we noted that establishing an effective governance structure as part of this strategic approach is particularly vital since numerous agencies and components are involved in the development, maintenance, and use of the watchlist process, both within and outside of the federal government. Also, establishing a governance structure with clearly-defined responsibility and authority would help to ensure that agency efforts are coordinated, and that the federal government has the means to monitor and analyze the outcomes of such efforts and to address common problems efficiently and effectively. We determined at the time that no such structure was in place and that no existing entity clearly had the requisite authority for addressing interagency issues. We recommended that the Homeland Security Council ensure that a governance structure was in place, but the council did not comment on our recommendation. At the time of our report, TSC stated that it had a governance board in place, comprised of senior-level agency representatives from numerous departments and agencies. However, we also noted that the board provided guidance concerning issues within TSC's mission and authority. We also stated that while this governance board could be suited to assume more of a leadership role, its authority at that time was limited to TSC- specific issues, and it would need additional authority to provide effective coordination of terrorist-related screening activities and interagency issues governmentwide. In January 2010, the FBI stated that TSC has a Policy Board in place, with representatives from relevant departments and agencies, that reviews and provides input to the government's watchlist policy. The FBI also stated that the policies developed are then sent to the National Security Council Deputies Committee (formerly the Homeland Security Council) for ratification. The FBI noted that this process was used for making the most recent additions and changes to watchlist standards and criteria. We have not yet been able to determine, however, whether the Policy Board has the jurisdiction and authority to resolve issues beyond TSC's purview, such as issues within the intelligence community and in regard to the nominations process, similar to the types of interagency issues the December 25 attempted attack identified. We maintain that a governance structure with the authority for and accountability over the entire watchlist process, from nominations through screening, and across the government is important. On January 7, 2010, the President tasked the National Security Staff with initiating an interagency review of the watchlist process--including the business processes, procedures, and criteria--and the interoperability and sufficiency of supporting information technology systems. This review offers the government an opportunity to develop an updated strategy, related plans, and governance structure that would provide accountability to the administration, the Congress, and the American public that the watchlist process is effective at helping to secure the homeland. As we reported in October 2009, in an effort to improve the capability to detect explosives at aviation passenger checkpoints, TSA has 10 passenger screening technologies in various phases of research, development, procurement, and deployment, including the AIT (formerly Whole Body Imager). TSA is evaluating the AIT as an improvement over current screening capabilities of the metal detector and pat-downs specifically to identify nonmetallic threat objects and liquids. The AITs produce an image of a passenger's body that a screener interprets. The image identifies objects, or anomalies, on the outside of the physical body but does not reveal items beneath the surface of the skin, such as implants. TSA plans to procure two types of AIT units: one type uses millimeter wave and the other type uses backscatter X-ray technology. Millimeter wave technology beams millimeter wave radio frequency energy over the body's surface at high speed from two antennas simultaneously as they rotate around the body. The energy reflected back from the body or other objects on the body is used to construct a three-dimensional image. Millimeter wave technology produces an image that resembles a fuzzy photo negative. Backscatter X-ray technology uses a low-level X-ray to create a two-sided image of the person. Backscatter technology produces an image that resembles a chalk etching. As we reported in October 2009, TSA has not yet deployed any new technologies nationwide. However, as of December 31, 2009, according to a senior TSA official, the agency has deployed 40 of the millimeter wave AITs, and has procured 150 backscatter X-ray units in fiscal year 2009 and estimates that these units will be installed at airports by the end of calendar year 2010. In addition, TSA plans to procure an additional 300 AIT units in fiscal year 2010, some of which will be purchased with funds from the American Recovery and Reinvestment Act of 2009. TSA plans to procure and deploy a total of 878 units at all category X through category IV airports. Full operating capability is expected in fiscal year 2014. TSA officials stated that the cost of the AIT is about $130,000 to $170,000 per unit, excluding installation costs. In addition, the estimated training costs are $50,000 per unit. While TSA stated that the AIT will enhance its explosives detection capability, because the AIT presents a full body image of a person during the screening process, concerns have been expressed that the image is an invasion of privacy. According to TSA, to protect passenger privacy and ensure anonymity, strict privacy safeguards are built into the procedures for use of the AIT. For example, the officer who assists the passenger never sees the image that the technology produces, and the officer who views the image is remotely located in a secure resolution room and never sees the passenger. Officers evaluating images are not permitted to take cameras, cell phones, or photo-enabled devices into the resolution room. To further protect passengers' privacy, ways have been introduced to blur the passengers' images. The millimeter wave technology blurs all facial features, and the backscatter X-ray technology has an algorithm applied to the entire image to protect privacy. Further, TSA has stated that the AIT's capability to store, print, transmit, or save the image will be disabled at the factory before the machines are delivered to airports, and each image is automatically deleted from the system after it is cleared by the remotely located security officer. Once the remotely located officer determines that threat items are not present, that officer communicates wirelessly to the officer assisting the passenger. The passenger may then continue through the security process. Potential threat items are resolved through a direct physical pat-down before the passenger is cleared to enter the sterile area. In addition to privacy concerns, the AITs are large machines, and adding them to the checkpoint areas will require additional space, especially since the operators are segregated from the checkpoint to help ensure passenger privacy. We previously reported on several challenges TSA faces related to the research, development, and deployment of passenger checkpoint screening technologies and made a number of recommendations to improve this process. Two of these recommendations are particularly relevant today, as TSA moves forward with plans to install a total of 878 additional AITs--completing operational testing of technologies in airports prior to using them in day-to-day operations and assessing whether technologies such as the AIT are vulnerable to terrorist countermeasures, such as hiding threat items on various parts of the body to evade detection. First, in October 2009, we reported that TSA had relied on technologies in day-to-day airport operations that had not been proven to meet their functional requirements through operational testing and evaluation, contrary to TSA's acquisition guidance and a knowledge-based acquisition approach. We also reported that TSA had not operationally tested the AITs at the time of our review, and we recommended that TSA operationally test and evaluate technologies prior to deploying them. In commenting on our report, TSA agreed with this recommendation. A senior TSA offici stated that although TSA does not yet have a written policy requiring operational testing prior to deployment, TSA is now including in its contracts with vendors that checkpoint screening machines are required to successfully complete laboratory tests as well as operational tests. The test results are then incorporated in the source selection plan. The official also stated that the test results are now required at key decision points by DHS's Investment Review Board. While recently providing GAO with updated information to our October 2009 report, TSA stated that operational testing for the AIT was completed as of the end of calendar year 2009. We are in the process of verifying that TSA has tested all of the AIT's functional requirements in an operational environment. Deploying technologies that have not successfully completed operational testing and evaluation can lead to cost overruns and underperformance. TSA's procurement guidance provides that testing should be conducted in an operational environment to validate that the system meets all functional requirements before deployment. In addition, our reviews have shown that leading commercial firms follow a knowledge-based approach to major acquisitions and do not proceed with large investments unless the product's design demonstrates its ability to meet functional requirements and be stable. The developer must show that the product can be manufactured within cost, schedule, and quality targets and is reliable before production begins and the system is used in day-to-day operations. TSA's experience with the ETPs, which the agency uses for secondary screening, demonstrates the importance of testing and evaluation in an operational environment. The ETP detects traces of explosives on a passenger by using puffs of air to dislodge particles from the passenger's body and clothing that the machine analyzes for traces of explosives. TSA procured 207 ETPs and in 2006 deployed 101 ETPs to 36 airports, the first deployment of a checkpoint technology initiated by the agency. TSA deployed the ETPs even though agency officials were aware that tests conducted during 2004 and 2005 on earlier ETP models suggested that they did not demonstrate reliable performance. Furthermore, the ETP models that were subsequently deployed were not first tested to prove their effective performance in an operational environment, contrary to TSA's acquisition guidance, which recommends such testing. As a result, TSA procured and deployed ETPs without assurance that they would perform as intended in an operational environment. TSA officials stated that they deployed the machines without resolving these issues to respond quickly to the threat of suicide bombers. In June 2006, TSA halted further deployment of the ETP because of performance, maintenance, and installation issues. According to a senior TSA official, as of December 31, 2009, all but 9 ETPs have been withdrawn from airports and 18 ETPs remain in inventory. TSA estimates that the 9 remaining ETPs will be removed from airports by the end of calendar year 2010. In the future, using validated technologies would enhance TSA's efforts to improve checkpoint security. Furthermore, retaining existing screening procedures until the effectiveness of future technologies has been validated could provide assurances that use of checkpoint technologies improves aviation security. Second, as we reported in October 2009, TSA does not know whether its explosives detection technologies, such as the AITs, are susceptible to terrorist tactics. Although TSA has obtained information on vulnerabilities at the screening checkpoint, the agency has not assessed vulnerabilities-- that is, weaknesses in the system that terrorists could exploit in order to carry out an attack--related to passenger screening technologies, such as AITs, that are currently deployed. According to TSA's threat assessment, terrorists have various techniques for concealing explosives on their persons, as was evident in Mr. Abdulmutallab's attempted attack on December 25, where he concealed an explosive in his underwear. However, TSA has not assessed whether these and other tactics that terrorists could use to evade detection by screening technologies, such as AIT, increase the likelihood that the screening equipment would not detect the hidden weapons or explosives. Thus, without an assessment of the vulnerabilities of checkpoint technologies, it is unclear whether the AIT or other technologies would have been able to detect the weapon Mr. Abdulmutallab used in his attempted attack. TSA is in the process of developing a risk assessment for the airport checkpoints, but the agency has not yet completed this effort or clarified the extent to which this effort addresses any specific vulnerabilities in checkpoint technology. TSA officials stated that to identify vulnerabilities at airport checkpoints, the agency analyzes information such as the results from its covert testing program. TSA conducts national and local covert tests, whereby individuals attempt to enter the secure area of an airport through the passenger checkpoint with prohibited items in their carry-on bags or hidden on their persons. However, TSA's covert testing programs do not systematically test passenger and baggage screening technologies nationwide to ensure that they identify the threat objects and materials the technologies are designed to detect, nor do the covert testing programs identify vulnerabilities related to these technologies. We reported in August 2008 that while TSA's local covert testing program attempts to identify test failures that may be caused by screening equipment not working properly or caused by screeners and the screening procedures they follow, the agency's national testing program does not attribute a specific cause of a test failure. We recommended, among other things, that TSA require the documentation of specific causes of all national covert testing failures, including documenting failures related to equipment, in the covert testing database to help TSA better identify areas for improvement. TSA concurred with this recommendation and stated that the agency will expand the covert testing database to document test failures related to screening equipment. In our 2009 report, we also recommended that the Assistant Secretary for TSA, among other actions, conduct a complete risk assessment--including threat, vulnerability, and consequence assessment--for the passenger screening program and incorporate the results into TSA's program strategy, as appropriate. TSA and DHS concurred with our recommendation, but have not completed these risk assessments or provided documentation to show how they have addressed the concerns raised in our 2009 report regarding the susceptibility of the technology to terrorist tactics. Mr. Chairman, this concludes our statement for the record. For additional information on this statement, please contact Eileen Larence at (202) 512-6510 or [email protected] or Stephen Lord at (202) 512-4379 or [email protected]. In addition to the contacts named above, Kathryn Bernet, Carissa Bryant, Frances Cook, Joe Dewechter, Eric Erdman, Richard Hung, Anne Laffoon, Linda Miller, Victoria Miller, and Michelle Woods made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The December 25, 2009, attempted bombing of flight 253 raised questions about the federal government's ability to protect the homeland and secure the commercial aviation system. This statement focuses on the government's efforts to use the terrorist watchlist to screen individuals and determine if they pose a threat, and how failures in this process contributed to the December 25 attempted attack. This statement also addresses the Transportation Security Administration's (TSA) planned deployment of technologies for enhanced explosive detection and the challenges associated with this deployment. GAO's comments are based on products issued from September 2006 through October 2009 and selected updates in January 2010. For these updates, GAO reviewed government reports related to the December 25 attempted attack and obtained information from the Department of Homeland Security (DHS) and TSA on use of the watchlist and new technologies for screening airline passengers. The intelligence community uses standards of reasonableness to evaluate individuals for nomination to the consolidated terrorist watchlist. In making these determinations, agencies are to consider information from all available sources. However, for the December 25 subject, the intelligence community did not effectively complete these steps and link available information to the subject before the incident. Therefore, agencies did not nominate the individual to the watchlist or any of the subset lists used during agency screening, such as the "No Fly" list. Weighing and responding to the potential impacts that changes to the nomination criteria would have on the traveling public will be an important consideration in determining what changes may be needed. Also, screening agencies stated that they do not check against all records in the watchlist, partly because screening against certain records may not be needed to support a respective agency's mission or may not be possible because of the requirements of computer programs used to check individuals against watchlist records. In October 2007, GAO reported that not checking against all records may pose a security risk and recommended that DHS and the FBI assess potential vulnerabilities, but they have not completed these assessments. TSA is implementing an advanced airline passenger prescreening program--known as Secure Flight--that could potentially result in the federal government checking passengers against the entire watchlist under certain security conditions. Further, the government lacks an up-to-date strategy and implementation plan--supported by a clearly defined leadership or governance structure--which are needed to enhance the effectiveness of terrorist-related screening and ensure accountability. In the 2007 report, GAO recommended that the Homeland Security Council ensure that a governance structure exists that has the requisite authority over the watchlist process. The council did not comment on this recommendation. As GAO reported in October 2009, since TSA's creation, 10 passenger screening technologies have been in various phases of research, development, procurement, and deployment, including the Advanced Imaging Technology (AIT)--formerly known as the Whole Body Imager. TSA expects to have installed almost 200 AITs in airports by the end of calendar year 2010 and plans to install a total of 878 units by the end of fiscal year 2014. In October 2009, GAO reported that TSA had not yet conducted an assessment of the technology's vulnerabilities to determine the extent to which a terrorist could employ tactics that would evade detection by the AIT. Thus, it is unclear whether the AIT or other technologies would have detected the weapon used in the December 25 attempted attack. GAO's report also noted the problems TSA experienced in deploying another checkpoint technology that had not been tested in the operational environment. Since GAO's October report, TSA stated that it has completed the testing as of the end of 2009. We are currently verifying that all functional requirements of the AIT were tested in an operational environment. Completing these steps should better position TSA to ensure that its costly deployment of AIT machines will enhance passenger checkpoint security.

Foreign science students and scholars generally begin the visa process by scheduling a visa interview. On the day of the appointment, a consular officer reviews the application, checks the applicant's name in the Consular Lookout and Support System (CLASS), takes the applicant's digital fingerprints and photograph, and interviews the applicant. Based on the interview and a review of pertinent documents, the consular officer determines if the applicant is eligible for nonimmigrant status under the 1952 Immigration and Nationality Act (INA). If the consular officer determines that the applicant is eligible to receive a visa, the applicant is notified right away and he or she usually receives the visa within 24 hours. In some cases, the consular officer decides that the applicant will need a Security Advisory Opinion (SAO), a response from Washington on whether to issue a visa to the applicant. SAOs are required for a number of reasons, including concerns that a visa applicant may engage in illegal transfer of sensitive technology. An SAO based on sensitive technology transfer concerns is known as Visas Mantis and, according to State officials, is the most common type of SAO applied to science applicants. It is also the most common type of SAO sent from the posts we visited in China, as well as in Kiev, Ukraine. The Visas Mantis process is designed to further four important national security objectives: prevent the proliferation of weapons of mass destruction and their restrain the development of destabilizing conventional military capabilities in certain regions of the world; prevent the transfer of arms and sensitive dual-use items to terrorists and states that sponsor terrorism; and maintain U.S. advantages in certain militarily critical technologies. The Visas Mantis process has several steps and involves multiple U.S. agencies (see fig. 1). In deciding if a Visas Mantis check is needed, the consular officer determines whether the applicant's background or proposed activity in the United States could involve exposure to technologies on the Technology Alert List (TAL). The list, published by the State Department in coordination with the interagency community and based on U.S. export control laws, includes science and technology-related fields where, if knowledge gained from research or work in these fields were used against the United States, it could potentially be harmful. If a Visas Mantis is needed, the consular officer generally informs the applicant that his or her visa is being temporarily refused under Section 221(g) of the INA, pending further administrative processing. After a consular officer decides that a Visas Mantis is necessary for an applicant, several steps are taken to complete the process. The officer or a Foreign Service National drafts a Visas Mantis SAO request, which contains information from the applicant's application package and interview. The case is then generally reviewed and approved by a consular section chief or other consular official at post before it is transmitted both electronically and through State's traditional cabling system. Once the request is sent, the State Department's Bureau of Nonproliferation and other agencies review the information in the cable and respond within 10 working days to State's Bureau of Consular Affairs. Several agencies, such as the Departments of Commerce and Energy, receive Mantis cases but do not routinely respond to Consular Affairs. State's Bureau of Consular Affairs receives all responses pertaining to an applicant, summarizes them, and prepares a security advisory opinion. This SAO is then transmitted to the post electronically indicating that State does or does not have an objection to issuing the visa, or that more information is needed. A consular official at post reviews the SAO and, based on the information from Washington, decides whether to deny or issue the visa to the applicant. The officer then notifies the applicant that the visa has been denied or issued, or that more information is needed. Last year, consular officers submitted roughly 20,000 Mantis cases. According to consular officials, the visa is approved in the vast majority of cases. Data provided show that less than 2 percent of all Mantis requests result in visa denial. However, even when the visa is issued, the information provided by the consular posts on certain visa applicants is useful to various U.S. government agencies in guarding against illegal technology transfer. According to State, the Visas Mantis program provides State and other interested agencies with an effective mechanism to screen out those individuals who seek to evade or violate laws governing the export of goods, technology, or sensitive information. This screening, in turn, addresses significant issues of national security. Mantis processing times and the number of cases pending more than 60 days have declined significantly. In February 2004, we reported that the average length of time it took to process Mantis checks in Washington and for State to notify posts was 67 days for Mantis cases initiated from April-- June 2003. State reported that the average Mantis processing time in October 2003 was 75 days. However, by November 2004, the processing and notification time for Mantis cases submitted was only about 15 days. Figure 2 demonstrates how the average Mantis processing time for cases submitted by all consular posts has declined since October 2003. State Department data also show significant improvement in the number of Mantis cases pending more than 60 days. In February 2004, we reported that 410 Visas Mantis cases submitted by seven posts in China, India, and Russia had been pending more than 60 days. However, recent data provided by the State Department show that, as of October 2004, only 63 cases (or 9 percent of all pending Mantis cases) had been pending for more than 2 months. Figure 3 shows a breakdown of all pending Mantis cases, sorted by the length of time they have been pending. Consular officials at the posts we visited confirmed that they were receiving faster responses from Washington and that the number of Mantis cases pending more than 60 days had declined. In response to our February 2004 report, State, DHS, and the FBI took several steps to achieve this reduction in Mantis processing times. State submitted a Visas Mantis action plan to DHS in May 2004. Although this plan remained a draft and was not fully implemented, State and other agencies acted on many of the steps called for in the plan and undertook other efforts to address difficulties that students and scholars face in obtaining visas. These actions included establishing a stand-alone Mantis team; providing additional guidance to consular officers; creating an electronic tracking system for Mantis cases; clarifying the roles and responsibilities of agencies involved in the Mantis process; reiterating a policy to give students and scholars priority interviews; and extending the validity period for Mantis clearances. These actions contributed to a decline in overall Mantis processing times. Despite these improvements, some issues remain that, if resolved, could further refine the Mantis process. Consular officers in key Mantis posts continue to have questions about how to implement the Mantis program. Several agencies that participate in the Mantis process are not fully connected electronically to State's tracking system. In addition, the U.S. visa reciprocity schedule with China (which accounts for more than half of all Mantis cases) limits students and scholars to 6-month, two-entry visas. In order to facilitate travel, State Department officials proposed to extend visa validities for students and scholars on a reciprocal basis. However, the Chinese government did not agree to do so. Table 1 outlines the actions taken to improve Visas Mantis and the outstanding issues that need to be addressed. On February 25, 2004, the Assistant Secretary of State for Visa Services testified before the House Science Committee that the agency had taken steps to increase efficiency in the Visas Mantis process. These steps included creating a stand-alone Mantis team composed of five full-time employees dedicated to processing only Mantis cases. A key State official told us that he believed this action contributed significantly to the decline in Mantis processing times. The Assistant Secretary of State also testified that the agency had established procedures for expediting individual Mantis cases, when appropriate. These procedures involved faxing requests for expedition to the appropriate clearing agencies. Again, a key State official told us that closer cooperation with other agencies had led to faster Mantis processing times. In February 2004, we reported that consular staff at posts we visited said they were unsure whether they were contributing to lengthy waits because they lacked clear guidance on when to apply Visas Mantis checks and did not receive feedback on whether they were providing enough information in their Visas Mantis requests. As a result, State undertook a number of initiatives to provide guidance and feedback to the consular officers responsible for adjudicating cases that require Mantis checks. In 2004, the State Department: Added a special presentation on Visas Mantis to the nonimmigrant visa portion of the Basic Consular Training course. Funded a trip by Nonproliferation (NP) and Consular Affairs (CA) officials to a regional consular conference in China to make presentations and hold discussions with consular officers on specific Mantis issues. Organized a series of videoteleconferences with posts that submit large numbers of Visas Mantis SAO requests to provide direct feedback to embassy and consular officers on the quality of their Visas Mantis requests. Began issuing quarterly reports to the field about Visas Mantis policy and procedural issues to "help consular officers understand the Visa Mantis program better, provide guidance on what cases should be submitted as Visas Mantis SAO requests and what information should be included in requests, and to give feedback on the quality of those requests." The first quarterly report was issued in March 2004, followed by two more in July and October. Arranged one-on-one meetings with the CA and NP offices for new junior officers assigned to posts with high Mantis volumes. Provided feedback to individual consular officers on the Mantis SAOs they have submitted. This initiative is designed both to recognize consular officers who are submitting well-documented requests that correctly target applicants of concern and to guide officers on what kind of information should be included in requests, depending on the type of visit the applicant plans to make. The direct feedback program also allows State to guide officers as to whether they are submitting SAO requests on the correct applicants. Established a classified webpage through the State Department's intranet for consular officers to gain access to country-specific and other useful information related to the Mantis program. For example, it identifies websites that officials in NP use when determining how to respond to a Mantis case. Officers at the posts we visited stated that some of these steps were extremely useful, especially those initiatives that allowed for direct interaction with officials from Consular Affairs and Nonproliferation. For example, a junior officer in Guangzhou who had attended the new Mantis presentation in consular training and had held a one-on-one meeting with Consular Affairs stated that these initiatives were useful for understanding how the SAO process works and why it is necessary. Another junior officer in Shanghai stated that a videoteleconference his post held with NP was invaluable for addressing his questions about the Visas Mantis program. Consular officials in China who met with representatives from NP and CA at the consular conference in February 2004 said that they found the opportunity helpful in addressing some of their Mantis-related questions. State developed and implemented an electronic system to track Mantis cases. Beginning in early 2003, State invested about $1 million to upgrade its Consular Consolidated Database to allow for electronic processing and tracking of all SAOs, including Visas Mantis requests, and to eliminate use of its traditional cabling system. This upgrade, called the "SAO Improvement Project" (SAO IP), resulted in a computer-based system that allows posts to send Mantis requests electronically. Previously, consular officers relied solely on the cabling system to transmit Mantis cases to Consular Affairs. As we found in our February 2004 report, this system resulted in Mantis cases getting lost due to cable formatting errors and duplicate cases being rejected by the FBI database. By attaching a unique identifier to each Mantis case, the SAO IP ensures that cases can be easily tracked. As an added measure, a block is built into the system that prevents consular officers from resubmitting Mantis requests on the same visa application. The SAO IP allows the State Department to more easily produce and track important statistics. For example, it enables State to follow average Mantis processing times, the number of Mantis cases submitted by each post, and the amount of time each step in the Mantis process is taking. Officials at posts we visited told us that they like being able to track individual cases as they go through the interagency process in Washington. In both Moscow and Kiev, for example, the SAO IP institutionalizes and expands upon tracking efforts that posts had begun on their own. Officials in Beijing told us that when they receive a public inquiry on a pending Mantis case, they can use the tracking system to determine the status of the case. In July 2004, the FBI, State, and DHS reached an agreement that fundamentally changed the FBI's role in the Visas Mantis process. Officials from these agencies had determined that the FBI could fulfill its law enforcement role in the Mantis process without routinely clearing Mantis cases. Under the new "no objections policy," the State Department does not have to wait for an FBI response before processing Mantis cases, but the FBI continues to receive information on visa applicants subject to Mantis checks. Prior to this change, State's policy was to wait for a response from the FBI before proceeding with each Visas Mantis case. If the FBI requested that State "put a hold" on an individual Mantis case, State could not provide a response to post on the case until the hold was removed. This policy resulted in a backlog of almost 1,000 cases and contributed to lengthy wait times for visa applicants. As we reported in February 2004, it took the FBI an average of about 29 days to complete clearances on Mantis cases. In fact, FBI clearance often took longer than any other step in the Mantis process. Once cases had been cleared by the FBI, it could take another 6 days before State was informed. Some of the Mantis cases in the random sample we reviewed took more than 100 days to be processed at the FBI. The FBI's new role allows State to process Mantis cases more easily. As the Bureau of Consular Affairs reported to consular posts in October 2004, "the change in the FBI's role has made it easier for us to respond to most Mantis SAO requests more expeditiously." The new agreement also allowed State to clear about 1,000 Mantis cases that the FBI had maintained on hold, many of them for a "very long time," according to State officials. Consular officers we spoke to in China, Russia, and Ukraine confirmed that they were beginning to receive clearances on Mantis cases that had been pending for long periods of time. In November 2004, the remaining agencies responsible for clearing Mantis cases agreed to respond to the Bureau of Consular Affairs within 10 working days. Before this agreement, the agencies had 15 working days to respond to State. As a result, the total Mantis processing time could not be lower than about 20 calendar days (to account for weekends). According to Consular Affairs, under the new rule, State should be able to achieve total Mantis processing times of about 15 to 17 calendar days. In July 2004, the Secretary of State reminded posts via cable that they should give priority scheduling to persons applying for F, J, and M visas. As explained in the cable, students and exchange visitors are often subject to deadlines, so posts must have well-publicized and transparent procedures in place for obtaining priority appointments for them. Data show that this policy is critical for ensuring that students and scholars obtain their visas in time to meet their deadlines. For example, between January and September 2004, non-student, nonimmigrant visa applicants applying in Shanghai could expect to wait between 1 and 2 months to obtain an interview. Data provided by the State Department also point to long interview wait times for non-student or scholar visa applicants at other posts. As of October 7, 2004 (when visa demand has usually declined from summer levels), the nonimmigrant visa interview wait time was 32 days in Beijing, 49 days in Guangzhou, and 34 days in Kiev. Post-specific data show that interview wait times for students are much shorter. For example, on June 15, 2004 (when visa demand is typically high), students and scholars in Shanghai could get an interview within 13 days, while other nonimmigrant visa applicants had to wait 56 days. Figure 4 illustrates that, in June 2004, a peak visa application period, non-student visa applicants could wait as long as 87 days to receive visas, while student applicants could receive visas in as few as 44 days. On February 11, 2005, State issued a cable to consular posts establishing new maximum validities for Mantis clearances, thereby allowing students and others to reapply for visas without undergoing frequent Mantis checks. Previously, Mantis clearances were valid for 1 year. Under that rule, if an applicant reapplied for a visa more than 1 year after the processing of the original Mantis check, he or she would have to undergo another Mantis check before receiving the new visa. Organizations representing the international scientific community argued that this validity period was too short. For example, foreign students attending 4-year college programs had to renew their Mantis clearances each year. Under the new validity periods, students can receive Mantis clearances valid for the length of the approved academic program up to 4 years, and temporary workers, exchange visitors, and intracompany transferees can receive clearances for the duration of an approved activity for up to 2 years. State estimates that this change will allow the agency to cut in half the total number of Mantis cases processed each year. The new validity periods are the result of negotiations between State, DHS, and the FBI. Although State and DHS proposed extending Mantis clearances in the summer of 2004, the FBI argued that an extension in Mantis clearances would significantly reduce its capability to track and investigate individuals subject to the Visas Mantis program. The FBI informed us that without the same frequency of automatic Mantis notifications, it would have far less knowledge of when these individuals enter the country, where they go, and what they are supposed to do while here. As a result, the FBI made its agreement to State's and DHS's proposal conditional on receiving access to the US-VISIT system and the Student and Exchange Visitor Information System (SEVIS). US-VISIT is housed in DHS and is a governmentwide program for collecting, maintaining, and sharing information on certain foreign nationals who enter and exit the United States. SEVIS is a system that maintains information on international students and exchange visitors and their dependents in the United States. In February 2005, the FBI and DHS reached agreement on the terms of the FBI's access to these two systems, allowing the proposed extension of Mantis clearances to take effect. China and Russia account for roughly 76 percent of all Mantis cases. However, we found that some consular officers at these posts remain confused about how to apply the Mantis program. For example, Beijing consular officers, some of them new to the post, consistently told us that they needed more clarity and guidance regarding how to use the Technology Alert List (TAL). According to a key consular official in Beijing, because these officers generally do not have scientific or technical backgrounds, they often do not understand what entries on the TAL mean or whether the visa applicant has advanced knowledge about the subject he or she plans to study in the United States. They are also confused about how to apply vague, seemingly benign categories. For example, officers in Beijing did not know whether to continue submitting Mantis requests for all individuals that fall under the category of "Communications - wireless systems, advanced," even if the visa applicant works for a foreign multinational corporation that is not a Chinese government-owned telecom enterprise. Few of the consular officers we spoke with in China, Russia, or Ukraine were familiar with the quarterly reports issued by Consular Affairs on Mantis issues. The only officer aware of the classified webpage maintained by the Consular Affairs Bureau told us that he did not find it useful because it had very little information on it and because it was hard for him to access the classified computer system, which is housed in a separate building far from the consular section. We found that consular officers at the consular posts we visited did not have regular opportunities to interact directly with officials from the Nonproliferation Bureau or the Consular Affairs Bureau knowledgeable about the Mantis program. For example, representatives from State's Nonproliferation Bureau and Consular Affairs Bureau have visited just one consular conference--the February 2004 conference in China. Although new consular officers are given the option to meet with NP and CA officials before traveling to post, State does not require these one-on-one meetings for officers assigned to key Mantis posts. Although China accounts for more than half of Mantis requests submitted, only one of the country's six consular posts has held a videoteleconference. Kiev requested a videoteleconference in early 2004, but had been unable to schedule one, as of December. Finally, in Beijing, only one of the officers who had attended the consular conference in February was still at post. Several law enforcement, intelligence and non-intelligence agencies that receive Mantis cases, including the Departments of Commerce and Treasury, are not fully connected to State's electronic tracking system. This system, in addition to allowing State to track individual cases, was designed to eliminate the use of cables for the transmission of SAO cases because, according to State, they were "the source of garbled information and other errors that resulted in lost or delayed cases that required human intervention." For example, as we found in our February 2004 report, 700 Mantis cables that were sent from Beijing in fall 2003 did not reach the FBI. It took Consular Affairs about a month to identify that there was a problem and to provide the FBI with the cases. However, since several of the agencies that receive Mantis cases are not yet fully connected electronically to the system they continue to receive Mantis cases through State's traditional cabling system. For the time being, consular officers send Mantis cases both electronically and by cable. Those agencies that are responsible for routinely clearing Mantis cases provide responses to State on compact discs that must be hand-carried between the agencies. As we found previously, this use of cables and couriers can lead to unnecessary delays in the process. State officials informed us that they are working to establish full connectivity with other agencies. However, State's goals for fully connecting certain agencies to the system have not been met. Further, State has not set milestones for connecting the remaining agencies to the system. In July 2004, State's Assistant Secretary for Congressional Relations wrote in a letter to the House Science Committee and other House and Senate committees that he expected the FBI to begin relying on the network on a regular basis by the end of that month. State and the FBI also signed a memorandum of understanding in July outlining the terms of the FBI's electronic connectivity to the system. However, it was not until December 2004 that the FBI had developed the ability to gain access to State's electronic tracking system to test the connection and discontinue using the cabling system. Although the FBI no longer actively clears Mantis cases, all agencies and bureaus that receive Mantis cases, regardless of whether they routinely clear cases, must be connected electronically to the system before use of the cabling system can be eliminated. State's goal was to establish connectivity with another intelligence agency responsible for clearing Mantis cases by the end of 2004, but an agency official told us that a deadline of February 2005 was more realistic. State has not set milestones for connecting the remaining agencies that receive Mantis cases to the tracking system. A key agency official told us that providing full electronic connectivity to all agencies that receive Mantis cases will be a gradual process. China has one of the strictest visa reciprocity schedules for students and scholars. Under the United States' reciprocity agreement with China, visas for F-1 and J-1 visa holders are only valid for up to 6 months, with two entries into the United States allowed. According to a key State official, the agency's instructions to consular officers are to give single-entry, 3- month visas for applicants who undergo Mantis checks. This reciprocity schedule is one of the primary concerns of the international scientific community. Under the reciprocity schedule, if a Chinese citizen in the United States on an F or J visa leaves the United States, he or she will have to reapply for a visa. In 2004, State Department officials entered negotiations with the Chinese government to revise the visa reciprocity schedule for business travelers, tourists, and students. However, in December, State officials informed us that, while the Chinese government agreed to extend visa validities for business travelers and tourists, it did not agree to do so for students and scholars. While the new agreement with the Chinese government may address some of the concerns that the business community and tourism industry hold about travel to the United States, students and scholars will still need to reapply for visas frequently. In 2004, State, DHS, and the FBI collaborated successfully to reduce Mantis processing times. However, opportunities remain to further refine the Visas Mantis program and facilitate legitimate travel to the United States. As we reported in 2004, the use of the cabling system to transmit Mantis cases can lead to unnecessary delays in the process. The State Department has also noted that the cabling system is the source of garbled information and other errors. However, agencies continue to receive cases via cable because they are not yet fully connected electronically to State's computer database. State has not established milestones for connecting these agencies to the electronic tracking system. Additionally, because consular officers have only a few minutes to determine whether a visa applicant who appears at their interview window needs to undergo a Mantis check, it is critical that they fully understand the purpose of the Mantis program. Our work suggests that consular officers learn best through direct interaction with those agency officials responsible for implementing the Mantis program in Washington. However, because consular officers at key Mantis posts do not routinely have opportunities for such interaction, there is a risk that they may submit Mantis cases on applicants who do not need them or fail to submit cases when appropriate. Further, officers may fail to include information in their Mantis requests that is most useful to agencies in Washington. In order to further streamline the Visas Mantis process, we recommend that the Secretary of State, in coordination with the Secretary of Homeland Security, take the following two actions. In order to eliminate use of the cabling system in the Mantis process, establish milestones for fully connecting all necessary U.S. agencies and bureaus to the computer system used to track and process Mantis cases. Provide more opportunities for consular officers at key Mantis consular posts to receive guidance and feedback on the Visas Mantis program through direct interaction with agency officials knowledgeable about the program. These opportunities could include, among other initiatives, mandatory one-on-one meetings with officials from the Bureaus of Consular Affairs and Nonproliferation for new consular officers before they travel to post; additional visits by State officials to consular conferences; and more frequent videoteleconferences with posts that submit large numbers of Mantis requests. We provided a draft of this report to the Departments of State, Homeland Security, and Justice for their comments. State, DHS, and Justice provided written comments on the draft (see appendixes II, III, and IV, respectively). State commented that it had already made considerable progress with regard to the report's recommendations and outlined the actions it had taken to do so. For example, State has committed to sending representatives from its Consular Affairs and Nonproliferation Bureaus to India, China, and Russia to engage in on-site discussions of Mantis issues with consular officers. In addition, State is in the process of negotiating and signing memoranda of understanding with five U.S. agencies to share Mantis data electronically. DHS expressed appreciation for our work to identify actions to improve the Visas Mantis process and stated that it will pursue completion of GAO's recommendations. Justice responded to a recommendation included in the draft report that directed the Secretary of Homeland Security and the Attorney General to set a formal timeframe for completing negotiations on FBI access to US- VISIT and SEVIS. Because the two agencies reached agreement prior to publication of the final draft, the recommendation is not included in this report. The Department of Justice also provided technical comments, which we have incorporated where appropriate. We are sending copies of this report to other interested Members of Congress. We are also sending copies to the Secretary of State and the Secretary of Homeland Security. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128 or [email protected]. Staff contacts and other key contributors to this report are listed in Appendix V. The scope of our work covered improvements to and implementation of the Visas Mantis program between February 2004 and February 2005. To determine how long it takes to process Visas Mantis checks, we obtained and analyzed data from the State Department's electronic tracking system for Security Advisory Opinions (SAOs). Specifically, we reviewed "SAO Processing Statistics" reports for all Mantis requests submitted to the State Department between April 1, 2004, and August 31, 2004, as well as other Mantis statistics produced by the State Department. These reports showed the average total processing time (in calendar days) for Mantis cases worldwide. To assess the reliability of State's data on Visas Mantis cases, we (1) interviewed State officials responsible for creating and maintaining the electronic tracking system used for Mantis cases, (2) observed use of the tracking system, and (3) examined data collected through the tracking system. We noted in our report that average Mantis processing times, as calculated through State's tracking system, do not take into account Mantis cases that are still pending. As a result, reported average Mantis processing times can change as cases that have been pending are cleared. State may also calculate average Mantis processing times based on the date on which a consular post initially drafted a Mantis case, rather than the date on which the consular post submitted the final draft to Washington. As a result, total Mantis processing times can seem longer than they really are. Despite these limitations, we determined that the data were sufficiently reliable for the purposes of identifying trends in Mantis processing. To identify and assess actions taken to implement our recommendation to improve the Visas Mantis program, we obtained documentation from key U.S. agencies, primarily the State Department, interviewed officials from these agencies, and observed training classes for new consular officers at the State Department's Foreign Service Institute. We reviewed the Immigration and Nationality Act, the Foreign Affairs Manual, the Bureau of Consular Affairs' quarterly reports on Visas Mantis, and other cables and related documents from that bureau. In Washington, we interviewed officials from the Departments of State, Homeland Security, and Justice. At State, we met with officials from the Bureau of Consular Affairs and the Bureau of Nonproliferation. At the Department of Homeland Security, we met with officials from the Directorate of Border Transportation and Security. At the Department of Justice, we met with officials from the Federal Bureau of Investigation's Name Check Unit. We requested a meeting with Department of Justice and FBI officials to discuss negotiations with DHS regarding access to US-VISIT and SEVIS; they agreed to answer questions in writing. In August 2004, we observed classes at the Foreign Service Institute for newly assigned consular officers. As part of that training, we attended the Visas Mantis briefing that had been added to the curriculum for new officers in response to our recommendation in the February 2004 report. To identify whether there were any remaining issues that affect the total amount of time it takes for science students and scholars to obtain visas, we analyzed data on interview wait times, spoke with representatives of various educational organizations, and observed a roundtable discussion on Mantis issues sponsored by the Senate Foreign Relations Committee. We obtained data on interview wait times at consular posts worldwide from State's Bureau of Consular Affairs. We also obtained information on interview wait times from the consular posts in China and Russia. We met with representatives from the National Academies of Science, NAFSA: Association of International Educators, and the Alliance for International Education. The roundtable discussion we attended involved officials from the Departments of State and Homeland Security, as well as representatives from the International Institute for Education; the Association of American Universities; the National Institutes of Health; the National Academies of Science; NAFSA: Association of International Educators; and others. Representatives from various colleges and universities were also in attendance. We conducted fieldwork at five visa-issuing posts in three countries-- China, Russia, and Ukraine. We chose these countries because they are leading places of origin for international science students and scholars visiting the United States and because they account for 78 percent of all Mantis cases. During our visits to these posts, we observed visa operations, reviewed selected Visas Mantis data, and interviewed consular staff about the Visas Mantis program. In China, we met with consular officers at the U.S. Embassy in Beijing and the consulates in Shanghai and Guangzhou. We also met with the Deputy Chief of Mission, as well as officials from the Office of the Defense Attache; the Office of Environment, Science, Technology, and Health; the Office of Public Diplomacy; and the Foreign Commercial Service. In Beijing, we observed a meeting of the American Chambers of Commerce in China, where they discussed their experience with the Visas Mantis program. In both Shanghai and Guangzhou, we met with the Consul General. In Russia, we met with consular officers at the U.S. Embassy in Moscow. We met with the Consul General and his Deputy, as well as officials from the Department of Energy; the Office of Environment, Science, Technology, and Health; and Public Affairs. In Ukraine, we met with consular officers at the U.S. Embassy in Kiev. We met with the Deputy Chief of Mission, the Consul General and her Deputy, as well as officials from the Department of Energy; the Office of Public Affairs; and the Office of the Defense Attache. Furthermore, in both Russia and Ukraine we held meetings with various organizations that sponsor summer work/travel exchanges, and they expressed their opinions and observations about the effects of U.S. visa policy on their programs. We conducted our work from July 2004 through February 2005 in accordance with generally accepted government auditing standards. The following are GAO's comments on the Department of Homeland Security's letter dated January 28, 2005. 1. We have revised the report to reflect the fact that the FBI requested access to both US-VISIT and the Student and Exchange Visitor Information System and that US-VISIT does not contain SEVIS. The following are GAO's comments on the Department of Justice's letter dated February 7, 2005. 1. Because the Departments of Homeland Security and Justice reached agreement on the FBI's access to US-VISIT and SEVIS prior to publication of the final draft, we did not include the recommendation in this report. The validity period for certain Visas Mantis clearances was extended on February 11, 2005. In addition to those named above, Elizabeth Singer, Carmen Donohue, Maria Oliver, Judith Williams, Mary Moutsos, Joe Carney, Martin de Alteriis, and Etana Finkler made key contributions to this report.

In February 2004, GAO reported that improvements were needed in the time taken to adjudicate visas for science students and scholars. Specifically, a primary tool used to screen these applicants for visas (the Visas Mantis program) was operating inefficiently. We found that it took an average of 67 days to process Mantis checks, and many cases were pending for 60 days or more. GAO also found that the way in which information was shared among agencies prevented cases from being resolved expeditiously. Finally, consular officers lacked sufficient program guidance. This report discusses the time to process Mantis checks and assesses actions taken and timeframes for improving the Mantis program. Mantis processing times have declined significantly. In November 2004, the average time to process a Mantis check was about 15 days, far lower than the average of 67 days we reported previously. The number of Mantis cases pending more than 60 days has also dropped significantly. Although an action plan that the State Department (State) drafted was not fully implemented, State and other agencies took several actions in response to our recommendations to improve Visas Mantis and to facilitate travel by foreign students and scholars. These actions included (1) adding staff to process Mantis cases, (2) providing additional guidance to consular officers, (3) developing an electronic tracking system, (4) clarifying roles and responsibilities of agencies involved in the Mantis program, (5) reiterating State's policy of giving students and scholars priority interviews, and (6) extending the validity of Mantis clearances. Nonetheless, some issues remain unresolved. Consular officers at posts we visited continue to need guidance on the Mantis program, particularly through direct interaction with State officials knowledgeable about the program. Several agencies that receive Mantis cases are not fully connected to State's electronic tracking system. This can lead to unnecessary delays in the process. Finally, students and scholars from China are limited to 6-month, two-entry visas. The Chinese government has rejected a proposal by the United States to extend visa validities, on a reciprocal basis, for students and scholars.

The lowest wage that a worker can earn is generally the federal minimum wage. The Fair Labor Standards Act of 1938 first established a minimum wage of 25 cents per hour, which has been raised numerous times eventually reaching its current level of $7.25 per hour. Since 1980 the federal government has increased the federal minimum wage various times; however, the actual purchase power after adjusting for inflation (i.e., the real value) of the minimum wage has trended downward (see fig. 1). Many states have enacted their own minimum wage laws, and under the provisions of the Fair Labor Standards Act of 1938, an individual is generally covered by the higher of the state or federal minimum-wage rates. As of January 1, 2017, according to the Department of Labor, 29 states and the District of Columbia had minimum wage rates above the federal minimum rate, and 2 states had minimum wage rates below the federal minimum rate. State minimum wages ranged from $5.15 per hour in Georgia and Wyoming to $11.50 per hour in the District of Columbia (see fig. 2). According to BLS data, hourly workers earning at or below the federal minimum wage of $7.25 per hour made up 1.6 percent of total wage and salary workers.in 2016. The number of minimum wage workers since 1995 ranged from a low of 1.7 million in 2006 to a high of 4.8 million in 1997 (see fig. 3). According to BLS, more than one-half of hourly workers earning the federal minimum wage were employed part-time in 2016, in contrast to about one-quarter of all hourly workers. By working part-time--defined by BLS as 1 to 34 hours per week--these workers are less likely to receive health insurance and other benefits from their employers. Research has also shown that many contingent workers, including some part-time workers, experience fluctuations in their earnings and employment status, making them more likely to seek assistance from federally funded social safety net programs, if eligible. As we previously reported, the official poverty measure used to provide information on how many people are "in poverty" in the United States was developed in the 1960s, based on the cost of food at that time. Each year Census updates its poverty thresholds--the income thresholds by which households are considered to be in poverty depending on family size. In 2016, the poverty thresholds ranged from $11,511 to $53,413, depending on family size and the age of the head of household (see table 1). The Department of Health and Human Services (HHS) uses these poverty thresholds to update its poverty guidelines each year. These guidelines are used as an eligibility criterion of a number of federal programs, including certain low-income programs. We also previously reported that the official poverty measure had not changed substantially since it was first developed, and concerns about its inadequacies had resulted in efforts to develop a new measure. For example, poverty threshold (the income level used to determine who is "in poverty" each year) is based on three times the cost of food and does not take into account the cost of other basic necessities, such as shelter and utilities. Additionally, the official poverty measure considers cash income in determining a household's income, but does not include additions to income based on the value of noncash assistance (e.g., food assistance) or reductions based on other necessary living expenses (e.g., medical expenses or taxes paid). A National Academy of Sciences panel on poverty and an interagency technical working group suggested ways that a new poverty measure could address some of these concerns. Based on these suggestions, Census, with support from BLS, developed a new poverty measure--the Supplemental Poverty Measure (SPM)--in 2010. Unlike the official poverty measure, the SPM adds other forms of non- cash benefits, such as tax credits and SNAP benefits, and subtracts expenses, such as federal, state, and local income taxes, when calculating a household's resources. We have previously reported that federally funded social safety net programs generally provide targeted assistance to specific groups within the low-income population, such as people with disabilities and workers with children. In 2015, we identified more than 80 federal programs (including 6 tax expenditures) that provided aid to individuals and families who may earn too little to meet their basic needs, cannot support themselves through work, or are disadvantaged in other ways. According to the Congressional Research Service, five of these programs-- Medicaid, SNAP, TANF, EITC, and ACTC--accounted for $551.2 billion in spending in fiscal year 2015, or two-thirds of total federal spending on low-income assistance programs in that year. Eligibility criteria vary for these five federally funded programs and can include both financial and nonfinancial criteria. As we have previously reported, some programs are administered by states, which may apply their own eligibility criteria. Assistance may be provided to an individual, a family, or household. More recently, we reported that these programs' eligibility criteria varied significantly in terms of the income limits used. In addition, we found that programs differed in the ways they measured applicants' income, the standards and methods used to determine the income limit (i.e., the maximum income an applicant may have and still be eligible for the program), whether this limit is set nationwide or varies by state or locality, and the amount of the income limit itself. We also found that rules for determining the maximum allowable income that an applicant may have a recipient could earn and still be eligible, the amounts themselves, and whether they are set nationwide or vary by state or locality, also varied significantly. For example, in TANF, income limits are determined by states. We found that some states use HHS's poverty guidelines, which are adjusted annually, while others had a limit set in state law, which is not adjusted. In addition to having income tests, we found that some programs limit assets that an eligible individual or family may hold, while others do not. Furthermore, we found that programs may have ongoing requirements that families must satisfy to remain enrolled and receiving assistance. For example, we found that some programs periodically require participants to recertify that their income remains below the income limit. About 40 percent of U.S. workers ages 25 to 64 earned hourly wages of $16 or less (in constant 2016 dollars) over the period 1995 through 2016, according to our analysis of CPS data (see fig. 4). In each of the 6 years we reviewed, an estimated 1 to 5 percent of these workers earned an hourly wage or less of that year's federal minimum wage, about 17 percent earned above federal minimum wage to $12 per hour, and about 18 percent earned above $12 per hour to $16 per hour. The stagnation of low-wage workers in the workforce as depicted in our analysis of CPS data is also consistent with the literature on income inequality. Recent studies have found that while average wages experienced little or no change from 1973 through 2011 (when held in constant 2011 dollars), income inequality increased as a result of income growth among high-wage workers. Low-wage workers, on average, worked fewer hours per week from 1995 through 2016 than similar workers earning higher wages, according to our analysis of CPS data. In each of the years we reviewed, our estimates showed that workers who earned the federal minimum wage or less worked an average of about 30 hours per week, workers earning above the federal minimum wage to $12 per hour worked an average of about 33 hours per week, and those earning $12.01 to $16 per hour worked an average of about 37 hours per week (see fig. 5). One option that a worker has to increase earnings is working multiple jobs. Our analysis of CPS data found that few low-wage workers held multiple jobs and low-wage workers tended to work multiple jobs at the same rate as workers earning higher wages. Specifically, our estimates showed that about 5 percent of low-wage workers in each low-wage category worked multiple jobs, or about the same percent as workers earning more than $16 per hour in each of the years we reviewed. The combination of low wages and limited hours can affect a worker's earnings and potential eligibility for federal social safety net programs. The reported growth of involuntary part-time workers--workers who would prefer to work more hours but are limited by economic conditions such as employers cutting hours or lack of full-time job opportunities--has likely reduced the average hours that low-wage workers can work. According to BLS, the number of these involuntary part-time workers peaked during the Great Recession and has yet to return to pre-recession levels. In 2016, BLS estimated that 5.6 million workers were involuntary part-time workers, of which about 61 percent said they were part-time because of business conditions and 34 percent said they could only find part-time employment. In previous reports, we found that low-wage workers employed on a contingent basis were more likely to earn low wages, less likely to have employer-sponsored benefits, and more likely to rely on social safety net programs. Low-wage workers who provide the sole income for a family may have income that is low enough to qualify them for federally funded social safety net programs. As shown in table 2, a hypothetical low-wage single parent who served as the sole income provider for a family of three would qualify for several programs of the five that we included in our analysis provided any other applicable eligibility requirements were also met. The same five industries consistently employed the majority of low-wage workers from 1995 through 2016--leisure and hospitality, education and health, professional and business services, wholesale and retail trade, and manufacturing. Specifically, in each of the years we reviewed, these five industries employed approximately 70 percent of low-wage workers. Comparatively, these five industries also employed about 62 percent of workers earning more than $16. (See fig. 6). Our estimates showed the highest concentration of low-wage workers to be in the health and education industry with an estimated 22 to 25 percent of workers in each of our wage categories in this industry. Occupational Concentration of Low-Wage Workers The following six occupational categories employed the majority of low-wage workers: Food preparation and serving - fast food workers, cafeteria, and restaurant workers Sales - cashiers, retail salespersons, and sales representatives Office and administrative support - secretaries and administrative assistants, payroll and time-keeping clerks, and mail carriers Building grounds cleaning and maintenance - janitors and building keepers, maids and housekeeping workers, and grounds maintenance workers Personal care and service - hairdressers and barbers, child care workers, and home care aides Transportation and materials moving - bus drivers, taxi drivers, ambulance drivers, and parking lot attendants Low-wage workers were also highly concentrated in six occupational categories in 2016--food preparation and serving, sales, office and administrative support, building and grounds cleaning and maintenance, personal care and service, and transportation and material moving. (See textbox above for more detailed descriptions of these occupational categories). Our estimates showed that half or more of low-wage workers were employed in one of these six occupational categories in 2016 whereas 26 percent of higher-wage workers were employed in these categories (see fig. 7). Although low-wage workers were concentrated in these six occupations, the amount of concentration varied by the amount of wages earned. For example, our estimates showed that workers earning hourly wages of federal minimum wage or below in 2016 were most concentrated in personal care and services, sales, and food service and preparation, with an estimated 11 to 12 percent of these workers participating in each occupation. In contrast, our estimates showed that workers earning $12.01 to $16 per hour were concentrated in office and administrative support occupations, with an estimated 18 percent of these workers participating in this occupation. While low-wage workers had lower levels of education, on average, than workers earning higher wages, increases in their educational attainment from 1995 through 2016 generally did not lead to higher wages. Specifically, in each year we reviewed, about 68 percent of low-wage workers and about half of higher-wage workers had a high school diploma. However, the proportion of low-wage workers with college degrees also increased during this time. Our estimates showed that the percentage of workers earning $12.01 to $16 per hour with college degrees increased from 16 percent in 1995 to 22 percent in 2016. A similar trend occurred in the other low-wage categories. For example, the percentage of workers who had at least a high-school diploma yet earned the federal minimum wage or below increased from an estimated 70 percent in 1995 to 80 percent in 2016. Families with a low-wage worker ages 25 to 64 shared several common characteristics, according to our estimates based on CPS data. For example, our estimates showed that the majority of these families were not in poverty, had just one low-wage worker, and derived 80 percent or more of their family income from wages and salaries. In addition, on average, married families had two workers (contributing to a family income that often exceeded the poverty threshold); families with children had two children; and between 5 and 9 percent of families included someone over age 65. The majority of families with a low-wage worker were not in poverty, yet the percentage of families that were in poverty persisted in each of the years we reviewed and in each of the low-wage categories we examined. While higher wages were generally associated with a lower percentage of families in poverty in a given year, poverty levels among families of low-wage workers changed little in the past 2 decades across all three wage categories that we examined. (See fig. 8.) In almost all of the years we reviewed, the presence of a child in a family with a low-wage worker was associated with higher rates of poverty regardless of the worker's wage category or marital status. For example, across all low-wage categories we examined from 1995 through 2016, 4 to 20 percent of married families with children were in poverty compared to 7 percent or fewer of married families without children. However, in 1995 the higher rate of poverty was not statistically different based on children for unmarried households in all of the wage categories. In addition, while poverty was most prevalent among families with a worker earning the federal minimum wage or below, it was most prevalent among single-parent families earning this amount. (See fig. 9.) Our analysis of CPS data found sizeable percentages of families with a low-wage worker who had incomes just above the poverty threshold, potentially limiting their access to certain federal social safety net programs. The estimated percentage of families with incomes placing them just beyond the poverty thresholds remained relatively unchanged across the years we reviewed (see table 3). Families with a low-wage worker may be eligible for and use one or more federal social safety net programs. The largest of these programs is Medicaid, which HHS reported had 69 million individuals enrolled in April 2017. Our estimates based on CPS data found that the percentage of families with a low-wage worker enrolled in Medicaid rose significantly over the past 2 decades, almost tripling for families with a worker earning more than the federal minimum wage between 1995 and 2016 (see fig. 10). In 2016, about 29 percent of families with a worker earning federal minimum wage or below, 31 percent of families with a worker earning above federal minimum wage to $12 per hour, and 21 percent of families with a worker earning $12.01 to $16 per hour were enrolled in Medicaid. This growth in enrollment coincided with a rise in overall Medicaid enrollment (i.e., not just families with a low-wage worker), which according to HHS, doubled during this time frame. Researchers have noted that key factors affecting the growth in Medicaid enrollment in the past decade were the 2008 recession and the expansion of Medicaid in some states under the Patient Protection and Affordable Care Act. Families with a low-wage worker may also be eligible for and use other federal social safety net programs (e.g., TANF, SNAP, EITC, and ACTC). Our estimates showed that 5 percent or less of families with a low-wage worker received TANF cash assistance at least once in the prior calendar year from 1995 through 2016. In previous work, we reported that as of July 2015, TANF income eligibility thresholds for a family of three ranged from $0 to $1,660 per month, depending on the state, with a median income threshold of $817. Given these thresholds, most low-wage workers, including workers earning federal minimum wage or below, would generally earn too much to qualify for TANF cash assistance in most states. In this report, our estimates showed that the percentage of families with a worker earning more than the federal minimum wage receiving SNAP benefits at least once in a calendar year doubled from 1995 to 2016. In 2016, about 16 percent of families with a worker earning federal minimum wage or below, 15 percent of families with a worker earning above federal minimum wage to $12 per hour, and 8 percent of families with a worker earning $12.01 to $16 per hour received SNAP benefits. The U.S. Department of Agriculture (USDA), which administers SNAP, has reported that the overall increase in SNAP enrollment from 1995 to 2014 was influenced by economic conditions, such as higher poverty rates during recessionary periods, and policy changes, such as increases the value of a vehicle that could be excluded when calculating a family's income. Finally, our estimates showed that EITC eligibility generally increased among families with a worker earning above federal minimum wage over this time frame, with an estimated 23 to 35 percent of those families eligible in 2016; whereas eligibility for the ACTC generally remained unchanged among families with a low-wage worker. A low-wage worker's family type also influenced the extent that families used social safety net programs. When comparing program usage across different family types, we generally found that regardless of the low-wage workers' wages, a greater percentage of single-parent families used selected programs than the other family types we examined. For example, among families with a worker earning federal minimum wage or below in 2016, our estimates showed that two-thirds of married families without children and about half of married families with children used none of the aforementioned programs. In contrast, more than half of single-parent families used three or more of the programs (see fig. 11). Agencies that administer the selected social safety net programs indicated that eligible working families participate in these programs at a lower rate than the total eligible population for reasons that are not well known. For example, IRS reported that in 2013, 80 percent of eligible filers--all of whom had earnings--claimed the EITC, with state rates ranging from 72 percent in the District of Columbia to 85 percent in Hawaii. Additionally, USDA estimates show that a significantly smaller percentage of eligible households with a wage earner participated in SNAP than other eligible households--70 percent compared to 83 percent in fiscal year 2014. Although some research has examined the reasons why eligible people choose not to participate in social safety net programs, our literature review found few studies that focused specifically on working families rather than the general eligible population, none of which had findings that were generalizable to the experiences of working families nationwide. Our interviews with state and local officials for the selected social safety net programs, representatives from nonprofit organizations, and researchers helped provide additional context for the experiences of working families. Specifically, the officials we interviewed identified several reasons why families with a low-wage worker may decline to participate in assistance programs for which they are eligible. Assumed ineligibility. Some workers may assume that earning income at a job automatically makes them ineligible for benefits, even if their earnings are low enough to qualify for assistance. A program official in Atlanta told us that eligible families are generally aware of the existence of a program, but assume they have to hit "rock bottom" before they can qualify for assistance. A researcher also told us that families that had exceeded the eligibility threshold in the past may assume they remain ineligible, even if their income has decreased. Lack of time. Some workers may find it difficult to take time off from work to apply for benefits in person at a program office, if required. Some states have implemented online or phone application processes to make programs more accessible to working families. However, as a nonprofit director in Santa Fe cautioned, not all families have Internet access and the proficiency required to complete an application online. Complex program requirements. Some families may find program documentation requirements complex and difficult to fulfill. For example, the state TANF application in one city we reviewed requires applicants to provide information verifying their earned and unearned income, money in the bank, immigration status, identity, vehicle registration, and immunizations of children under 7 years of age. Other program documents state that beneficiaries must also resubmit financial information, along with verification of their children's school attendance, semi-annually or whenever changes occur that would affect their eligibility. Researchers have found that recent changes in the SNAP income documentation requirements, such as requiring less frequent recertification of income and eligibility, increased participation and retention of SNAP benefits. In addition, some states have combined applications for TANF, SNAP, and/or Medicaid into a single form, reducing the amount of paperwork that applicants must submit. Stigma. Some working families may be especially sensitive to the stigma associated with some social safety net programs, because their earnings did not make them as self-sufficient as they hoped. To avoid this stigma, according to several officials we interviewed, eligible working families may choose not to participate in a program if their income is sufficient for them to survive without assistance. For example, a 2007 study of 115 EITC recipients in the Boston area found that respondents who had received TANF benefits desired to leave the program as soon as possible. In contrast, according to a caseworker in San Francisco, while unemployed families face the same stigma, they cannot afford to refuse any benefits for which they qualify. Minimal benefit amounts. SNAP, TANF, EITC, and ACTC have means-tested structures that may reduce benefit levels as recipients' incomes increase. Several officials told us that at some point the benefits may become too small to be worth the effort of obtaining them. For example, a study of low-income customers of a large tax preparation service in two counties in California during the 2007 tax season found that 16 percent of those who had previously applied for SNAP had stopped pursuing the benefits because the "hassle was not worth it." Confusing tax rules. Some families may find the process of claiming the EITC and ACTC on their tax returns to be confusing. For example, a nonprofit director in the District of Columbia told us that applying for these tax credits can be complex, especially the requirements for qualifying children and filing status, and families claiming the credits may need high quality and costly assistance to prepare their taxes. To help mitigate this complexity, IRS encourages individuals who may qualify for the tax credits to visit one of the more than 12,000 free tax help locations across the country, but this task may also interfere with some individuals' working hours. We provided a draft of this report to the Secretary of Labor and the Secretary of Commerce for comment. Each agency provided technical comments, which we incorporated in the report, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Department of Labor, the Department 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 have any questions about this report, please contact Cindy Brown-Barnes at (202) 512-7215 or Oliver Richard at (202) 512- 8424.You may also reach us by e-mail at [email protected] 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 contributed to this report are listed in appendix IV. Our review focused on the following questions: (1) what are the characteristics of the low-wage workforce and how have they changed over time, (2) to what extent are families with low-wage workers in poverty, and (3) to what extent do families with low-wage workers participate in selected social safety net programs and what factors affect their participation. After discussions with agency officials, we identified the Current Population Survey (CPS) as the data source best suited to answer our research questions. The CPS is a national survey designed and administered jointly by the Census Bureau (Census) and the Department of Labor's Bureau of Labor Statistics (BLS) and it contains data on individual earnings, as well as poverty rates of families and individuals. CPS is a key source of official government statistics on employment and unemployment in the United States and is the data source for several BLS and Census reports addressing issues similar to those in our objectives. For example, it is used to produce a BLS report on the characteristics of minimum wage workers and a Census report on the supplemental poverty rate. The CPS is conducted on a monthly basis, but different questions are asked in different months during the year. Respondents are surveyed over two separate 4-month periods. Information on hourly wages and other labor force topics are collected on a monthly basis of a sub-sample of respondents. Information on poverty, program participation and income over the prior calendar year is collected annually in the Annual Social and Economic Supplement (ASEC), conducted in March. In consultation with Census officials, we combined information on hourly wages and poverty and program participation, by linking respondents of the ASEC to the months those respondents answered questions about hourly wages (March, April, May, and June). We used the CPS years 1995, 2000, 2005, 2010, 2015 and 2016. Estimates produced from CPS data are subject to sampling error. For all of our estimates we weighted observations based on the monthly weight and generated standard errors under the assumption of with replacement sampling using state as a stratification variable. To the extent possible, we compared our estimates of values published by Census derived from our weighting procedures and standard errors to reported values for that year and found them to be consistent. In addition to estimates, we generated standard errors or the margin of error for the 95 percent confidence interval, and report them with estimates in figures and tables. Based on our data checks, review of documentation and interviews with agency officials, we found the CPS data to be sufficiently reliable for our purposes. However, our method of estimating variance results in standard errors that are relatively conservative; that is, the 95 percent confidence intervals are wider than those resulting from the use of replicate weights. We relied on the monthly CPS information to obtain information about individual hourly wages to determine whether an individual was a low- wage worker. We relied on estimated hourly wages to determine the wage rate of salaried individuals, though in some cases we used reported hourly wages; to estimate hourly wages we used a method provided by BLS economists. This method included observations of (1) workers who reported an hourly wage and (2) salaried workers who reported weekly wages. We included both types of workers in our sample to obtain a broader spectrum of low-wage workers. This method also takes into account potential overtime hours worked and individuals working multiple jobs. We identified three mutually exclusive categories of low-wage workers earning: 110 percent of the federal minimum wage or below (salaried and hourly). This group consisted of workers that earned 110 percent of the federal minimum wage or below (based on the federal minimum wage in each of the years that we reviewed). Above 110 percent of the federal minimum wage to $12.00. This group consisted of workers that earned above110 percent of the federal minimum wage in that year but not more than $12.00 (in constant 2016 dollars). $12.01 to $16.00. This group consisted of workers that earned between $12.01 and $16.00 (in constant 2016 dollars). To define these groups, we only included workers ages 25 to 64--a definition used in prior GAO work on the low-wage workforce. We used this definition to ensure that our sample included workers who were more likely to be independent, out of school, and less likely to be earning a retirement pension. For the groups described above, we reported the following statistics: occupation, industry, whether an individual worked multiple jobs, education level, and total number of hours worked at all jobs. As stated above, we relied on the ASEC to obtain information about the poverty rate and program participation of families. Family type: The unit of analysis within the CPS data was the "family record." We examined four different family types: (1) married couple families with children; (2) married couple families without children; (3) single-parent families with children; and (4) other families. The "other families" category covers a wide variety of living situations, such as single adults living alone, but does not include married couples or a single-parent living with children. Poverty: We relied on Census' determination within the ASEC survey to determine whether a family was in poverty. We used two different poverty measures. The official poverty measure measures a family's resources against a poverty threshold that varies by the number of supported adults and children. However, it excludes certain types of resources, such as in-kind assistance (such as Supplemental Nutrition Assistance Program benefits). We also used the Supplemental Poverty Measure, which is also provided by Census. The Supplemental Poverty Measure includes some in-kind assistance, but also deducts certain expenses such as child care from family resources. In 2016, Census reported that overall, the national rates of poverty are similar based on the two measures. Program participation: We relied on Census' determination within the ASEC survey to determine whether a family participated in the following federal social safety net programs: EITC, ACTC, Medicaid, SNAP, and TANF cash assistance. Specifically, we measured the use of programs in the following ways: Medicaid enrollment: Anyone in the family enrolled in Medicaid, based on self-report. SNAP participation: The family received SNAP benefits during the prior calendar year, based on self-report. TANF participation: Anyone in the family received TANF cash assistance during the prior calendar year, based on self-report. EITC eligibility: Anyone in the family eligible for EITC receipt during the prior calendar year. Census determines EITC eligibility based on income and family structure. ACTC eligibility: Anyone in the family eligible for ACTC receipt during the prior calendar year. Census determines ACTC eligibility based on income and family structure. An important limitation to our analysis on program participation is that the use of the programs reported by CPS has been noted by researchers to be imprecise. The sources of imprecision are not fully known, and likely depend on the program. In the cases of Medicaid, SNAP, and TANF cash assistance, where benefit receipt is self-reported, CPS data are known to underreport program benefits, perhaps because a stigma is associated with its use. In addition, we reported that the Urban Institute staff found that CPS data captured about 61 percent of TANF cash assistance benefits received and 57 percent of SNAP benefits received in 2012. In the case of EITC and ACTC, Census imputes eligibility for the credits from reported income and other information about the family. According to researchers, in some cases the CPS will overstate usage of the EITC, by imputing the credit to those that do not claim it. In other cases, they will understate usage because they will fail to assign the credit to those that do claim it. However, as noted earlier, we used these data because they were the best available for the analysis we wished to conduct. To examine what is known about the reasons eligible working families do not participate in the five selected federal programs, we conducted a literature review of academic, government, and think tank reports published from 2006 to 2016. We excluded reports that we determined did not have sufficient methodological rigor. To gather examples and current information on factors influencing families' decisions in a variety of settings, we interviewed researchers and industry groups as well as state and local officials at the selected social safety net programs and community nonprofit organizations that work with low-wage working families. We selected organizations from four metropolitan areas: Atlanta, San Francisco, Santa Fe, and Washington, D.C. The metropolitan areas represent a range of local minimum wage levels relative to the federal minimum wage, costs of living, and participation rates in the selected social safety net programs. We interviewed one to two state or local government or nonprofit agencies in each of these locations, but did not cover all five programs in each of the four locations. We conducted a content analysis of the reports identified during our literature review and information gained in our interviews to identify factors that applied specifically to families with a low-wage worker. The information we gathered from the literature and interviews is not generalizable, but is used to provide examples of factors affecting working families who are eligible for, but not receiving, assistance from social safety net programs. Margins of error for 95 percent confidence interval (+/-) Margins of error for 95 percent confidence interval (+/-) Margins of error for 95 percent confidence interval (+/-) Margins of error for 95 percent confidence interval (+/-) The following table presents the estimated total number of families with a worker ages 25 to 64 and the estimated number of these families in poverty. The table provides estimates based on the type of the worker's family type and hourly wage. As discussed in appendix I, to develop these estimates, we merged multiple months of Current Population Survey (CPS) survey data with data from the Annual Social and Economic Supplement (ASEC) survey to CPS to estimate poverty among families with low-wage workers. When we performed this procedure, the match rate between the datasets in each year was at least 90 percent, but varied by year. As a result, the estimates of the populations included in the table below may underestimate the actual number of families in poverty by as much as 10 percent. Because the extent of underestimation varied by year, conclusions based on comparisons of the estimates across years should be avoided. In addition, the margin of error was larger than the estimated number in many cases, which limited what we could report. Specifically, we did not report the number of families with incomes less than 50 percent of the poverty threshold. We did report estimates of the percentage of families with incomes less than 50 percent, by family type. Table 5 provides the estimated numbers for this group, with the margins of error that were not included in the body of the report. In addition to those named above, Kimberley Granger and Benjamin Bolitzer, Assistant Directors; Andrea Dawson and Jonathan S. McMurray, Analysts-in-Charge; Brittni Milam, Michael Naretta, Anna Maria Ortiz, Rhiannon Patterson, and Amanda Pritchard made key contributions to this report. Also contributing to this report were Susan Aschoff, Rachel Frisk, Alexander Galuten, Grant Mallie, Joel Marus, Sheila McCoy, Jean McSween, Mimi Nguyen, Jessica Nierenberg, Michelle Rosenberg, and Almeta Spencer.

According to the Department of Labor, private-sector employers have added millions of jobs to the economy since the end of the most recent recession in 2009; however, many are in low-wage occupations. GAO was asked to examine several characteristics of low-wage workers and their families, including their use of federally funded social safety net programs over time. This report answers the following questions: (1) What are the characteristics of the low-wage workforce and how have they changed over time? (2) To what extent are families with low-wage workers in poverty? and (3) To what extent do families with low-wage workers participate in selected social safety net programs and what factors affect their participation? GAO analyzed CPS data from 1995, 2000, 2005, 2010, 2015, and 2016 on worker characteristics, family poverty, and participation in social safety net programs. GAO defined low-wage workers as those workers ages 25 to 64 earning $16 or less per hour. In addition, GAO interviewed officials with state and local social safety net programs and other experts in four metropolitan areas--Atlanta, San Francisco, Santa Fe, and Washington, D.C.--representing a range of local minimum wage levels relative to the federal minimum wage, costs of living, and participation rates in five selected federally funded social safety net programs. According to GAO's analysis of data in the Census Bureau's Current Population Survey (CPS), on average, low-wage workers worked fewer hours per week, were more highly concentrated in a few industries and occupations, and had lower educational attainment than workers earning hourly wages above $16 in each year GAO reviewed--1995, 2000, 2005, 2010, 2015 and 2016. Their percentage of the U.S. workforce also stayed relatively constant over time. About 40 percent of the U.S. workforce ages 25 to 64 earned hourly wages of $16 or less (in constant 2016 dollars) over the period 1995 through 2016. The combination of low wages and few hours worked compounded the income disadvantage of low-wage workers and likely contributed to their potential eligibility for federal social safety net programs. About 20 percent of families with a worker earning up to the federal minimum wage (currently $7.25 per hour), 13 percent of families with a worker earning above federal minimum wage to $12.00 per hour, and 5 percent of families with a worker earning $12.01 to $16 per hour were in poverty in each year GAO reviewed (see figure).The extent of poverty varied considerably by the type of family in which a worker lived. For example, single-parent families earning the federal minimum wage or below comprised a higher percentage of families in poverty. In contrast, married families with no children comprised the lowest percentage of families in poverty, and generally had family incomes at or above the poverty line. Note: All references to the "federal minimum wage" are based on 110 percent of the hourly federal minimum wage in effect that year or the equivalent hourly calculated wage for salaried workers. Brackets are used to represent margins of error of estimated percentages at a 95 percent confidence level. Families with a worker earning $16 or less per hour consistently used selected federally funded social safety net programs between 2005 and 2016, with varied factors affecting eligible families' participation. GAO estimated that the percentage of these families enrolled in Medicaid rose significantly over the past 2 decades, almost tripling among families with a worker earning more than the federal minimum wage between 1995 and 2016. In contrast, an estimated 5 percent or less of these families received cash assistance from the Temporary Assistance for Needy Families (TANF) program at least once in the prior calendar year from 1995 through 2016. A low-wage worker's family type also influenced the extent that families used selected social safety net programs. For example, among families with minimum wage earners in 2016, GAO estimated that about half or more married families used none of the programs GAO examined--Medicaid, TANF, Supplemental Nutrition Assistance Program, Earned Income Tax Credit, and Additional Child Tax Credit--while more than half of single-parent families used three or more. Program officials and others told GAO that eligible working families may not participate in programs for a variety of reasons, including time needed to apply for benefits, low benefit amounts, and assumed ineligibility.

ORI is an independent group within HHS; its Director reports to the Secretary. Created from a merger of two offices within HHS, ORI's mission is to oversee and direct PHS research integrity activities, which it does primarily through its handling of scientific misconduct investigations. In fiscal year 1994, ORI had a total operating budget of $4 million and maintained a staff of about 50 employees; currently, it has 43 employees. Although ORI investigates misconduct related to intramural research programs, about three-fourths of its caseload in 1994 related to oversight of extramural integrity reviews conducted by grantee institutions. ORI generally monitors the progress of an extramural investigation and reviews the institution's final report. ORI also presents the results of misconduct investigations in administrative hearings before the HHS Departmental Appeals Board if ORI's decisions are challenged. Besides its investigative function, ORI performs other research integrity activities. These efforts include developing model policies and procedures for handling allegations of scientific misconduct; evaluating institutional policies and processes for conducting investigations; investigating whistleblower retaliation complaints; and promoting scientific integrity through educational initiatives and other collaborations with universities, medical schools, and professional societies. Most allegations of scientific misconduct are made directly to the institutions conducting the research. Responding to an allegation involves a two-step process: an inquiry and, if necessary, an investigation. Institutions have the primary responsibility for responding to allegations involving extramural research; ORI's role in these instances is usually that of reviewing the institution's investigation report. ORI generally does not review institutional inquiries because an institution is not required to inform ORI that an inquiry is under way nor to submit a report at its conclusion. ORI does, however, review all investigations. Institutions must inform ORI when they begin an investigation and submit a report at its conclusion. ORI reviews the final report, the supporting materials, and the determinations to decide whether the investigation has been performed with sufficient objectivity, thoroughness, and competence. ORI plays a more direct role in responding to scientific misconduct allegations in PHS intramural research programs. It reviews all misconduct inquiries conducted by PHS agencies and conducts all investigations when they are needed. ORI's handling of intramural scientific misconduct cases can be a complex undertaking that may involve collaborations among ORI staff, other agencies, and institutions performing research. In general, for intramural research allegations, the review process begins when an individual making an allegation (referred to as a complainant) alleges to either ORI or a PHS agency that another researcher (a respondent) committed scientific misconduct. If a misconduct allegation is made to ORI, an investigator within ORI's Division of Research Investigations (DRI) conducts an initial screening primarily to determine if PHS funding is involved and whether the allegation falls within the PHS definition of scientific misconduct. Allegations that do not meet these criteria result in no action or are referred outside of ORI for consideration. When allegations do fall within PHS' definition of misconduct, ORI forwards them to the PHS agency that funded the research and directs that agency to conduct a formal inquiry. This involves gathering information--including interviewing the subjects involved--to determine the nature of evidence available to support the allegation. ORI investigators may monitor inquiries and advise PHS agencies on matters such as procedures for sequestering laboratory research notebooks. They often directly assist the agency in sequestering the research data and other evidence. If the results of an inquiry suggest that misconduct may have occurred, ORI then opens a full investigation to determine the existence and magnitude of misconduct. An investigation could involve an extensive review of experiments and other scientific data as well as interviews with all parties involved with the research. The ORI investigator assigned to the case may seek assistance from a staff biostatistician and other in-house experts. Also, ORI may elicit assistance from outside scientists who have expertise in subject areas that ORI staff lack. Investigators produce a written report with findings. The report is reviewed by ORI management, its legal staff, and the respondent before being issued by the ORI Director. For investigations that result in a finding of misconduct, the ORI Director, in combination with the HHS debarring official, determines possible sanctions against the respondent, which may include debarment from receiving federal grant or contract funds for a specified period. ORI developed procedures for handling scientific misconduct cases and implemented them in November 1992. These procedures detail ORI's process for receiving and assessing misconduct allegations, reviewing PHS agency inquiry reports, conducting investigations, and overseeing extramural investigations. The procedures were developed by a task force, consisting mainly of ORI management (in consultation with officials from PHS agencies) and the HHS Office of the General Counsel and the IG. We compared ORI's policies and procedures with investigation guidelines established by the President's Council on Integrity and Efficiency (PCIE). The PCIE guidelines apply to federal government investigations and generally outline issues and procedures for handling matters such as background and security inquiries as well as special investigations requested by any appropriate authority. These standards were established through a collaborative effort of staff from various inspector general offices throughout government. We found ORI's procedures for handling scientific misconduct cases to be consistent with PCIE standards. Specifically, ORI procedures meet the PCIE standards by containing explicit statements on the qualifications of staff needed to handle investigations; independence required to conduct investigations; due professional care needed for the work; and other qualitative standards, such as planning, executing, and reporting investigation results. ORI investigators handling misconduct cases are scientists with doctoral degrees who were engaged in scientific research prior to their tenure with ORI. They represent varied scientific disciplines, such as biochemistry, genetics, biomedical engineering, and nutritional science. At the time of our review, each investigator had received the introductory investigation course given to most federal law enforcement agents. Supervisory investigators had taken some of the more advanced courses as well. Our assessment of case files confirmed that ORI investigators documented the work performed and followed established procedures in screening allegations and handling misconduct investigations. ORI investigators appeared to be making appropriate decisions as to which allegations did not merit further examination beyond their initial screening. We reviewed ORI case files on 30 allegations made to ORI since June 1993 that were closed without a formal inquiry. We sampled these 30 cases from a universe of 113 such closures. In each case, investigators followed established procedures and appropriately followed up on leads, and logically closed out the screening process. Our interviews with four individuals who had contacted ORI revealed a general satisfaction with ORI's handling of their allegations or requests for information. For example, a scientist who had asked whether a laboratory chief could take authorship credit for research conducted in his facility told us he accepted ORI's explanation that his inquiry did not constitute misconduct. The scientist added that the ORI investigator handling the call provided useful information on NIH guidelines for research collaborations. ORI investigators also appeared to have followed established procedures for the 10 investigations we reviewed. However, two limitations on our analysis should be noted. First, at the time of our review, ORI had opened and closed only four intramural investigations since its formation in May 1992. Second, these four investigations did not require investigators to apply sophisticated investigative or scientific techniques. (For example, two of them related to alleged falsification of academic credentials.) The remaining six cases involved possible misconduct in extramural research in nonfederal institutions. In these six cases, ORI's role was that of oversight, reviewing the institutions' investigations. We concluded from our review of case files for the four ORI-led investigations that ORI investigators employed appropriate techniques. Specifically, investigators developed investigation plans, interviewed relevant individuals, analyzed scientific data where appropriate, coordinated with other HHS offices, appropriately followed up on leads, and wrote reports with evidence supporting their decisions. ORI investigators also appeared to have followed proper procedures in reviewing the extramural investigations. Our examination of the six extramural case files revealed that ORI investigators adequately documented their work and included relevant documents, such as copies of the inquiry and investigation reports, in case files. We observed from our review of documentation in the case files that investigators generally followed the steps outlined in the ORI procedures manual. For example, investigators made appropriate contacts with institutions and took steps to ensure that the institution conducting the investigation properly notified the complainant and respondent at various stages of the investigation. ORI's procedures specify time frames for screening allegations and for conducting inquiries and investigations. These procedures state that screening should be completed within 30 days of receipt of the allegation. Inquiries are generally to be completed within 60 days of their initiation and investigations within 120 days. We observed delays in ORI's handling of misconduct cases. ORI's inability to close current cases in a timely manner has contributed to a backlog, some of which it inherited from its predecessor offices. When ORI was established, it inherited 70 active cases (inquiries and investigations) and about 420 more allegations which had apparently not been reviewed or screened. Although it has made progress in working through these inherited cases, ORI still has a substantial backlog. On April 30, 1995, ORI reported 169 active cases, including 71 inquiries and investigations. Although ORI completed the initial screening on 208 of the 288 misconduct allegations it received between June 1, 1993, and December 6, 1994, ORI investigators had not completed the screening process for the remaining 80 allegations, even though most of them had been unresolved for more than the 30 days allotted. More importantly, a majority of these (45 of 80) had remained open for over 6 months. Investigators and supervisors we interviewed attributed the backlog to competing work priorities. Our discussions with investigators and analysis of their workload indicated that, generally, investigators are each assigned 6 to 10 allegations to review in addition to their caseload of open investigations, inquiries, and oversight of extramural investigations. Although none of the investigators indicated that the workload was too high, they expressed concern about the backlog of initial allegations. For the four ORI-led investigations we reviewed, ORI went well beyond the targeted 120 days to complete them. Although we could not determine the actual staff time spent on these cases, the elapsed calendar time ranged from about 6 to 13 months. In two instances, investigators took what appeared to be an inordinate amount of time to complete relatively straightforward cases. For example, ORI took over a year to investigate and adjudicate a case of alleged falsification of academic credentials in several NIH grant applications. In another case, ORI took about 6 months for an investigation in which the respondent submitted a statement partially admitting to the misconduct prior to ORI's opening an investigation. ORI investigators indicated that higher priority cases prevented them from closing these cases more expeditiously. The investigators also gave specific reasons for each case. In the first case, investigators wanted to establish a pattern of falsifying credentials to counter the respondent's claim that the incident was not common. In the other case, ORI initiated an investigation because it wanted to ensure that appropriate procedures were followed and that the full extent of the respondent's misconduct was identified. We also observed a lack of timeliness in closing extramural investigations. The six cases we reviewed were open for about 9 to 13 months. The time spent on four of these cases can be partly attributed to additional work ORI did on these cases after the institutions completed their investigations. During the course of our review, ORI officials took various steps to reduce the case backlog and improve ORI's work. These actions ranged from giving greater attention to setting priorities among cases to providing increased guidance to extramural institutions. Priority Setting--ORI has begun holding frequent management meetings to systematically review all open cases. The point is to decide which cases can be closed and to set priorities among the open cases. Early Settlement Agreements--ORI has also begun to seek earlier resolutions of cases through advance settlements with respondents (generally referred to as voluntarily exclusions). When respondents voluntarily agree to or accept ORI's early disposition of a case, further pursuit of an investigation or appeal can be avoided. Significant savings in investigative and litigation resources may result. Reassigning Program Analysts--ORI has assigned a program analyst to expedite allegation assessments by performing initial tasks, such as securing research articles and grant information. Managers and investigators indicated that this effort has proven useful and support the increased use of program analysts for this purpose. Guidance to Institutions--In an effort to better educate intramural and extramural institutions on handling scientific misconduct, ORI has instituted formal processes for communicating with these entities. ORI now issues a quarterly newsletter, conducts seminars, and posts notices on an HHS computer bulletin board. Additionally, in November 1994, ORI issued draft model policies and instructions for handling misconduct cases to extramural institutions. In their present form, the guidelines are intended to assist institutions in complying with federal regulations. ORI sent these draft procedures to officials at 40 extramural institutions requesting their review and comment. We interviewed four of these officials, and the consensus was that the draft procedures would have a positive effect by giving institutions improved guidance for investigations. Although these measures appear to have helped ORI improve its handling of cases, additional efforts are needed to more effectively respond to workload demands. Facing a substantial case backlog and lengthy delays in completing its work, ORI needs additional management tools to meet its workload demands. Specifically, ORI still needs strategic planning and resource assessments to decide how to most efficiently and effectively deploy its staff. For example, 11 of ORI's staff (within DRI) are directly involved in investigations full time. The remaining 32 staff members (about 75 percent of total staff) are either professional or administrative staff who support DRI or are devoted to other ORI functions, such as policy development and education. Investigative work is not ORI's only responsibility. Given the case backlog, however, ORI's current staff allocation to investigations may not be sufficient even with the recent improvements ORI has made. ORI also needs a system to track the amount of time investigators spend on cases. Generally, each investigator handles 6 to 10 initial allegations of misconduct, 1 to 3 investigations, and 1 to 4 oversight cases. Some investigators we interviewed expressed occasional uncertainty about whether their use of time coincided with management's priorities. Planning processes, such as routine staffing assessments, could help ORI's management team systematically gauge the appropriate balance between ORI's needs and resources. Staffing assessments might also help identify ways to augment ORI's skill base--for example, identifying the need for different disciplines and backgrounds among the staff, such as trained criminal investigators. Such assessments might also help management determine ways to better use its administrative staff. The HHS IG reached a similar conclusion in its November 1994 report on ORI's staffing and management. The IG recommended that ORI develop a strategic plan to help it "be better prepared to handle fluctuations in its work load and to provide a balance between its roles in stewardship and research integrity education." The plan, according to the IG, should detail objectives in specific, measurable terms and show how resources and staff should be allocated to accomplish these objectives. The IG's report made a number of other recommendations designed to improve ORI's productivity. Another deficiency noted in the IG's report was the absence of a structured timekeeping system. The report concluded that implementing such a system would greatly aid in determining whether ORI needs additional investigative staff. The IG recommended that ORI set and enforce performance measures for its staff regarding the quality, quantity, and timeliness of work conducted. Our work supports the IG's conclusion that ORI needs a strategic plan and specific performance measures for its staff. Such a plan--particularly if it includes (1) a comprehensive assessment of ORI's workload and staffing requirements and (2) measures to reduce the case backlog and close cases more quickly--should help ensure an optimum use of resources. Among its fiscal year 1995 management initiatives, ORI has started work on a strategic plan and will begin setting specific performance measures. Additionally, ORI officials told us they had initiated a two-pronged pilot study for tracking investigators' time. One part of the pilot requires investigators to track time spent on an investigation. The second part requires investigators to record the time they devote to the specific tasks they perform, such as interviewing and analyzing research experiments, in addition to the total time spent. Since its inception, ORI has made progress in improving its handling of scientific misconduct cases. By continuing to follow sound investigative procedures and striving to improve its handling of cases, the office will gain increased public trust as a preserver of federal interest in biomedical research. However, persistent delays in case handling and deficiencies in its management systems are barriers that ORI needs to overcome if it is to effectively fulfill its mission in the future. ORI's management team must confront these challenges and develop strategies to address them. HHS provided comments on a draft of this report, which we incorporated where appropriate (see app. II). HHS generally agreed with our findings and representation of its current efforts to improve productivity. HHS also described planned efforts to reduce the "management superstructure of ORI," which should result in productivity gains. We incorporated technical comments provided by HHS, but did not include them in the appendix. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to interested parties and make copies available to others on request. Please call me on (202) 512-7119 if you or your staff have any questions about this report. Other major contributors are listed in appendix III. To assess ORI's process for handling misconduct cases, we reviewed its written guidance and examined how it screens allegations and conducts investigations and oversight functions. We compared ORI's written policies and procedures for handling misconduct allegations and investigations with guidelines established for federal agencies that engage in comparable activities. In examining how ORI handles and screens misconduct allegations, we reviewed case files for 30 of the almost 300 allegations received from June 1993 to December 6, 1994. We selected cases that did not proceed to the inquiry phase. For four of these cases, we interviewed the individuals who made the allegations to obtain their perspectives on how well ORI handled them. We selected these particular individuals primarily because their case files did not contain sufficient information for us to determine whether ORI had completed its work responding to the allegations. To assess ORI procedures for conducting and monitoring misconduct investigations, we reviewed the 10 investigations that were opened since ORI's establishment in May 1992 and completed by the time of our review. ORI conducted 4 of the 10 investigations; the remaining 6 were done by institutions and reviewed by ORI. We did not review cases initiated and conducted primarily by ORI's predecessor offices because ORI had not implemented its current investigation procedures when these cases were opened. In addition, we neither independently verified the information ORI investigators used to reach their conclusions nor conducted our own investigation of cases. We supplemented our reviews of ORI case files with interviews with the seven investigators, two supervisory investigators, and the DRI Acting Director. We primarily sought to further our understanding of the investigative techniques used in handling misconduct cases, particularly the cases that presented greater technical challenges for investigators. As part of our interviews, we discussed procedures being used for cases currently under review. We interviewed officials at intramural and extramural institutions to gain their perspectives on ORI guidance for handling misconduct and on the quality of ORI investigations. We sought to obtain their views on ways in which ORI could improve its handling of misconduct cases. We also analyzed ORI's automated case tracking system, which contains misconduct allegations. Finally, we interviewed ORI's Deputy Director and the DRI Acting Director to ascertain current strategies to improve misconduct case management. We did not independently verify the accuracy of the data in ORI case files or automated databases. We did our work between July 1994 and April 1995 in accordance with generally accepted government auditing standards. Barry Tice, Assistant Director, (202) 512-4552 Glenn Davis, Evaluator-in-Charge, (312) 220-7600 Fred Chasnov Woodrow Hunt Cameo Zola The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO determined whether the Department of Health and Human Services' (HHS) Office of Research Integrity (ORI): (1) has the appropriate policies, procedures, and investigative practices for handling misconduct allegations in a timely; and (2) has any staffing issues that may adversely affect ORI responsiveness. GAO found that: (1) ORI has developed and implemented procedures for handling misconduct cases by assessing the qualifications of its investigative staff, the level of independence and professional care needed to conduct investigations, and other qualitative standards for planning, executing, and reporting investigation results; (2) the techniques ORI uses in handling misconduct cases raises a few concerns; (3) despite ORI success in implementing procedures for handling misconduct cases, it continues to experience delays in closing cases; (4) ORI needs a comprehensive assessment of its resources since it faces a substantial case backlog; and (5) ORI has initiated a number of actions to improve productivity and plans to refine its planning processes during fiscal year 1995.

Many firms of varying sizes make up the U.S. petroleum industry. While some firms engage in only limited activities within the industry, such as exploration for and production of crude oil and natural gas or refining crude oil and marketing petroleum products, fully vertically integrated oil companies participate in all aspects of the industry. Before the 1970s, major oil companies that were fully vertically integrated controlled the global network for supplying, pricing, and marketing crude oil. However, the structure of the world crude oil market has dramatically changed as a result of such factors as the nationalization of oil fields by oil-producing countries, the emergence of independent oil companies, and the evolution of futures and spot markets in the 1970s and 1980s. Since U.S. oil prices were deregulated in 1981, the price paid for crude oil in the United States has been largely determined in the world oil market, which is mostly influenced by global factors, especially supply decisions of the Organization of Petroleum Exporting Countries (OPEC) and world economic and political conditions. The United States currently imports over 60 percent of its crude oil supply. In contrast, the bulk of the gasoline used in the United States is produced domestically. In 2001, for example, gasoline refined in the United States accounted for over 90 percent of the total domestic gasoline consumption. Companies that supply gasoline to U.S. markets also post the domestic gasoline prices. Historically, the domestic petroleum market has been divided into five regions: the East Coast region, the Midwest region, the Gulf Coast region, the Rocky Mountain region, and the West Coast region. Proposed mergers in all industries, including the petroleum industry, are generally reviewed by federal antitrust authorities--including FTC and the Department of Justice (DOJ)--to assess the potential impact on market competition. According to FTC officials, FTC generally reviews proposed mergers involving the petroleum industry because of the agency's expertise in that industry. FTC analyzes these mergers to determine if they would likely diminish competition in the relevant markets and result in harm, such as increased prices. To determine the potential effect of a merger on market competition, FTC evaluates how the merger would change the level of market concentration, among other things. Conceptually, the higher the concentration, the less competitive the market is and the more likely that firms can exert control over prices. The ability to maintain prices above competitive levels for a significant period of time is known as market power. According to the merger guidelines jointly issued by DOJ and FTC, market concentration as measured by HHI is ranked into three separate categories: a market with an HHI under 1,000 is considered to be unconcentrated; if HHI is between 1,000 and 1,800 the market is considered moderately concentrated; and if HHI is above 1,800, the market is considered highly concentrated. While concentration is an important aspect of market structure--the underlying economic and technical characteristics of an industry--other aspects of market structure that may be affected by mergers also play an important role in determining the level of competition in a market. These aspects include barriers to entry, which are market conditions that provide established sellers an advantage over potential new entrants in an industry, and vertical integration. Over 2,600 merger transactions occurred from 1991 through 2000 involving all three segments of the U.S. petroleum industry. Almost 85 percent of the mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of petroleum) accounted for about 13 percent, and the midstream segment (transportation) accounted for over 2 percent. The vast majority of the mergers--about 80 percent--involved one company's purchase of a segment or asset of another company, while about 20 percent involved the acquisition of a company's total assets by another so that the two became one company. Most of the mergers occurred in the second half of the decade, including those involving large partially or fully vertically integrated companies. Petroleum industry officials and experts we contacted cited several reasons for the industry's wave of mergers in the 1990s, including achieving synergies, increasing growth and diversifying assets, and reducing costs. Economic literature indicates that enhancing market power is also sometimes a motive for mergers. Ultimately, these reasons mostly relate to companies' desire to maximize profit or stock values. Mergers in the 1990s contributed to increases in market concentration in the downstream segment of the U.S. petroleum industry, while the upstream segment experienced little change overall. We found that market concentration, as measured by the HHI, decreased slightly in the upstream segment, based on crude oil production activities at the national level, from 290 in 1990 to 217 in 2000. Moreover, based on benchmarks established jointly by DOJ and FTC, the upstream segment of the U.S. petroleum industry remained unconcentrated at the end of the 1990s. The increases in market concentration in the downstream segment varied by activity and region. For example, the HHI of the refining market in the East Coast region increased from a moderately concentrated level of 1136 in 1990 to a highly concentrated level of 1819 in 2000. In the Rocky Mountain and the West Coast regions, it increased from 1029 to 1124 and from 937 to 1267, respectively, in that same period. Thus, while each of these refining markets increased in concentration, the Rocky Mountain remained within the moderately concentrated range but the West Coast changed from unconcentrated in 1990 to moderately concentrated in 2000. The HHI of refining markets also increased from 699 to 980 in the Midwest and from 534 to 704 in the Gulf Coast during the same period, although these markets remained unconcentrated. In wholesale gasoline markets, market concentration increased broadly throughout the United States between 1994 and 2002. Specifically, we found that 46 states and the District of Columbia had moderately or highly concentrated markets by 2002, compared to 27 in 1994. In both the refining and wholesale markets of the downstream segment, merger activity and market concentration were highly correlated for most regions of the country. Evidence from various sources indicates that, in addition to increasing market concentration, mergers also contributed to changes in other aspects of market structure in the U.S. petroleum industry that affect competition--specifically, vertical integration and barriers to entry. However, we could not quantify the extent of these changes because of a lack of relevant data. Vertical integration can conceptually have both pro- and anticompetitive effects. Based on anecdotal evidence and economic analyses by some industry experts, we determined that a number of mergers that have occurred since the 1990s have led to greater vertical integration in the U.S. petroleum industry, especially in the refining and marketing segment. For example, we identified eight mergers that occurred between 1995 and 2001 that might have enhanced the degree of vertical integration, particularly in the downstream segment. Concerning barriers to entry, our interviews with petroleum industry officials and experts provide evidence that mergers had some impact on the U.S. petroleum industry. Barriers to entry could have implications for market competition because companies that operate in concentrated industries with high barriers to entry are more likely to possess market power. Industry officials pointed out that large capital requirements and environmental regulations constitute barriers for potential new entrants into the U.S. refining business. For example, the officials indicated that a typical refinery could cost billions of dollars to build and that it may be difficult to obtain the necessary permits from the relevant state or local authorities. At the wholesale and retail marketing levels, industry officials pointed out that mergers might have exacerbated barriers to entry in some markets. For example, the officials noted that mergers have contributed to a situation where pipelines and terminals are owned by fewer, mostly integrated companies that sometimes deny access to third-party users, especially when supply is tight--which creates a disincentive for potential new entrants into such wholesale markets. According to some petroleum industry officials that we interviewed, gasoline marketing in the United States has changed in two major ways since the 1990s. First, the availability of unbranded gasoline has decreased, partly due to mergers. Officials noted that unbranded gasoline is generally priced lower than branded. They generally attributed the decreased availability of unbranded gasoline to one or more of the following factors: There are now fewer independent refiners, who typically supply mostly unbranded gasoline. These refiners have been acquired by branded companies, have grown large enough to be considered a brand, or have simply closed down. Partially or fully vertically integrated oil companies have sold or mothballed some refineries. As a result, some of these companies now have only enough refinery capacity to supply their own branded needs, with little or no excess to sell as unbranded. Major branded refiners are managing their inventory more efficiently, ensuring that they produce only enough gasoline to meet their current branded needs. We could not quantify the extent of the decrease in the unbranded gasoline supply because the data required for such analyses do not exist. The second change identified by these officials is that refiners now prefer dealing with large distributors and retailers because they present a lower credit risk and because it is more efficient to sell a larger volume through fewer entities. Refiners manifest this preference by setting minimum volume requirements for gasoline purchases. These requirements have motivated further consolidation in the distributor and retail sectors, including the rise of hypermarkets. Our econometric modeling shows that the mergers we examined mostly led to higher wholesale gasoline prices in the second half of the 1990s. The majority of the eight specific mergers we examined--Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal, Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), BP-Amoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS--resulted in higher prices of wholesale gasoline in the cities where the merging companies supplied gasoline before they merged. The effects of some of the mergers were inconclusive, especially for boutique fuels sold in the East Coast and Gulf Coast regions and in California. For the seven mergers that we modeled for conventional gasoline, five led to increased prices, especially the MAP-UDS and Exxon-Mobil mergers, where the increases generally exceeded 2 cents per gallon, on average. For the four mergers that we modeled for reformulated gasoline, two-- Exxon-Mobil and Marathon-Ashland--led to increased prices of about 1 cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) merger led to price decreases of less than one-half cent per gallon, on average, for branded gasoline only. For the two mergers--Tosco-Unocal and Shell-Texaco I (Equilon)--that we modeled for gasoline used in California, known as California Air Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to price increases. The increases were for branded gasoline only and exceeded 6 cents per gallon, on average. For market concentration, which captures the cumulative effects of mergers as well as other competitive factors, our econometric analysis shows that increased market concentration resulted in higher wholesale gasoline prices. Prices for conventional (non-boutique) gasoline, the dominant type of gasoline sold nationwide from 1994 through 2000, increased by less than one-half cent per gallon, on average, for branded and unbranded gasoline. The increases were larger in the West than in the East--the increases were between one-half cent and one cent per gallon in the West, and about one- quarter cent in the East (for branded gasoline only), on average. Price increases for boutique fuels sold in some parts of the East Coast and Gulf Coast regions and in California were larger compared to the increases for conventional gasoline. The wholesale prices increased by an average of about 1 cent per gallon for boutique fuel sold in the East Coast and Gulf Coast regions between 1995 and 2000, and by an average of over 7 cents per gallon in California between 1996 and 2000. Our analysis shows that wholesale gasoline prices were also affected by other factors included in the econometric models--particularly, gasoline inventories relative to demand, refinery capacity utilization rates, and the supply disruptions that occurred in some parts of the Midwest and the West Coast. In particular, wholesale gasoline prices were about 1 cent per gallon higher, on average, when gasoline inventories were low relative to demand, typically in the summer driving months. Also, prices were higher by about an average of one-tenth to two-tenths of 1 cent per gallon when refinery capacity utilization rates increased by 1 percent. The prices of conventional gasoline were about 4 to 5 cents per gallon higher, on average, during the Midwest and West Coast supply disruptions. The increase in prices for CARB gasoline was about 4 to 7 cents per gallon, on average, during the West Coast supply disruptions. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Key contributors to this testimony included Godwin Agbara, Scott Farrow, John A. Karikari, and Cynthia Norris. 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.

Gasoline is subject to dramatic price swings. A multitude of factors cause volatility in U.S. gasoline markets, including world crude oil costs, limited refining capacity, and low inventories relative to demand. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several of them between large oil companies that had previously competed with each other. For example, in 1999, Exxon, the largest U.S. oil company, merged with Mobil, the second largest. This testimony is based primarily on Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry ( GAO-04-96 , May 17, 2004). This report examined mergers in the U.S. petroleum industry from the 1990s through 2000, the changes in market concentration (the distribution of market shares among competing firms) and other factors affecting competition in the U.S. petroleum industry, how U.S. gasoline marketing has changed since the 1990s, and how mergers and market concentration in the U.S. petroleum industry have affected U.S. gasoline prices at the wholesale level. To address these issues, GAO purchased and analyzed a large body of data and developed state-of-the art econometric models for isolating the effects of eight specific mergers and increased market concentration on wholesale gasoline prices. Experts peer-reviewed GAO's analysis. One of the many factors that can impact gasoline prices is mergers within the U.S. petroleum industry. Over 2,600 such mergers have occurred since the 1990s. The majority occurred later in the period, most frequently among firms involved in exploration and production. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Partly because of the mergers, market concentration has increased in the industry, mostly in the downstream (refining and marketing) segment. For example, market concentration in refining increased from moderately to highly concentrated on the East Coast and from unconcentrated to moderately concentrated on the West Coast. Concentration in the wholesale gasoline market increased substantially from the mid-1990s so that by 2002, most states had either moderately or highly concentrated wholesale gasoline markets. On the other hand, market concentration in the upstream (exploration and production) segment remained unconcentrated by the end of the 1990s. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as firms' ability to enter the market. Two major changes have occurred in U.S. gasoline marketing related to mergers, according to industry officials. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. Based on data from the mid-1990s through 2000, GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States. Six of the eight mergers GAO modeled led to price increases, averaging about 2 cents per gallon. Increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices in most cases. For conventional gasoline, the predominant type used in the country, the change in wholesale price due to increased market concentration ranged from a decrease of about 1 cent per gallon to an increase of about 5 cents per gallon. For boutique fuels sold in the East Coast and Gulf Coast regions, wholesale prices increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon. GAO also identified price increases of one-tenth of a cent to 7 cents that were caused by other factors included in the models--particularly low gasoline inventories relative to demand, high refinery capacity utilization rates, and supply disruptions in some regions. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound.

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

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

Under the Communications Act, as amended, FCC regulates interstate and international communications by radio, television, wire, satellite, and cable. FCC regulates these industries by carrying out various activities, including issuing licenses for radio and television broadcast stations; overseeing the licensing, enforcement, and regulatory functions of cellular telephones and other personal communication services; regulating the use of the radio spectrum and conducting auctions of licenses for use of the spectrum; investigating consumer complaints and taking enforcement actions for violations of communications laws and commission rules; addressing public safety, homeland security, emergency management, and preparedness; educating and informing consumers about telecommunications goods and services; and reviewing mergers of companies holding FCC-issued licenses. FCC carries out these responsibilities using its 7 bureaus and 10 offices. Table 2 provides descriptions of each bureau's responsibilities. To fulfill its responsibilities, FCC requires regulated entities, such as companies and licensees, in the communications industry that it regulates to maintain records, submit information, or disclose information to others. For example, television stations are required to provide FCC with information relating to construction permits, license renewals, and ownership. When collecting and managing information, FCC must adhere to various laws and regulations and coordinate with various entities. Paperwork Reduction Act. The PRA requires agencies, such as FCC, to obtain approval for each information collection instrument that meets the requirements of the PRA from OMB. Before approving a collection instrument, OMB is required to determine that the agency's collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility. Consistent with the PRA's requirements, OMB has established a process to review all proposals by agencies to collect information from 10 or more persons, whether the collections are voluntary or mandatory. OMB's approval of each information collection instrument usually expires within 3 years, and agencies must periodically ask for an extension until the collection is no longer needed. Records management by federal agencies. As required by statute, the head of each federal agency must establish and maintain an active, continuing program for the economical and efficient management of the agency's records. The agency must provide for effective controls over the creation, maintenance, and use of records in the conduct of current business. Further, the agency must cooperate with the Administrator of General Services and the Archivist in applying standards, procedures, and techniques designed to improve the management of records; promote the maintenance and security of records deemed appropriate for preservation; and facilitate the segregation and disposal of records of temporary value. Federal Information Security Management Act of 2002 (FISMA). FISMA requires the head of each agency to provide information security protections commensurate with the risk and magnitude of harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of information collected or maintained by or on behalf of the agency. Additional requirements. In addition to the requirements established by the various laws, federal agencies must follow regulations promulgated by agencies such as OMB and the National Archives and Records Administration (NARA). For example, OMB established policy for managing information through its A-130 Circular. NARA provides federal agencies with guidance on the management of records and other types of documentary materials and assists agencies in creating and maintaining accurate and complete records of an agency's functions and activities and in ensuring the authorized, timely, and appropriate disposition of documentary materials. To develop new rules or modify existing rules, including rules pertaining to information collection instruments, FCC initiates a rulemaking process. When implementing a rulemaking process, FCC must follow the procedures set forth in the Administrative Procedure Act (APA). The APA generally requires a "notice and comment" or "notice and comment rulemaking" process to ensure that stakeholders and the public have adequate opportunity to participate in agencies' rulemaking processes. In particular, the APA requires agencies, in most cases, to publish a notice of proposed rulemaking in the Federal Register and give interested parties an opportunity to comment on the proposed rule or rule change by providing "written data, views, or arguments." FCC generally collects information through the following methods. Notice of Inquiry (NOI). FCC releases a NOI to gather information about a broad subject or as a means of generating ideas on a specific issue. Notice of Proposed Rulemaking (NPRM). FCC issues a NPRM to propose new rules or changes to its existing rules. The NPRM must include either the terms or substance of the proposed rule or a description of the subjects and issues involved and seek public comment on the proposal. Further Notice of Proposed Rulemaking (FNPRM). After reviewing comments in the NPRM, FCC can issue a FNPRM regarding specific issues raised in the process. The FNPRM provides an opportunity for the public to comment further on a related or specific proposal. As of April 2009, FCC used 413 OMB-approved information collection instruments to gather information, maintain records, or disclose information; however, the amount of information collected and managed varied by bureau or office. Responsibility for these collections is spread across 10 FCC bureaus and offices (see table 3). The Media, Wireline Competition, and Wireless Telecommunications bureaus are responsible for almost three- quarters of the collections, with 139, 85, and 74 collections, respectively. The estimated number of responses also varies significantly by bureau or office. For example, both the Wireline Competition and Consumer and Governmental Affairs bureaus anticipate over 140 million individual responses annually to their collection instruments, whereas the Enforcement Bureau anticipates fewer than 10,000. The burden associated with submitting the information also varies by bureau or office; according to the PRA, the term "burden" means the time, effort, or financial resources expended by persons to generate, maintain, or provide information to a federal agency. The Consumer and Governmental Affairs Bureau estimates over 39 million hours for its collection instruments, more than the other bureaus and offices combined; other bureaus with over 1 million estimated annual burden hours include the Media, Wireline Competition, and Wireless Telecommunications bureaus. FCC collects a wide variety of information through its 413 OMB-approved information collection instruments. In response to our request, FCC placed each of its 413 collection instruments in a category based on the industry and/or purpose. FCC identified 21 categories, and we further organized these 21 categories into five groups (see table 4). As shown in the table, there is significant variation in the number of collection instruments and estimated number of responses and annual burden hours across the 21 categories. We provide a description of the types of information collection instruments below. Requirements. FCC-defined information collection instruments for requirements span a wide variety of industries, including wireless and wireline telephone, broadcasting, cable, equipment, and public safety. FCC regulations require companies to provide a variety of information. For example, the Wireline Competition Bureau has 58 collection instruments of this type, including employment reports and local number portability for wireline telephone companies. The Wireless Telecommunications Bureau has 59 collection instruments of this type, such as reports on interference. Applications. Regulated entities, such as companies and individuals, seeking to provide certain services must apply for and receive a license from FCC. For example, the Media Bureau gathers license application information from companies seeking to provide radio and television broadcast service. The Office of Engineering and Technology gathers license application and equipment authorization information from companies seeking to market new wireless equipment, such as wireless telephones. Complaints. FCC collects consumer complaints on a variety of problems through OMB-approved information collection instruments. These complaints include a wide variety of problems such as deceptive or unlawful advertising or marketing; obscene, profane, and/or indecent material on broadcast radio or television; slamming, the illegal practice of changing a consumer's telephone service without permission; and accessibility of communications services to persons with disabilities. Financial and accounting. The Wireline Competition Bureau collects information pertaining to both wireline carrier accounting and the universal service fund. The wireline carrier accounting collections include a variety of company submissions, such as information on rates, costs, investment, and customer satisfaction. The universal service fund collections include submissions necessary to pay into or receive payment from the universal service fund. We also include collection instruments for FCC's financial operations in this group; these collections include, for example, documents for FCC's regulatory fees. Other. These information collection instruments pertain to a variety of topics. For example, the Media, Wireline Competition, and Wireless Telecommunications bureaus conduct surveys of cable television operators, companies providing broadband service, and participants in FCC's spectrum auctions, respectively. The Consumer and Governmental Affairs Bureau collects information pertaining to telecommunications relay service, which allows persons with hearing or speech disabilities to place and receive telephone calls. The Wireless Telecommunications Bureau uses collection instruments to receive applications for participants in spectrum auctions and auction participants seeking bidding credits. FCC has established commissionwide programs, policies, and procedures for the collection and management of information; FCC articulates these policies and procedures in its records management program, forms management program, security policies and procedures, and information system protection. However, since bureaus and offices are the primary users of information, implementing decisions generally occur at the bureau or office level. On the basis of responses to our questionnaires about 30 OMB-approved information collection instruments, FCC's bureaus and offices collect and manage information in a variety of different ways. FCC has four primary directives that establish procedures for commission staff to follow for collecting and managing information. These directives help ensure FCC's compliance with governmentwide laws and regulations pertaining to information collection and management, such as the PRA and FISMA. Records management program. By statute, the head of each federal agency must establish and maintain an active, continuing program for the economical and efficient management of all records of the agency. To meet this requirement, FCC established a records management program that sets out the policies, procedures, and activities needed to manage the commission's recorded information. The objectives of FCC's records management procedures are to accurately and completely document the policies and transactions of the control the quantity and quality of records produced by the commission; establish and maintain mechanisms of control to promote effective and economical operations of the commission; simplify the activities, systems, and processes of creating, maintaining, and using records; and judiciously preserve and dispose of records. Within the Office of Managing Director, FCC's Performance Evaluation and Records Management (PERM) staff carry out procedures to establish and oversee the records management program. The procedures require PERM staff to review and evaluate the program by conducting (1) on-site inspections, (2) annual reviews of all bureau and office records control schedules, and (3) reviews of bureau and office submissions of record holdings. Forms management program. FCC has a forms management program to comply with statutory, regulatory, and policy requirements for federal forms. The objectives of the forms management program are to ensure (1) forms are directly linked to accomplishing specific missions of the commission; (2) forms are properly designed with clear instructions to make it easy as possible for respondents to provide information requested in the least amount of time; and (3) forms make effective and efficient use of electronic technologies for creating, collecting, distributing, and using these forms to record, store, and disseminate information. The procedures state that each bureau and office chief is responsible for, among other things, ensuring that forms are created, maintained, and disposed of in conformance with the commission's records management program. Security policies and procedures. FCC has security policies and procedures for the management and safeguarding of all nonpublic information. FCC has two categories of nonpublic information: 1. "Highly sensitive/restricted" information is defined as information that is highly market sensitive (i.e., disclosure of which is likely to substantially affect the value of securities traded publicly or a company's market valuation) or other commercial or financial information the commission considers confidential and highly sensitive. For example, according to FCC officials, information that is submitted to FCC's Disaster Information Reporting System may contain commercial information that could affect competition among wireless, wireline, broadcast, and cable providers and is treated as confidential by FCC. 2. "Internal use only" information is defined as all other nonpublic information not routinely available for inspection. For example, FCC maintains information for internal use only that allows its crisis incident managers to coordinate activities in the telecommunications industry and FCC in the event of a crisis. This internal document has contact information for FCC employees, other federal government agencies, state and local governments, and the communications industry. According to these procedures, the bureau or office creating or using nonpublic information is responsible for determining in which category the information should be placed. FCC's procedures are designed to safeguard the nonpublic information in all formats including, but not limited to, paper, computer files, e-mails, diskettes, CDs, audio and video recordings, and oral communications. Among other things, the policies and procedures require that nonpublic information must be disposed of in a locked document disposal bin; such bins are located throughout FCC headquarters. Information systems protection. FCC has established policy to help ensure that adequate levels of protection exist for all FCC information systems, including the FCC network, applications and databases, and information created, stored, or processed. FCC's Chief Information Officer (CIO) has primary responsibility for managing the commission's policy. The policy states that the CIO's responsibilities include (1) evaluating and approving the resolution of issues relating to information security, (2) developing and maintaining an agencywide information security program, and (3) training and overseeing personnel with significant responsibilities for information security. FCC also has a Chief Information Security Officer responsible for (1) developing plans for providing adequate information security for networks, facilities, and systems or groups of information systems; (2) conducting periodic assessments of the risk and magnitude of the harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems that support the operations and assets of the agency; and (3) developing plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. FCC's policies and procedures for managing information are primarily carried out at the bureau or office level. As the primary users of information, FCC's bureaus and offices manage most of the commission's information collected through OMB-approved collection instruments. The previously mentioned records management guidance, which was established by PERM, gives bureau and office chiefs authority to establish their own procedures for managing records and ensuring staff observe guidelines. According to FCC officials, bureaus and offices are allowed to establish their own procedures. However, officials also said that they are not aware of any bureaus and offices that have officially done so. Similarly, officials with the bureaus and offices with whom we spoke said that they use the commissionwide guidance to manage their information and have no additional internal information procedures. According to responses to our questionnaires about 30 OMB-approved information collection instruments, FCC's bureaus and offices collect and manage information in various ways based on the type of information. As mentioned previously, a reporting entity or third-party entity maintains the information associated with some FCC collection instruments. In those instances, certain questions pertaining to information collection, management, dissemination, and retention and disposal are not applicable. Therefore, we used two questionnaires, one for collection instruments where FCC maintains the information and one for collection instruments where the reporting entity or a third-party entity maintains the information. Of the 30 responses we received, FCC maintains the information for 21 collection instruments; for the remaining 9 collection instruments, the reporting entity or third party maintains the information. Most of the following analysis pertains to the 21 collection instruments where FCC maintains the information. Information collection. Respondents to our questionnaire reported that they collect information in different formats, including electronic, paper, and compact disc (CD). For the 21 collection instruments where FCC maintains the information, 14 respondents reported that the reporting entity submits information to the bureau or office in an electronic format. For example, one respondent reported that cost and revenue information from telephone companies, such as AT&T and Verizon, is submitted electronically to FCC. In three instances, the respondent reported that the bureau or office receives the information in a paper format. For example, 1 respondent reported that entities using certain radio frequency identification devices are required to submit their information on paper to register the location of these devices. Additionally, 3 respondents reported receiving electronic and paper submissions, and 1 respondent reporting receiving both paper and CD submissions. The frequency of the collection also varied among the information collection instruments. Nine information collections are annual. For example, one respondent reported that FCC collects information annually from a sample of cable operators on average rates charged for the basic cable service, cable programming service tiers, and cable equipment. The frequency of the collection for the remaining collection instruments varied, from onetime submissions when filing an application to triennial filings. Information management. After collecting the information, bureaus and offices manage it in various ways. For all 30 collection instruments, 15 respondents reported that the bureau or office stores the information in a database. As we discussed previously, in nine instances the reporting entity or a third party maintains the information. The remaining respondents to our questionnaire reported that the bureau or office stores information in an internal network system or a file cabinet. Respondents to our questionnaire reported that bureaus and offices use several quality control procedures to ensure the accuracy of information. For example, three respondents reported that information systems run validity checks that ensure (1) certain data do not fall outside a reasonable range for that data and (2) all data have been submitted as required. A respondent reported that drop-down menus for individuals submitting data electronically provide checks on the quality of the data, as do pop-up warnings for data entries outside of the expected reasonable range. Other respondents reported that staff review the information for completeness and accuracy. For the 9 collection instruments wherein the reporting entity or a third party maintains the information, 4 respondents reported that the bureau or office may randomly select items for review, request the records be provided to the commission, and review the records for compliance with the commission rules; 3 respondents reported that the bureau or office does not verify the information. In terms of correcting errors, some respondents reported that the bureau or office contacts the individual or organization that submitted the information and asks that entity to make corrections. Other respondents reported that the bureau or office will contact the individual or organization and ask for clarification and update the information internally. Respondents to our questionnaire also identified several approaches the bureaus and offices employ to safeguard information. For the 21 collection instruments where FCC maintains the information, 12 respondents reported that their bureau's or office's information collections contain business sensitive or confidential information. Nine respondents reported that the information collections are less sensitive: 6 reported that the information is generally public data, 1 reported that the information is not typically business sensitive or confidential, and 2 reported that the information is not business sensitive or confidential. To ensure the safeguarding of information, 17 respondents reported that the bureau or office limits access to information. For example, 1 respondent who reported that much of the information is business sensitive also reported that access to the information is limited to bureau staff. In addition, staff members are instructed to keep the information and any related notes and worksheets confidential and to keep any paper copies of the information in locked cabinets. Fourteen respondents also reported that the information is safeguarded with data backup and storage, and 2 respondents reported that information is protected by encryption. Two respondents reported that confidential submissions are kept in a locked file cabinet. Information dissemination. FCC disseminates the information gathered through some of the collection instruments we reviewed to the public. Specifically, 15 respondents to our questionnaire reported that the information collected is disseminated through internal or external reports. Of the 15 respondents, 11 reported that some of the information collected is disseminated to the public on FCC's Web site. For example, 1 respondent reported that information on applications and licenses for experimental use of radio frequencies is publicly accessible. Other respondents reported the public can request the information or view the information at FCC. For example, 1 respondent reported that in order to protect the identity of the entity submitting information, FCC releases redacted information in response to a request for information. Additionally, several respondents reported that internal reports are generated from the information collected. For example, 1 respondent reported that the bureau or office generates internal workload, trend, and management reports from the information. Information retention and disposal. Bureaus and offices collecting information via the collection instruments we reviewed retain the information for a period of 1 year to indefinitely. Specifically, 7 respondents to our questionnaire reported that the bureau or office retains the information indefinitely. For example, 1 respondent reported that although the actual survey forms are kept for 5 years, spreadsheets of information on surveys of license and spectrum auctions are kept indefinitely. Another respondent reported that the information is retained indefinitely because the disposal procedures are not yet in place. We also asked about the procedures for disposing of information. Six respondents reported that information is transferred to the NARA after being retained by FCC for 5 years. Two respondents reported that paper documents are shredded and electronic records are physically destroyed or erased electronically. According to our review of 30 OMB-approved information collections, FCC's bureaus and offices appear to follow commission- and governmentwide policies and procedures for the collection and management of information. For example, the bureaus and offices conduct quality control procedures for these information collections. However, in prior reports, we have identified weaknesses in FCC's information collection and management practices, and some stakeholders with whom we spoke noted the same or similar weaknesses. In particular, these reported weaknesses concern FCC's information collection processes and the estimated burden hours associated with FCC's information collections. For the 30 information collections that we reviewed, FCC's bureaus and offices appeared to follow commission- and governmentwide policies and procedures for the collection and management of information. In particular, we compared the 30 responses from our questionnaires with the commission's internal policies and procedures and federal guidance on information collection and management practices. We found that the bureaus and offices followed the relevant policies and procedures for these 30 information collections. For example, respondents to our questionnaire reported carrying out a variety of commissionwide information management procedures, including the following: Quality control. FCC bureaus and offices responsible for the collections reported using a variety of quality control procedures for managing the collections to ensure the accuracy and integrity of the information in the collections. These quality control procedures include general processes to verify information, such as edit checks; Web-based filing systems, which incorporate presubmission checks for internal consistency; and notification of the filers of erroneous information and the legal obligation to correct the information and resubmit the document. Safeguarding sensitive and confidential information. The bureaus and offices collecting confidential information reported implementing a variety of safeguards. These safeguards include system limitations that restrict access to the information and encryption of the data in information collections. As mentioned previously, in several reports, we have found weaknesses in certain information collection, management, and reporting processes at FCC. In several instances, FCC has not implemented our recommendations. For example, we recommended that FCC consider collecting additional data and developing additional measures to monitor competition for dedicated access service on an ongoing basis; FCC disagreed that it needed to better define competition and collect additional data, although on November 5, 2009, it released a Public Notice inviting comment on an appropriate analytical framework for examining dedicated access. Some stakeholders with whom we spoke also identified certain weaknesses in FCC's processes. Information collection. We recently reported that when issuing a NPRM to gather public input before adopting, modifying, or deleting a rule, including those rulemakings involving information collection instruments, FCC rarely includes the text of the proposed rule in the notice, an omission that may limit the effectiveness of the public comment process. We recommended that FCC, where appropriate, include the actual text of proposed rules or rule changes in either a NPRM or a FNPRM before the commission votes on new or modified rules to improve the transparency and effectiveness of the decision-making process. Six stakeholders with whom we spoke also expressed concern about FCC's lack of specificity when proposing the collection of information through the notice and comment process. For example, four stakeholders said that FCC does not initially specify the information that it wants to gather through a proposed collection instrument in the NPRM. Additionally, an official representing a major telecommunications company said that FCC issues NPRMs that do not contain the proposed rule for stakeholders to review and comment on. This official added that NPRMs usually contain a general description of what the rule will be and the companies can submit comments. The lack of specificity in the NPRM makes it harder for stakeholders and the public to provide meaningful input on the proposed information collection instrument. Burden hour estimates. OMB recently released a request for comments on improving implementation of the PRA. In its request, OMB noted that agencies' estimation methodologies can sometimes produce imprecise and inconsistent estimates of the burdens associated with information collection instruments. In particular, OMB noted that some estimates are not based on sufficiently rigorous or internally consistent methodologies. Additionally, OMB noted that some information collections may impose significant burdens on small businesses. Therefore, OMB sought comment on a variety of topics, including the following: examples of substantially inaccurate burden estimates for information new or improved practices for estimating burden, examples of information collections that inaccurately estimate the impact of burden upon small entities, and whether or not a separate burden estimate should be created for small entities. Seven stakeholders with whom we spoke expressed concern about FCC's burden hour estimates and the overall burden associated with the commission's information collections, particularly the burden on small companies. Three stakeholders mentioned that FCC's burden hour estimates are not accurate. For example, an official with a telecommunications company said that the burden estimates for some of the information collections the company submits are underestimated. In particular, this official said that aggregating and submitting information to FCC on broadband service (FCC Form 477) takes longer than FCC's estimate; FCC's estimated average burden hours per response for the Form 477 is 72 hours, yet this official said the time to prepare and submit the Form 477 is off by a factor of 10. Six stakeholders mentioned the burdensome nature of some FCC collections, particularly for small companies. For example, one association said that providing data is a burden for some of the smaller companies, which might have as few as 500 customers. Another official noted that inaccurate estimates can adversely affect small companies, since the additional burden could negatively affect their operations. In general, these stakeholders did not provide concrete examples to substantiate their concerns about the estimated burden. On July 22, 2009, the FCC Chairman directed the Office of Strategic Planning and Policy Analysis (OSPPA) to conduct a top-to-bottom review of the commission's systems and processes for information collection, processing, analysis, and dissemination. According to the Chairman, he initiated the review to uncover opportunities to improve the commission's information capabilities. In particular, the Chairman sought information on whether any (1) new information should be collected to support the commission's mission, (2) existing information reporting requirements could be streamlined or eliminated because they are unduly burdensome or no longer relevant, and (3) existing technological platforms and management processes could be modernized in order to make the commission's use of information more efficient and effective. The Chairman asked OSPPA to answer 20 questions, including the following: For each bureau and office, what significant information is collected and which information is used most heavily internally or externally? Is there overlap among bureaus or offices with regard to information collection? What formal operational processes exist to manage the full information "life cycle" and are there any bottlenecks? Does FCC make regular efforts to gather best practices from other information collections agencies? What reports does FCC regularly generate to make information available to the public, what are the most important information systems, and what metrics does FCC have to track public consumption of information? According to FCC officials, OSPPA has taken several steps to carry out the Chairman's request. In particular, OSPPA (1) sought information on the current information collection efforts and future information needs in FCC's bureaus and offices and (2) identified potential gaps between the current collections and future needs. OSPPA officials said that the current effort will likely identify areas for greater investigation for the bureaus and offices, and that the current effort is the beginning of a multiyear review and transition process. Additionally, the Chairman initiated an assessment of FCC's database and communications infrastructure. According to the Chairman, an initial review strongly suggested that a significant upgrade will be warranted to bring the commission into the 21st century. The Chairman also stated that an upgrade will permit the commission and its staff to function much more efficiently and facilitate public use of its Web site. FCC also launched an internal online forum where employees can submit ideas for improvement and reform, and FCC plans to launch a section on its Web site allowing the public to offer ideas for reform as well. We provided FCC with a draft of this report for its review and comment. FCC provided written comments, which appear in appendix II. In its written comments, FCC discussed the various efforts under way at the commission to improve its data management processes. FCC also provided technical comments that we incorporated where appropriate. As agreed with your office, unless you publicly announce the contents of the report earlier, we plan no further distribution of it until 30 days from the date of this report. At that time we will send a copy of this report to the Chairman of the Federal Communications Commission. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512- 2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. This report examines (1) the information the Federal Communication Commission (FCC) collects; (2) how FCC collects and manages information; (3) the strengths and weaknesses, if any, in FCC's information collection and management practices; and (4) the status of FCC's internal review of its information collection and management practices. To describe the information FCC collects, we obtained and reviewed FCC's list of information collection instruments approved under the Paperwork Reduction Act (PRA); we reviewed collection instruments that were approved as of April 22, 2009. The list included FCC's description of the information collection, the PRA number, the name of the bureau or office responsible for managing the collection, and the estimated annual burden hours associated with the collection. We also interviewed FCC officials from seven bureaus and offices, including the Chief Information Officer. We discussed the availability, formats, and special characteristics of FCC's information collections. To describe how FCC collects and manages information, we reviewed commissionwide directives on FCC's (1) records management program, (2) forms management program, (3) management of nonpublic information, and (4) information security program. We reviewed the National Institute of Standards and Technology's guidance on security procedures for information, the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs directives on managing and securing information, and the National Archives and Records Administration's (NARA) guidance for retaining and disposing of information. We also interviewed FCC officials. Additionally, to obtain information on how various FCC bureaus and offices collect and manage information, we developed two questionnaires that covered various aspects of the information life cycle--collection, management, dissemination, and retention and disposal. We developed one questionnaire for collection instruments where FCC retains the information and a second questionnaire for collection instruments where the filing entity or a third party maintains the information. We pretested the questions to determine appropriateness and made revisions based on the results of the pretest. To select the information collection instruments from which we would obtain information via the questionnaires, we initially asked FCC for the repository (e.g., the database where the information resides) associated with each of its information collections; FCC officials said the commission could not readily provide that information because it does not maintain its records in such a manner. In response, we adopted an alternative, multistep approach. We asked FCC to classify the 413 OMB-approved information collection instruments into categories based on activity or use (e.g., licenses and surveys); FCC divided its 413 collection instruments into 21 categories. We determined the average burden hours for each of the 21 categories, based on the estimated annual burden hours for the collection instruments in each category. We established three strata based on the average burden hours (greater than 46,803 hours, 46,803 hours to 17,904 hours, and less than 17,904 hours). We selected one category from each of the first two stratum and two categories from the third strata in order to obtain a mix of collection types and to eliminate collections that received extremely limited submissions. Finally, we judgmentally selected collection instruments from each of these four categories; this process resulted in the selection of 30 information collection instruments. Because of the nature of our selection process, our results can not be used to evaluate FCC's collection processes overall. Of the 30 collection instruments, FCC maintains the information for 21 collection instruments and the filing entity or a third party maintains the information for the remaining 9 collection instruments. We received responses for all 30 collections. After receiving the 30 responses, we reviewed and analyzed the answers and followed up on selected answers and documentation provided in the questionnaire by interviewing the responsible officials. To describe the strengths and weaknesses in FCC's information collection and management practices, we compared the 30 responses from the questionnaires with the commission's internal policies and procedures and federal guidance on information collection and management practices. We also interviewed 19 stakeholders, including representatives from communication companies, industry trade associations, consumer and public interest groups, state regulators, and academic and industry experts. We selected these stakeholders to include a cross section of industries regulated by FCC, including radio and television broadcasters, cable television operators, satellite operators, and wireline and wireless telephone companies, as well as parties representing consumers and regulators that are affected by the commission's policies and rulemaking. We reviewed prior GAO reports and performed a literature review of best practices for the collection and management of information. To describe the steps FCC is taking to address information management weaknesses, we reviewed a memoranda dated July 22, 2009, from the FCC Chairman initiating a review of the commission's information management collections and processes. We also reviewed a congressional hearing statement made by the Chairman in which he discussed FCC's initiatives to improve information management. We met with the Chief of the Office of Strategic Planning and Policy Analysis to discuss progress on the commissionwide information management review the Chairman requested in July of 2009. In addition to the contact listed above, Michael Clements (Assistant Director), Andy Clinton, Mya Dinh, Amy Rosewarne, Don Watson, Mindi Weisenbloom, and Elizabeth Wood made major contributions to this report.

The Federal Communications Commission (FCC) regulates industries that affect the lives of virtually all Americans. FCC-regulated industries provide Americans with daily access to communications services, including wireline and wireless telephone, radio, and television. To ensure FCC is carrying out its mission, the commission requires a significant amount of information, such as ownership and operating information from radio and television stations. In prior reports, GAO has found weaknesses with FCC's information collection, management, and reporting processes. While FCC has taken action, the commission has not implemented all the recommendations associated with information collection, management, and reporting. As requested, this report provides information on (1) the information FCC collects; (2) how FCC collects and manages information; (3) the strengths and weaknesses, if any, in FCC's information collection and management practices; and (4) the status of FCC's internal review of its information collection and management practices. To complete this work, GAO gathered information on FCC's information collection efforts, reviewed information collection and management practices for 30 collection instruments, interviewed agency officials and industry stakeholders, and reviewed relevant laws and guidance. FCC provided comments which discuss its efforts to improve data management. FCC gathers a wide variety of information though information collection instruments. FCC gathers information through 413 collection instruments approved by the Office of Management and Budget (OMB). Through these OMB-approved collection instruments, FCC gathers information pertaining to (1) required company filings, such as the ownership of television stations; (2) applications for FCC licenses; (3) consumer complaints; (4) company financial and accounting performance; and (5) a variety of other issues, such as an annual survey of cable operators. FCC estimates that it receives nearly 385 million responses with an estimated 57 million burden hours associated with the 413 collection instruments. FCC's bureaus and offices collect and manage most commission information following commissionwide programs, policies, and procedures. FCC articulates its commissionwide programs, policies, and procedures in several directives, including its records management program. These directives help ensure FCC's compliance with governmentwide laws and regulations. Since FCC's bureaus and offices are the primary users of information, implementing decisions generally occur at that level. According to GAO's review of 30 information collections, FCC's bureaus and offices collect and manage information in a variety of ways. For example, FCC collects and manages 14 of the 30 information collections electronically, while it collects and manages some information in paper format. FCC disseminates information from 11 of the 30 information collections on its Web site, while it disseminates some information upon request, but in a redacted format. According to GAO's review of 30 information collections, FCC's bureaus and offices appear to follow commission- and governmentwide guidance, such as quality control procedures and safeguards for sensitive information. However, prior GAO reports and some stakeholders identified certain weaknesses with FCC's information collection and management practices. These weaknesses concern FCC's information collection processes and the accuracy of the estimated burden hours associated with FCC's information collections. For example, GAO recently reported that FCC rarely includes the text of a proposed rule in its Notice of Proposed Rulemaking, and stakeholders similarly noted that FCC does not initially specify the information that it wants to gather in the notice; the lack of specificity makes it harder for stakeholders and the public to provide meaningful input on the proposed information collection instrument. Recognizing the need to improve the commission's information practices, in July 2009, FCC's Chairman initiated a review of the commission's systems and processes. The Chairman sought to address whether (1) new information should be collected, (2) existing information reporting requirements could be streamlined or eliminated, and (3) existing technology and management processes could be modernized in order to make the commission's use of information more efficient and effective. FCC staff have taken several steps to implement the review and the effort continues.

Medicare hospice benefit services include nursing services, services provided by a physician to a hospice, drugs and medical supplies necessary for treating pain and other symptoms of a terminal illness, as well as dietary, spiritual, and bereavement counseling; medical social worker services; homemaker services; and short-term inpatient care both to provide respite for caregivers and to treat a patient's symptoms. Volunteers are an important resource in delivering hospice care; Medicare requires each hospice to have volunteers provide services equal to at least 5 percent of the total paid patient care hours. The specific services that a patient should receive are outlined in a plan of care, vary based on the type and intensity of the patient's symptoms and psychosocial needs and the needs of the patient's caregiver, and may vary throughout the hospice stay as the patient's condition changes. To be eligible for the Medicare hospice benefit, a patient must be certified by a physician as having a life expectancy of 6 months or less if his or her terminal illness runs its normal course. A Medicare patient who elects hospice care must waive Medicare coverage for all other services related to the terminal illness, although the patient retains coverage for services to treat other conditions. A patient may opt out of the hospice benefit and return to traditional Medicare at any time; a patient may also reelect hospice coverage at a later date. While there is no limit on the number of days an individual can receive hospice care, the prognosis of the patient's terminal illness must be reaffirmed after the first 90 days, the first 180 days, and then every 60 days thereafter. Under the law, Medicare pays hospices a daily rate that covers all services provided to the patient. HCFA developed four hospice per diem payment categories, which reflect the intensity of the services and the location of service delivery. In 1986, annual updates to the rates for the four payment categories were set in law. A typical day of care provided in a patient's residence is paid as RHC, and in 2001, the vast majority of hospice care days, 96 percent, were billed as RHC (see table 1). Unless a hospice provides CHC, IRC, or GIC, it is paid the RHC rate for each day the patient is under its care. Hospice care delivered during periods of crisis can be paid as CHC if the care is provided in the home for at least 8 hours within a 24-hour period beginning at midnight and at least half the care hours are delivered by a nurse. To provide respite for primary caregivers, IRC can be provided for up to 5 consecutive days in an inpatient setting. Inpatient care for symptoms that cannot be treated in the patient's residence is paid as GIC. Hospices provide the care in their own inpatient units or arrange with hospitals, skilled nursing facilities, or other inpatient facilities to provide these services. The payment rate is adjusted by a wage index, which varies based on the patient's residence, to account for geographic differences in wage costs. The hospice payment categories and their corresponding payment rates were developed from cost data from the 26 hospices that participated in the 1980 to 1982 Medicare demonstration. To calculate the payment rates, HCFA used cost data to identify the cost factors that contributed to providing hospice services and summed the mean cost per day of each cost factor for each of the four categories of hospice care. The costs of bereavement and volunteer services were not included in the rates. By law, hospices are subject to an annual aggregate Medicare payment cap that was meant to ensure that payments for hospice care would not exceed what Medicare would have paid if patients had been treated in a traditional setting, such as a hospital. Total annual payments to a hospice may not exceed a per-patient amount multiplied by the number of Medicare patients who received care from that hospice during the year. The 2004 cap amount for the 12 months beginning November 1, 2003, is $19,635.67 per Medicare patient. Hospice patients, services, and providers have changed since the demonstration. For example, the mean patient length of stay at hospices participating in the Medicare demonstration from 1980 to 1982, was 70 days; in 2001, the mean length of stay was about 50 days. While demonstration costs were based only on Medicare patients with cancer diagnoses, patients with noncancer diagnoses, who may require a different mix of services, represented approximately half of all hospice patients in 2000. In addition, hospice providers have stated that advances in end-of- life care, notably new, more costly pain-management drugs and palliative chemotherapy and radiation, have increased the costs of providing care to certain types of patients. The mix of hospice providers today differs from the provider types in the demonstration. In the demonstration, the predominant type of hospice provider was hospital-based, whereas in 2001, the predominant type was freestanding (see fig. 1). More recently, the proportion of for-profit hospices increased from almost 13 percent of all hospices in 1992 to almost 28 percent in 2001, and the percentage of hospices serving patients primarily living in rural areas rose from 32 in 1992 to 38 in 2001. In addition, the number of hospices participating in Medicare grew from 1,208 in 1992 to 2,275 in 2002, the most recent data available. We determined that for freestanding hospices, the unadjusted per diem payment rate across the four payment categories was about 8 percent higher than estimated average per diem costs in 2000, and over 10 percent higher in 2001. For the payment categories, we estimate that the home care (RHC and CHC) per diem payment rate was almost 10 percent higher than average home care per diem costs in 2000, and over 12 percent higher in 2001. We estimate that the IRC payment rate was almost 53 percent lower than average IRC per diem costs in 2000, and 61 percent lower in 2001. In both years, the GIC payment rate was about 7 percent higher than average GIC per diem costs. In 2000, we estimate that average per diem costs for small hospices were over 13 percent higher than for medium hospices and almost 7 percent higher than for large hospices. In 2001, average per diem costs for small hospices were over 15 percent higher than for medium hospices and almost 8 percent higher than for large hospices. With the exception of average GIC per diem costs in 2000, small hospices also had higher average per diem costs than medium or large hospices for each payment category. Medicare's hospice payment rate, across the four payment categories and unadjusted for geographic differences in wages, was higher than freestanding hospices' estimated average per diem cost. The unadjusted payment rate was about 8 percent higher than average per diem costs in 2000, and over 10 percent higher in 2001 (see fig. 2). The 25 percent of hospices with the lowest average per diem costs had costs that were at least 27 percent below the unadjusted payment rate in 2000, and at least 31 percent below the unadjusted payment rate in 2001. However, in 2000, average per diem costs for almost 34 percent of freestanding hospices and, in 2001, almost 32 percent of freestanding hospices, were higher than the unadjusted per diem rate. The costs of individual hospices differ depending on the mix of services provided. In addition, the payments to individual hospices differ because of the wage adjustment and the mix of payment categories billed. We could not determine the relationship between payments and actual costs for individual hospices because of data limitations in the hospice cost reports and claims data. Unlike those for other providers, Medicare's hospice cost reports do not include Medicare payment information. In addition, Medicare hospice claims data contain only the total payment for all services provided during the billing period, including physician services, not the payment for each hospice payment category. The specific relationship between payment rates and costs for freestanding hospices varied among payment categories. For home care (RHC and CHC) days, we estimate that in 2000, the unadjusted per diem payment rate for freestanding hospices was almost 10 percent higher than the average per diem cost of over $92. In 2001, the per diem payment rate was over 12 percent higher than the average home care per diem cost of over $96. Nonetheless, about 35 percent of freestanding hospices in 2000, and over 32 percent in 2001, had average home care per diem costs that were higher than the home care per diem payment rate. We estimate that in 2000, the unadjusted IRC per diem payment rate for freestanding hospices was almost 53 percent lower than the average IRC per diem cost of about $218. In 2001, the IRC per diem payment rate was over 61 percent lower than the average IRC per diem cost of over $279. However, the GIC per diem payment rate was higher than average GIC per diem costs for freestanding hospices; it was over 7 percent higher than costs in both years. In addition, average per diem costs for IRC and GIC varied widely among freestanding hospices. Our estimates of average IRC and GIC per diem costs may understate actual costs because of data limitations. IRC costs may be much higher than the IRC payment rate because the hospice continues to provide services and visits to the patient in addition to paying the inpatient facility. Our analysis of the proprietary 2002 patient-specific visit data found that the number and type of visits provided per day to patients during IRC days were comparable to the number and type of visits per day to patients during RHC days. In 2001, IRC accounted for 0.2 percent of hospice days of care. We estimate that for 2000 and 2001, small freestanding hospices had higher average per diem costs than medium and large freestanding hospices. In 2000, average per diem costs for small hospices were more than 13 percent higher than for medium hospices and almost 7 percent higher than for large hospices. In 2001, average per diem costs for small hospices were more than 15 percent higher than for medium hospices and almost 8 percent higher than for large hospices (see table 2). With the exception of average GIC per diem costs in 2000, small hospices' average per diem costs were higher than medium and large hospices' costs for each individual payment category for both years. Cost disparities across providers of different sizes were greatest for IRC and GIC. As small freestanding hospices are more likely than other hospices to be located in rural areas, they are more likely to receive lower Medicare payments because the wage index adjustment generally reduces the payment rates for providers in rural areas. In 2001, 60 percent of small freestanding hospices were located in rural areas, while 35 percent of medium freestanding hospices and 10 percent of large freestanding hospices were located in rural areas. The structure of the hospice payment system may not reflect how hospices currently deliver services. For example, our analysis of the relative costs for freestanding hospices for different services provided during RHC days, the most common payment category, showed they have changed considerably since the payment rate was initially calculated, suggesting that the services delivered or the resources necessary for those services have changed over the years. In addition, our analysis of proprietary 2002 patient-specific visit data showed that visit frequency varied during the hospice stay, although the rate for each payment category does not. Also, the mean length of stay has decreased. Hospice officials raised concerns about some of the payment policy requirements for CHC and IRC, although our analysis of the limited available data could not confirm that the requirements restrict hospices' ability to provide care. Finally, the annual aggregate cap was intended to help limit Medicare spending for all hospices, but it was not based on actual hospice costs, and for each year from 1999 through 2002, few hospices reached it. The relative costs of services in 2001 have changed considerably since the payment rate was developed in 1983, suggesting that the services delivered or the resources necessary for those services have changed over time. Specifically, the proportions of RHC costs attributable to nursing, drugs, social services, and durable medical equipment (DME) have increased, while the proportions attributable to home health aide services, supplies, and outpatient services have decreased (see fig. 3). In our analysis, this pattern is present across freestanding hospices of all sizes and locations. The largest cost increase occurred for drugs, which rose from 3 to 15 percent of RHC costs over this period. Hospice officials we spoke with stated that this increase was due in part to the introduction of new, more costly medications. Some stated that drugs have become one of their greatest cost pressures. Hospice visits are particularly concentrated at the beginning and end of a hospice stay, yet the payment rate of each category does not vary throughout a hospice stay. Our analysis of the 2002 patient-specific visit data showed that patients have a higher mean number of visits per day during the first, and especially the last, week of a stay. As a result, the costs of care are higher both at the beginning and end of a hospice stay. Officials from almost all hospices with whom we spoke also reported this pattern. They told us that at the beginning of a hospice stay they provide more visits because the patient's symptoms, including pain, must be stabilized and the family must be educated about the patient's care. Near the end of life, hospice officials indicated that the patient's symptoms and needs change, usually requiring more hospice management, and the family often needs additional psychosocial support. Our analysis of the 2002 patient-specific visit data showed that patients with a length of stay of 2 weeks or less had a higher mean number of visits per day than patients with a length of stay greater than 2 weeks. Hospice officials we spoke with stated that patients who are in hospice care a short time are relatively more costly on a per diem basis because there are fewer days of lower visit frequency to balance the higher costs of the days with more visits at the beginning and end of the stay. In 1983, the Medicare hospice per diem payment amounts accounted for the variation in daily hospice costs because they were based on the mean daily costs incurred by the hospices in the demonstration over a mean hospice stay of 70 days. However, hospice stays are considerably shorter now; the mean length of stay was 50 days in 2001. Mean daily costs may now be very different because of the change in the length of stay. No data are available, however, to compare costs at different points during a stay or for stays of different lengths. Hospice officials we spoke with raised concerns about some of the policy requirements for particular payment categories, although our analysis of the available data could not confirm their concerns. For example, to bill for CHC, Medicare requires that a nurse provide at least half of billed CHC hours. Hospice officials stated that this could restrict the hospice's ability to provide the most appropriate care when a social worker was a more appropriate caregiver than a nurse. The officials were also concerned that the 8-hour minimum required for billing CHC payment, counted from midnight of one day until midnight of the next, could restrict their ability to bill for CHC. For example, if a patient dies in less than 8 hours or the hospice provides 8 hours of services over 2 calendar days, the hospice must bill for RHC. Our analysis of 2001 Medicare hospice claims indicated that the mean number of hours provided on a CHC day was 18 hours, considerably above the 8-hour minimum. Similarly, our analysis of the 2002 patient-specific visit data from one large, freestanding hospice showed a mean of 20 hours provided on each CHC day. Therefore, instances of continuous care hours that fall just short of 8 hours, for which a hospice cannot bill CHC hours, do not occur often based on the patient-specific visit and claims data. Hospice officials we spoke with also stated that the statutory requirement that respite care be provided in an inpatient setting might hinder its use. Specifically, they stated that while primary caregiver respite is important, enabling patients to remain at home rather than moving them to an inpatient facility is also important; primary caregivers may not take respite in order to avoid moving the patient to an inpatient facility. Few hospices we spoke with currently provide home respite care for extended periods. They said this is largely because the costs are higher than the RHC payment rate, which is the payment category the hospices must bill for these services. Data related to home respite care are not available, although it is likely that the costs of providing 24 hours of home respite care would be higher than RHC costs. According to our analysis of data from the regional home health intermediaries, the contractors responsible for processing and paying Medicare hospice claims, less than 2 percent of all hospice providers reached the annual aggregate payment cap each year from 1999 through 2002. In 1982, the Congress required HCFA to calculate a cap that limited a hospice's total payments to a specific per-patient amount based on the Medicare costs incurred for patients with cancer during the last 6 months of life. However, a subsequent law enacted before the hospice benefit was implemented set a per-patient cap amount that was not based on the cost data; for the 12 months beginning November 1, 2003, the cap was $19,635.67 per Medicare patient. The cap is intended to ensure that payments for hospice care do not exceed what Medicare would have spent if patients had been treated in a traditional setting, such as a hospital. However, it affects few hospices, and therefore may not represent a meaningful limit. Hospice officials we spoke with who discussed the cap said it did not affect them. CMS has not evaluated the hospice per diem payment rates and methodology since they were developed to determine the relationship between payments and costs and whether the per diem methodology is consistent with current patterns of care. There are several indications that hospice payments may not be appropriately distributed across days of care or types of providers. The type of care provided during a hospice stay appears to be different than when the hospice per diem payment rates and methodology were developed. Comprehensive data are not available, however, to evaluate the number of visits or costs of services provided during a Medicare hospice stay. While our analysis of the limited data available indicates that the overall Medicare payment rate across all payment categories was above estimated costs, IRC costs were considerably above the payment rate. Further, small freestanding hospices had substantially higher average per diem costs than other hospices. As a result, a comprehensive analysis of patient-specific data may show that modifications to the hospice payment methodology are warranted. Because the payment rates for the four hospice payment categories, the per diem methodology, and the cap are set by law, CMS's ability to make modifications to the payment approach is limited. We recommend the following three actions. First, we recommend that the Administrator of CMS collect comprehensive, patient-specific data on the visits and services being delivered by hospices and the costs of these services. Second, using these data, the Administrator should determine whether the hospice payment methodology and payment categories need to be modified, including any special adjustments for small providers. Third, the Administrator should implement those modifications that would not require a change in Medicare law and submit a legislative proposal to the Congress for those that do. We received written comments on a draft of this report from CMS (see app. II). We also received oral comments from two groups representing industry organizations, the Hospice Association of American (HAA) and the National Hospice and Palliative Care Organization (NHPCO), as well as from the large, for-profit hospice that provided the patient-specific visit data. In commenting on a draft of this report, CMS stated that it agreed with our recommendations and intends to use our findings to supplement and reinforce preliminary evaluations the agency has made and future studies that are planned. In responding to our recommendation that it collect comprehensive, patient-specific data on hospice visits and services and the costs of these services, CMS stated that it recognized the need for this type of analysis. It stated that collection of these data would require additional research funding, and it is uncertain when such funding would be available. CMS noted that it has initiated efforts to collect data on costs with the recent establishment of the hospice cost reports. CMS stated that it hoped the recommendations in our report could help the agency in developing a comprehensive research strategy for the hospice benefit. In responding to our recommendation that CMS determine whether the hospice payment methodology and payment categories need to be modified, including any adjustments for small providers, CMS agreed that the methodology implemented in 1983 was based on a delivery model that may have changed since that time. It concurred that the methodology should be reevaluated to determine its current appropriateness. It again stated that research funding is limited. CMS agreed that the costs of drugs and other therapies, the number of hospice beneficiaries with noncancer diagnoses, and the mean length of stay have all changed since 1983. CMS stated that we did not demonstrate in the draft report that the provision of these and other therapies have increased the cost of providing care beyond the present payment. In the draft report, we stated that there may be problems with the distribution of hospice payments, but that comprehensive data are not available to evaluate the number of visits or costs of services provided during a Medicare hospice stay. As noted in the draft report, the overall payment rate across all types of care is higher than our estimate of hospices' overall costs. In its comments, CMS also raised concerns that we implied that payment methodology changes be made for small hospices before CMS collects comprehensive data. We have clarified our conclusion to indicate the need for comprehensive, patient-specific data on the visits and services delivered by hospices and the costs of these services to inform any changes to the payment methodology. In response to our recommendation that CMS should submit a legislative proposal to the Congress to implement those modifications that would require a change in Medicare law, CMS stated that should it determine changes are necessary, it would evaluate those changes as part of its overall legislative strategy. CMS also made technical comments, which we incorporated where appropriate. The external reviewers generally agreed with our findings and recommendations. Comments on specific portions of the draft report centered on two areas: our scope and methodology and the hospice payment methodology. Regarding our scope and methodology, HAA and NHPCO were concerned that we based our findings on Medicare freestanding hospice cost reports that had not been audited. The large, for-profit hospice noted that the cost report is complex and that hospices' accounting systems are not generally compatible with its structure. Similarly, HAA and NHPCO stated that hospices may not have had sufficient experience with completing the cost reports at the time of our review. NHPCO stated that our exclusion of hospice cost reports with fewer than 11 total patients or an average of less than 1 patient per day might have excluded a substantial number of cost reports. In addition, HAA and NHPCO recommended that we include bereavement counseling costs in our per diem cost calculation. They stated that although Medicare is precluded from paying hospices for bereavement counseling, it is a required service, and excluding it from the per diem cost calculation may misrepresent the amount by which payment rates exceeded hospice costs. Regarding reviewers' concerns about our use of unaudited cost reports, BBRA directed us to examine hospice cost factors. Information on these factors is available only from cost reports, which CMS has not audited. As stated in the draft report, we assessed the reliability of the cost reports by comparing descriptive statistics calculated using the cost reports with those calculated using the Medicare hospice claims, and found the data suitable for our purposes. Regarding reviewers' concerns about data we excluded from our analysis, we excluded 51 of 992, or 5 percent, of freestanding hospice cost reports in 2000, and 48 of 975, or 5 percent, of freestanding hospice cost reports in 2001, because they had fewer than 11 total patients or an average of less than 1 patient per day. We excluded these cost reports because we believe that these hospices either had too few patients to be representative of all hospices, or may have been reporting data incorrectly. We do not believe that these represent substantial numbers of cost reports and consider our exclusion criteria appropriate. Concerning the comments that we should include bereavement costs in our per diem cost calculation, as stated in the draft report, we included only Medicare-reimbursable costs in our calculations. If Medicare cannot, by law, pay hospices for bereavement services, it is inappropriate to include them in a per diem cost that is compared to a payment rate that is not designed to cover these costs. In 2001, in comparison to total Medicare-reimburseable costs, bereavement costs were small; they were equal to less than 2 percent of total Medicare- reimburseable costs. Reviewers also commented on the hospice payment methodology. NHPCO stated that costs on the cost report may not reflect the provision of all services that could potentially be provided because hospices may manage their costs to more closely approximate the per diem rate. Although the provision of additional services may be warranted, hospices cannot pay for them and therefore do not provide them. HAA and NHPCO stated that instances of CHC provision that fall close to 8 hours may not seem to occur often because hospices avoid providing CHC if they know they will not be able to provide at least 8 hours. However, HAA and NHPCO also stated that data to determine whether this is the case are not available. Regarding industry comments on hospice costs and the hospice payment methodology, we acknowledge that hospices may manage their costs to closely approximate the per diem rate, and that hospices may not provide CHC if they know they will not be paid for that level of care. Data are not available to evaluate whether either of these situations occur. Reviewers also made technical comments, which we incorporated where appropriate. We are sending copies of this report to the Administrator of CMS and appropriate congressional committees. The report is available at no charge on GAO's Web site at http://www.gao.gov. We will also make copies available to others on request. If you or your staffs have any questions, please call me at (202) 512-7119 or Nancy A. Edwards at (202) 512-3340. Other major contributors to this report include Beth Cameron Feldpush, Joanna L. Hiatt, and Gordon W. Richmond. To examine hospice costs and Medicare payments, we used 2000 and 2001 Medicare hospice cost reports, the financial documents that hospices submit annually to the Centers for Medicare & Medicaid Services (CMS), and 2000 and 2001 Medicare hospice claims data, bills submitted by hospices to receive Medicare payment. We also used proprietary 2002 patient-specific visit data from a large for-profit hospice, which has been collecting these data for its internal use since 1994. We interviewed officials from CMS and one regional home health intermediary, a contractor responsible for processing and paying Medicare hospice claims, in addition to officials from AARP, the Hospice Association of America, the National Hospice and Palliative Care Organization, and the Visiting Nurse Associations of America. We also spoke with representatives from 18 hospices, several national independent and academic hospice researchers, and two physicians who provide hospice care. Finally, we conducted a site visit to a freestanding hospice with an inpatient unit. To assess the reliability of the cost report data, we compared descriptive statistics calculated using the cost reports with those calculated using the Medicare hospice claims data. Because hospices began submitting cost reports in 1999, we also compared our calculations from the 2000 cost reports to those from the 2001 cost reports to ensure that hospices had provided consistent data. To assess the reliability of the claims data, we compared descriptive statistics calculated using the claims with statistics published by CMS. To assess the consistency of the 2002 patient-specific visit data, we verified that the distribution of visits in the 2002 data was similar to the distribution of visits in 1997 and 1999. In addition, before releasing these data to us, the hospice performed quality assurance edits, which consisted of confirming that the data provided to us were identical to the data in its database for more than 20 randomly selected patients. Finally, we calculated descriptive statistics and compared them with statistics for all hospices calculated using the Medicare hospice claims. We determined that the cost report, claims, and patient-specific data were all suitable for our purposes. The 2000 and 2001 hospice cost reports were the most recent data available at the time of our analysis. The Medicare payment methodology is the same for freestanding and facility-based hospices; however, we confined our analysis to cost reports of freestanding hospices. We excluded hospital- based and home health agency-based hospices because we found that their per diem costs were generally much lower than those of freestanding hospices, which may result from decisions made by these providers in allocating overhead costs between the hospital or home health agency and the hospice. For freestanding hospices, the only costs incurred are for delivering hospice care to patients. We excluded freestanding cost reports that reported no or low Medicare utilization, those that had cost reporting periods of fewer than 10 or greater than 14 months, and those outside the 50 states or District of Columbia. We also excluded cost reports that had fewer than 11 total patients or an average of less than 1 patient per day, those with no costs, and those reporting costs outside three standard deviations of the mean. Our final sample included 82 percent of all freestanding hospice cost reports in 2000 and 80 percent in 2001. We calculated freestanding hospices' total Medicare-reimburseable costs by subtracting nonreimburseable costs, such as bereavement and fund- raising, from total costs. To obtain average per diem costs, we summed total Medicare-reimburseable costs across all providers and divided by total hospice days across all providers. In addition, because of the cost report design, certain inpatient respite care (IRC), general inpatient care (GIC), and physician costs may be included in our estimate of combined routine home care (RHC) and continuous home care (CHC), or home care, costs. As a result, home care costs may be overestimated, which would result in our understating the amount by which the unadjusted home care payment rate exceeds average home care per diem costs. Because of the way cost centers are defined on the cost reports, the costs of IRC and GIC may be underestimated. We based the size of a hospice in each year on the number of days of care it provided that year. Small hospices were those that reported total days of care less than the 25th percentile of all hospices' total days of care. Medium hospices were those that reported total days of care equal to or greater than the 25th percentile and less than or equal to the 75th percentile of all hospices' total days of care. Large hospices were those that reported total days of care greater than the 75th percentile of all hospices' total days of care. We defined a hospice as urban if it was located in a county that was in a metropolitan statistical area and as rural if it was located in a county that was not in a metropolitan statistical area, as determined by the Office of Management and Budget as of June 30, 1999. We could not compare the 2000 and 2001 per diem costs we calculated to actual payments because hospice cost reports do not report Medicare payment information. In addition, Medicare hospice claims contain only the total payment for all services provided during the billing period, including physician services, not the payment for each payment category. Therefore, we calculated a 2000 and 2001 unadjusted payment rate that encompassed all payment categories. We did so by weighting the individual rates of the four payment categories by their respective utilization in the freestanding hospice cost reports in our final sample in each year. The costs for home care, combined RHC and CHC, are reported in aggregate on the hospice cost report. Therefore, we calculated a 2000 and 2001 unadjusted payment rate that encompassed RHC and CHC. We did so by weighting the individual rates of these two categories by their respective utilization in the freestanding hospice cost reports in our final sample in each year. In addition, we weighted the overall unadjusted payment rate and the unadjusted payment rate for each payment category to account for the different payment rates in effect during the year. The majority of freestanding hospices report costs using a calendar year reporting period, while payment rates are updated on a fiscal year basis, that is, on October 1 of each year. Therefore, during a calendar year, one payment rate is in effect from January 1 through September 30 and another from October 1 through December 31. Our unadjusted payment rates do not account for the wage adjustment Medicare applies to payments. To determine the proportion of total cost in 2001 accounted for by each service, such as nursing or home health aide services, that was included in the 1983 RHC rate, we grouped the services on the cost report into categories similar to the 1983 services, and divided by the total cost. Our estimates of the proportions of 2001 RHC costs include CHC costs because the costs of RHC and CHC are reported in aggregate on the hospice cost report. It is likely that CHC costs were a very small proportion of combined RHC and CHC costs, as CHC days accounted for just over 1 percent of total hospice days in 2001. To determine the percentage of total hospice days accounted for by each payment category and the mean CHC hours per CHC day for all hospices, we used 2000 and 2001 Medicare hospice claims data, the years that matched most closely with the cost reports used for our analysis. We excluded from our analysis patients who were younger than 20 or older than 110 years of age, who lived outside of the 50 states or the District of Columbia, and who had total hospice payments that fell below 1 day of care at the lowest wage-adjusted RHC payment rate and above 1 year of care at the highest wage-adjusted RHC payment rate. Our final sample included over 98 percent of all claims in both 2000 and 2001. To analyze the frequency and types of visits to hospice patients, we used proprietary 2002 data on Medicare hospice patients collected by a large, for-profit hospice with multiple freestanding facilities. We determined the number of visits per day and the number of nurse, home health aide, counselor, and other caregiver visits per day for all days and for days within each of the four payment categories. We also analyzed whether there were differences in the number of visits per day provided by patient length of stay, patient residence, diagnosis, number of secondary conditions, and age and determined the number of visits in the first and last week of a stay and for the remaining days of a stay. We conducted our work from January 2003 through October 2004 in accordance with generally accepted government auditing standards. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. 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The Medicare hospice benefit provides care to patients with a terminal illness. For each patient, hospices are paid a per diem rate corresponding to one of four payment categories, which are based on service intensity and location of care. Since implementation in 1983, the payment methodology and rates have not been evaluated. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 directed GAO to study the feasibility and advisability of updating Medicare's payment rates for hospice care. In this report, GAO (1) compares freestanding hospices' costs to Medicare payment rates and (2) evaluates the appropriateness of the per diem payment methodology. Because of Medicare data limitations, it was not possible to compare actual payments to costs or examine the services provided to each patient. Using Medicare cost reports from freestanding hospices, GAO determined that the per diem payment rate for all hospice care was about 8 percent higher than the estimated average per diem cost of providing care in 2000, and over 10 percent higher in 2001. However, the relationship between payment rates and costs varied across the payment categories and types of hospices. For all hospice care provided in the home, which accounted for about 97 percent of care in 2001, GAO estimates that the per diem payment rate was almost 10 percent higher than average per diem costs in 2000, and over 12 percent higher in 2001. Small hospices, however, had higher estimated average per diem costs than medium or large hospices overall and for each of the four per diem payment categories in 2001. GAO's analysis indicates that the hospice payment methodology, with rates based on the historical mix and cost of services, a per diem amount that varies only by payment category, and a cap on total Medicare payments, may not reflect current patterns of care. For example, GAO determined that the relative costs of services, such as nursing care, provided during routine home care (RHC) have changed considerably since the rates were calculated. Using limited patient-specific hospice visit data, GAO found that more visits were provided during the first, and especially last, week of a hospice stay than during other times in the stay. Finally, few hospices reached the payment cap, which was intended to limit Medicare hospice spending.

FPS MegaCenters provide federal agencies with three primary security services--alarm monitoring, radio monitoring, and dispatch--through four locations using a variety of IT systems. MegaCenters monitor intrusion, panic, fire/smoke, and other alarms. They also monitor FPS police officers' and contract guards' radio communication to ensure their safety and to provide information, such as criminal background or license plate histories, to officers upon request. In addition, they exercise command and control authority by dispatching FPS police officers or contract guards. MegaCenters also provide a variety of other services. For example, they notify federal agencies regarding national emergencies and facility problems and remotely diagnose problems with federal agency alarms. They also receive and transcribe FPS police officer incident reports. Individual MegaCenters may also provide unique services not provided by other MegaCenters, such as facility-specific access control and remote programming of alarms via the Internet. One MegaCenter also provides an after-hours telephone answering service for the Drug Enforcement Administration and for GSA building maintenance emergencies. The MegaCenters are located in Battle Creek, Denver, Philadelphia, and Suitland. Each MegaCenter has a sister center with redundant capability as backup in case of a failure at that MegaCenter. Suitland is paired with Battle Creek, and Philadelphia is paired with Denver. A force of 1,014 FPS police officers and 6,842 contract guards is available for the MegaCenters to dispatch in response to alarms and other emergencies. In fiscal year 2006, the MegaCenters were supported by a budget of $23.5 million, which accounts for about 5 percent of FPS's total budget. The MegaCenters are operated by 23 full-time federal employees--some of whom manage the centers--and about 220 private contractors to provide around the clock security services for over 8,300 federal facilities. The MegaCenters rely on a variety of IT systems, communications systems, and other equipment to provide their security services. The IT systems enable MegaCenter staff to, among other activities, monitor alarms and radio communications of FPS police officers and contract guards. For communications systems, MegaCenters have regional and national toll-free numbers for tenants and the public to contact the MegaCenters during emergencies. Other equipment includes dictation machines, which enable FPS police officers to dictate reports about incidents that occur at facilities. MegaCenters use various means to assess operations, but their performance measures have weaknesses and are not linked to FPS-wide performance measures. MegaCenter managers assess MegaCenter operations through a variety of means, including reviewing data about volume and timeliness of operations, listening to and evaluating a sample of calls between operators and FPS police officers and contract guards, and receiving informal feedback about customer satisfaction. FPS managers also have developed 11 performance measures for assessing MegaCenter operations: distribute emergency notification reports (also known as SPOT reports) within 30 minutes of notification; review problem alarm reports daily; obtain regular feedback about customer satisfaction from field continuously review all SPOT reports and other outgoing information to ensure 100 percent accuracy; transcribe dictated offense and incident reports into the database management system within 8 hours of receipt of the report; submit reviewed contractor billing reports and time sheets within 7 business days after the last day of the month; prepare and review contractor reports for quality assurance plan; maintain completely accurate (nonduplicative) case control numbers; meet Underwriters Laboratories (UL) guidelines and requirements test failover of alarm, radio, and telephone systems weekly; and monitor calls and review recorded call content for adherence to standard procedures at least monthly. The Government Performance and Results Act of 1993 requires federal agencies to, among other things, measure agency performance in achieving outcome-oriented goals. Measuring performance allows organizations to track the progress they are making toward their goals and gives managers critical information on which to base decisions for improving their progress. We have previously reported on some of the most important attributes of successful performance measures. These attributes indicate that performance measures should (1) be linked to an agency's mission and goals; (2) be clearly stated; (3) have quantifiable targets or other measurable values; (4) be reasonably free of significant bias or manipulation that would distort the accurate assessment of performance; (5) provide a reliable way to assess progress; (6) sufficiently cover the program's core activities; (7) have limited overlap with other measures; (8) have balance or not emphasize one or two priorities at the expense of others; and (9) address governmentwide priorities of quality, timeliness, efficiency, cost of service, and outcome. We assessed the 11 FPS MegaCenter performance measures against selected attributes: linkage to mission and goals, clarity, and measurable targets. Ten of the 11 MegaCenter performance measures were aligned with FPS's mission to protect federal properties and personnel and with the MegaCenter program's mission to provide high-quality and standardized alarm monitoring, radio monitoring, and dispatch. We found no link between timely review of contractor time sheets and billing statements and FPS's mission, however, primarily because this measure seems to be related to administrative activities. In addition, while 6 of the 11 performance measures have measurable targets--a key component for measuring performance, none of the MegaCenter performance measures met the clarity attribute because FPS could not provide information about how managers calculate the measures--a key component in the clarity attribute. For example, the performance measure that the centers test the failover ability of alarm, radio, and telephone systems weekly is measurable because it has a quantifiable target but does not meet the clarity attribute because FPS could not describe its methodology for calculating it. We also assessed whether, collectively, the MegaCenters' 11 performance measures sufficiently cover their core program activities (i.e., alarm monitoring, radio monitoring, and dispatch) and address governmentwide priorities of quality, timeliness, efficiency, cost of service, and outcome. Most of the MegaCenter performance measures relate to the three core activities. For example, regular feedback on customer service and monthly review of operator calls cover aspects of the dispatch and radio-monitoring functions. Other performance measures, like distributing emergency notification reports in 30 minutes, help fulfill other critical support functions. However, two performance measures--reviewing contractor quality assurance plans and timely review of contractor time sheets and billing statements--relate to administrative activities that are not strictly related to MegaCenter core activities. Additionally, the MegaCenter performance measures do not collectively address all of the governmentwide priorities. The MegaCenter performance measures primarily address the governmentwide priorities of quality and timeliness. For example, the MegaCenter measures pertaining to transcribing reports within 8 hours and reviewing recorded calls to see if the operator followed standard operating procedures address aspects of service timeliness and quality, respectively. None of the measures relate to the governmentwide priorities of efficiency, cost of service, and outcome. Finally, FPS does not link MegaCenter performance measures to FPS-wide performance measures, specifically the patrol and response time measure. FPS established FPS-wide performance measures to assess its efforts to reduce or mitigate building security risks. The performance measures that FPS established were (1) timely deployment of countermeasures, (2) functionality of countermeasures, (3) patrol and response time, and (4) facility security index. The one measure that relates to the MegaCenters-- patrol and response time--assesses FPS's ability to respond to calls for service and measures the average elapsed time from when a law enforcement request is received (e.g., alarm, telephonic request from a building tenant, FPS police officer-initiated call) to the time an officer arrives at the scene. FPS's goal is to reduce response times by 10 percent in fiscal year 2006. The MegaCenters are responsible for part of the patrol and response activity that is being measured because the MegaCenters receive alarms and emergency calls and dispatch FPS police officers or contract guards to the scene. However, although data pertaining to this activity exist in the MegaCenters' records management system, they do not measure the timeliness of this activity, and FPS has not developed a performance measure that would identify the MegaCenters' contribution toward meeting FPS's measure. The nine selected security organizations generally do not provide all three of the MegaCenters' primary services. However, the services these organizations offer are provided similarly by the MegaCenters with the exception of a CAD system, which three organizations use and the MegaCenters do not. The MegaCenters provide three primary services (i.e., alarm monitoring, radio monitoring, and dispatch), and the selected organizations provide all or some of these three main services. For example, the Park Police provide all three services, while the private organizations focus on providing alarm monitoring and offer some services the MegaCenters do not. Like the MegaCenters, all of the private organizations reviewed have centralized operations: the number of their national control centers ranges from two to five. Work allocation (i.e., how incoming alarms and calls are assigned) among centers varies by organization but overall is similar to the MegaCenter structure. For example, most of the organizations assign calls and alarms to a specific center based on the geographic location of the call or signal. However, the Postal Inspection Service and one private organization are unique because they are able to allocate workload to centers based on demand and operator availability. The organizations use a variety of methods to measure the quality of their services, many similar to methods used by the MegaCenters. For example, like the MegaCenters, most review a sample of operator calls on a regular basis. Two entities have established measurable performance goals for their centers. While there are similarities in the services offered, number of centers, work allocation, and service quality appraisals between the organizations reviewed and the MegaCenters, three organizations use a CAD system, which the MegaCenters do not. A CAD system is a tool used by the Denver Police Department for dispatching and officer tracking and by the Postal Inspection Service for officer tracking. The Park Police also uses a CAD system with limited capabilities at its San Francisco center and plans to purchase and upgrade the system for all three of its centers. Selected organizations and associations referred to CAD systems as being beneficial for dispatching services by allowing for faster operator response, automatic operator access to standard operating procedures and response prioritization, and automatic recording of operator actions enabling easier performance analysis. Since 2003, FPS and DHS both have assessed MegaCenter technology and have identified needs for technology upgrades, including the installation of a CAD system for the MegaCenters. Our guide on IT investment decision making--based on best practices in the public and private sector--stresses that part of achieving maximum benefits from an IT project requires that decisions be made on a regular basis about the status of the project. To make these decisions, senior managers need assessments of the project's impact on mission performance and future prospects for the project. While the MegaCenters have assessed their technology on many occasions and have determined that some refreshment is needed, FPS has not yet allocated the funding for such upgrades. FPS MegaCenters play a key role in protecting federal facilities, those who enter these facilities, and the FPS police officers and contract guards whose calls the MegaCenters respond to and monitor. How well the MegaCenters are fulfilling their role and carrying out their responsibilities is uncertain because they do not generate much of the information that would be useful for assessing their performance. To their credit, the MegaCenters have established performance measures for a number of their activities and operations, and these measures are aligned with the MegaCenters' mission. However, the measures have weaknesses, both individually and collectively, compared with the selected attributes of successful performance measures that we have identified. Many of the individual measures are neither quantifiable nor clearly stated, and collectively the measures do not address the governmentwide priorities of efficiency, cost of service, and outcome. As a result, FPS cannot compare performance across the MegaCenters or over time, and without such information, FPS is limited in its ability to identify shortfalls and target improvements. Although FPS has established an FPS-wide performance measure for response time--from the alarm to the FPS police officer's arrival on the scene--that incorporates the MegaCenters' operations, the MegaCenters have not established a comparable measure for their operations alone. Without such a measure, FPS cannot evaluate the MegaCenters' contribution--from the alarm to the FPS police officer's dispatch--to the FPS-wide measure for response time and identify opportunities for improvement. We recommend that the Secretary of Homeland Security direct the Director of the Federal Protective Service to take the following three actions: establish MegaCenter performance measures that meet the attributes of successful performance measures we have identified; develop a performance measure for the MegaCenters that is directly linked to the FPS-wide response time measure and covers the scope of the MegaCenters' operations, from alarm to dispatch; and routinely assess the extent to which the MegaCenters meet established performance measures. We provided a draft of this report to DHS, the Department of the Interior, and the U.S. Postal Service for their review and comment. DHS provided comments in a letter dated September 6, 2006, which are summarized below and reprinted in appendix II. DHS also provided technical comments, which we incorporated into the report where appropriate. The Postal Service informed us that it had no comments on this report. The Department of the Interior did not provide comments on this report. DHS generally agreed with the report's findings and recommendations. DHS stated that FPS and the U.S. Immigration and Customs Enforcement (ICE) have undertaken a comprehensive review of the MegaCenters to identify, among other things, ways in which performance can be better measured. DHS noted that through this broad approach, FPS personnel will be able to generate and track the kind of information necessary to assess the MegaCenters' performance. This one-time review may help FPS identify information needed to assess the MegaCenters' performance and, therefore, develop appropriate performance measures. In order to reliably assess performance over time, FPS should not only establish appropriate performance measures, but also routinely assess performance using these measures. We therefore clarified our recommendation to include the routine use of established performance measures to assess the MegaCenters' performance. With regard to the report's discussion of CAD system capabilities, DHS said that ICE's Chief Information Officer is currently assessing the MegaCenters' technology requirements and recognizes that previous studies have identified the need for technology upgrades. DHS indicated that the current assessment will have a meaningful impact on FPS's technology capabilities. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to other interested congressional committees and the Secretary of Homeland Security, and DHS's Assistant Secretary for Immigration and Customs Enforcement. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Since the 1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City and the September 11, 2001, attacks on the World Trade Center and Pentagon, terrorism has threatened the nation's security, including the physical security of federal facilities. The Homeland Security Act of 2002 created the Department of Homeland Security (DHS), a new federal department with the mission of preventing terrorist attacks within the United States, which includes safeguarding federal facilities. DHS, through its Federal Protective Service (FPS), provides law enforcement and security services to federal agencies that occupy almost 9,000 facilities under the jurisdiction of the General Services Administration (GSA) and DHS, protecting millions of federal employees, contractors, and citizens. Under agreement, FPS authority can be extended to provide its law enforcement and security services to any property with a significant federal interest. As part of its approach to facility protection, FPS provides support for its law enforcement and security services through four control centers (known as MegaCenters) located in Battle Creek, Michigan; Denver, Colorado; Philadelphia, Pennsylvania; and Suitland, Maryland. Because of the important role MegaCenters play in assuring the safety of federal facilities and their occupants, our objectives were to: (1) Identify the services the MegaCenters provide and how they provide them. (2) Determine how FPS assesses and measures the performance of MegaCenter operations and how FPS links MegaCenter performance measures to FPS-wide performance measures. (3) Examine how the MegaCenters compare to selected security organizations in the services they provide and in the methods they use to provide them. Document review: Reviewed the Memorandum of Agreement between GSA and FPS and other documentation related to MegaCenter services as well as documentation related to (1) FPS's request for a computer aided dispatch (CAD) system for the MegaCenters; (2) past FPS assessments of MegaCenter operations; (3) FPS's performance measures; and (4) FPS's budget for the MegaCenters. Interviews: Interviewed FPS officials, including MegaCenter branch chief and managers, and staff from the Program Review Office, Financial Management Division, and other offices; Immigration and Customs Enforcement's (ICE) Budget Enforcement Office; and officials from selected public and private organizations; officials from security industry standard setting and accreditation associations (associations). U.S. Customs and Border Protection U.S. Park Police U.S. Postal Inspection Service Denver Police Department 5 private security companies We conducted our review in accordance with generally accepted government auditing standards. Remote monitoring of building alarm systems, radio monitoring, and dispatching of FPS police officers and contract guards are the primary services FPS MegaCenters provide. These and other services are provided around the clock from four locations across the country. Each MegaCenter has a sister center with redundant capabilities that can serve as an emergency backup and each is operated by full-time federal employees and private contractors. In addition, the MegaCenters have a fiscal year 2006 budget of $23.5 million and use a variety of information technology (IT) systems and other equipment to provide their services. FPS MegaCenter managers assess MegaCenter operations through a variety of means, including reviewing information on the timeliness and volume of operations, listening to and evaluating a sample of calls between operators and FPS police officers and contract guards, and receiving informal feedback about customer satisfaction. FPS managers have also developed performance measures for assessing MegaCenter operations. Although these MegaCenter measures reflect some attributes of successful performance measures, they also contain some weaknesses because they are not always clearly stated or measurable, and do not address governmentwide priorities of efficiency, cost of service, and outcome. In addition, they do not directly measure key operations that would link to FPS-wide performance measures, which are (1) the timely deployment of countermeasures, (2) functionality of countermeasures, (3) patrol and response time, and (4) facility security index. The nine selected organizations offer some of the MegaCenters' primary services, and they deliver and assess the services they offer in a generally similar manner to the MegaCenters. For example, like the MegaCenters, many of these organizations have centralized their control center operations, have backup capability, allocate workload among control centers based on geographic location, and use regular call reviews as well as volume and time measures to assess the quality of the services they provide. A few organizations offer services the MegaCenters do not offer. One difference between the MegaCenters and the selected organizations is that three of these organizations use a CAD system, which the MegaCenters do not have. The MegaCenters have assessed their technology and have identified the need for a CAD; however FPS has not allocated funds for such a purchase. FPS operations are solely funded through security fees and reimbursements collected from federal agencies for FPS security services. These security fees consist of basic and building-specific security charges. The basic security charges cover the security services that FPS provides to all federal tenants in FPS-protected buildings, which include such services as patrol, monitoring of building perimeter alarms and dispatching of law enforcement response (MegaCenter operations), criminal investigations, and security surveys. The building-specific security charges are for FPS security measures that are designed for a particular building and are based on the FPS Building Security Assessment and its designated security level. Such measures include contract guards, X-ray machines, magnetometers, cameras, and intrusion detection alarms. Also, the tenant agencies may request additional security services such as more guards, access control systems, and perimeter barriers. The above two charges are billed monthly to the tenant agencies. The basic security charge is the same for all tenants regardless of the type of space occupied and is a square footage rate. The building-specific security charge reflects FPS cost recovery for security measures specific to a particular building and the billing is handled differently for single- and multi-tenant buildings. Single tenant buildings--the tenant agency is billed for the total cost of the security measures. Multi-tenant buildings--the tenant agencies are billed based on their pro rata share of the square feet occupied within the respective building. FPS uses a reimbursable program to charge individual agencies for additional security services and equipment that they request above the level determined for their building. FPS bills the tenant agencies for FPS security fees they have incurred. The agencies pay the fees into an FPS account in the Department of the Treasury, which is administered by FPS. Congress exercises control over the account through the annual appropriations process that sets an annual limit--called obligation authority--on how much of the account FPS can expend for various activities. FPS uses the security fees to finance its various activities within the limits that Congress sets. The Department of Homeland Security Appropriations Act for fiscal year 2006 authorized $487 million in obligation authority for FPS expenses and operations. Through FPS's security fees, funds are to be collected and credited to FPS's account as an offsetting collection from tenant agencies. Under the FPS reimbursable program, agencies request additional security services and equipment using a funded Security Work Authorization. Once the services are provided and the costs are expensed, FPS bills the agency for the costs, and the funds are transferred to the FPS account to offset the expenses FPS incurred. The DHS Inspector General reported in 2006 that when FPS was part of GSA it budgeted and paid for FPS's annual administrative support costs such as financial management, human capital, and IT using funds beyond those generated by security fees. GSA estimated these FY 2003 support services to cost about $28 million. According to the report, beginning in FY 2004, neither DHS's annual budget request nor DHS's appropriations set aside funding for FPS's support services. In FY 2004, as a component of DHS, FPS paid almost $24 million for support services using funds from security fees only; a year earlier these services had been funded by GSA using funds not derived from fees. Before GSA established the MegaCenters, FPS used regional and satellite control centers to monitor alarm systems, dispatch FPS police officers and contract guards, and perform criminal background checks. In total, there were 22 regional control centers and 12 satellite control centers, which were located throughout FPS's 11 regions. Most regions had more than 1 control center. In 1991, GSA conducted an internal review of the control centers. The review found that because of significant budgetary and personnel constraints over more than a decade, the control centers no longer performed well enough to ensure safe, effective, and efficient FPS actions to preserve life and property. GSA contracted with Sandia National Laboratories- the lead laboratory for U.S. Department of Energy security systems- to conduct an in-depth study of the control centers' operation and make recommendations. In 1993, Sandia issued its study entitled GSA Control Center Upgrade Program. The Sandia study identified serious shortfalls and problems that would require a more radical upgrade of the control centers at a much higher cost than originally believed. After validating the study's findings, GSA determined that a multimillion dollar upgrade of all control centers would be prohibitively expensive. The study noted that the control centers could be consolidated to almost any level to achieve economies of scale. However, the study recommended against a single national-level control center because a second center would be needed to continue operations under catastrophe or failover conditions. Background: Evolution of the MegaCenters, GSA concluded that the control center problems that the study identified were material weaknesses and reported them to Congress. FPS conducted an operational and technical review of the Sandia study's findings, which provided a critical assessment of the control centers, a high-level concept of operations for the centers, and functional specifications for upgrading the centers. GSA decided to upgrade 11 control centers--one in each region--and address the weaknesses that the study had identified. Within GSA, concerns were raised about the cost of upgrading 11 control centers, how many control centers were really needed, and whether the centers' operations could be outsourced. GSA established a project team to investigate these concerns. The team contacted several public and private sector organizations that operate control centers. The team found that the organizations were consolidating their control centers but were unable to assume the operations of FPS control centers. A decision was made to consolidate additional centers and the multi-regional control center or "MegaCenter" concept was developed. GSA endorsed the MegaCenter concept. GSA assembled a core project team and hired contractors to design, plan, and supervise the construction of the centers. ensure centers are meeting their goals and providing quality services, many similar to the MegaCenters. Mathew J. Scire (202) 512-2834 or [email protected]. Other key contributors to this report were Gerald P. Barnes, Assistant Director; Deirdre Brown; Bess Eisenstadt; Colin Fallon; Brandon Haller; Richard Hung; Alex Lawrence; Gail Marnik; and Josh Ormand.

The Department of Homeland Security's Federal Protective Service (FPS) through its control centers (MegaCenters) helps provide for the security and protection of federally owned and leased facilities. This report (1) identifies the services MegaCenters provide, (2) determines how FPS assesses MegaCenter performance and whether FPS links MegaCenter performance measures to FPS-wide measures, and (3) examines how MegaCenters and selected organizations compare in the services they provide. To address these issues, GAO reviewed FPS's performance measures and past MegaCenter assessments, assessed the MegaCenters' performance measures, and interviewed officials and collected relevant information at FPS, the four MegaCenters, and nine selected security organizations. FPS MegaCenters provide three primary security services--alarm monitoring, radio monitoring, and dispatching of FPS police officers and contract guards. These and other services are provided around the clock from four locations--Battle Creek, Michigan; Denver, Colorado; Philadelphia, Pennsylvania; and Suitland, Maryland. With a fiscal year 2006 budget of $23.5 million, the MegaCenters monitor alarms at over 8,300 federal facilities, covering almost 381 million square feet, and have available for dispatch over 7,800 FPS police officers and contract guards. FPS MegaCenter managers assess MegaCenter operations through a variety of means, including reviewing data about volume and timeliness of operations, listening to and evaluating a sample of calls between operators and FPS police officers and contract guards, and receiving informal feedback about customer satisfaction. FPS managers have also developed performance measures for assessing MegaCenter operations. However, these measures are of limited use because they are not always clearly stated or measurable and do not address governmentwide priorities of efficiency, cost of service, and outcome--which are among the attributes that GAO has identified for successful performance measures. In addition, the MegaCenters do not measure a key activity--the time from alarm to officer dispatch--that would link MegaCenter performance to an FPS-wide performance measure. Without this measure, FPS is limited in its ability to evaluate the MegaCenters' contribution to the FPS-wide measure of response time. Nine selected security organizations--including federal and local police and private entities--offer some of the MegaCenters' services as well as provide and assess these services in a manner that is generally similar to the MegaCenters. Like the MegaCenters, many of the selected organizations have centralized their operations. They also use regular call reviews and volume and time measures to assess the quality of the services they provide. A major difference between the MegaCenters and some selected organizations is the use of a computer-aided dispatch system, which enables these organizations to automate many functions.

U.S. insular areas receive hundreds of millions of dollars in federal grants from a variety of federal agencies, including the Departments of Agriculture, Education, Health and Human Services, Homeland Security, the Interior, Labor, and Transportation. The Secretary of the Interior has administrative responsibility over the insular areas for all matters that do not fall within the program responsibility of another federal department or agency. OIA, established in 1995, is responsible for carrying out the Secretary's responsibilities for U.S. insular areas. OIA's mission is to promote the self-sufficiency of the insular areas by providing financial and technical assistance, encouraging private sector economic development, promoting sound financial management practices in the insular governments, and increasing federal responsiveness to the unique needs of the island communities. Much of the assistance that OIA administers to insular areas is in the form of what it considers mandatory assistance, including compact assistance, permanent payments to U.S. territories, American Samoa operations funding, and capital improvement project grants. OIA also administers discretionary assistance through, for example, technical assistance grants and operations and maintenance improvement program grants. The administration and management of OIA grants is guided by OIA's Financial Assistance Manual. OIA grants other than compact assistance are subject to Interior's Grants Management Common Rule, relevant Office of Management and Budget (OMB) circulars, and specific terms and conditions that OIA outlines in each grant agreement, such as semiannual narrative and financial reporting and grant expiration dates. Within OIA, two divisions are largely responsible for grant administration and management--the Technical Assistance Division and the Budget and Grants Management Division. The Technical Assistance Division, which administers general technical assistance grants in addition to several other types of technical assistance, has a director and two grant managers. The Budget and Grants Management Division, which covers capital improvement project and operations and maintenance improvement program grants, has a director and three grant managers. A third OIA division--the Policy and Liaison Division--also provides some staff for grant-related tasks, including staff that focus on OIA's accountability and audit responsibilities. The majority of OIA's budget is directed to compact assistance and permanent fiscal payments (see table 1). About 2 percent of OIA's budget is dedicated to administrative costs, leaving less than 16 percent for noncompact grants and technical assistance. Among the random sample of 173 OIA grant project files that we reviewed in our March 2010 report, we identified 49 OIA technical assistance grant projects from a variety of technical assistance grant types (see table 2). The 49 technical assistance grant projects that we reviewed in our March 2010 report, were geographically dispersed among the insular areas and the State of Hawaii (see table 3). On the basis of our review of grant files from a random sample of grant projects, we determined that the long-standing internal control weaknesses that we, Interior's Office of Inspector General, and others, identified between 2000 and 2009 still exist. We estimated that 39 percent of the 1,771 grant projects in OIA's grant management database demonstrate at least one internal control weakness that may increase the projects' susceptibility to mismanagement. Of the 49 technical assistance grant projects in our sample, 47 grant projects demonstrated one or more of the internal control weaknesses that we assessed, which is more than double our estimated 39 percent occurrence rate for OIA grants as a whole. The eight internal control weaknesses that we assessed can be grouped into three categories based on the entity responsible for the activities: grant recipient activities, OIA grant management activities, or joint activities between grant recipients and OIA. Table 4 shows (1) how often we estimated each internal control weakness would occur within the universe of OIA grants based on our random sample, and (2) specific data on the 49 technical assistance grants included in our sample. The most prevalent weaknesses for the 49 technical assistance grant projects were insufficient reporting and record-keeping discrepancies. Table 5 shows how many internal control weaknesses were demonstrated by the 49 technical assistance grant projects in our sample. For example, one general technical assistance grant project that we reviewed in detail--the 2005 grant for the USVI Household Income and Expenditures Survey (HIES) project--had 4 out of 5 applicable internal control weaknesses. In 2005, OIA awarded a general technical assistance grant to the Eastern Caribbean Center (ECC) at the University of the Virgin Islands for the purpose of collecting data to update important economic and demographic indicators for the territory. Because of funding constraints, OIA was not able to award the entire amount requested at that time. In addition, OIA later reduced its financial support of the project after data collection was underway, thereby reducing the scope of data collection efforts. The Director of the ECC reported that OIA's decision to reduce available funding after data collection had begun was disastrous to the statistical integrity of the survey. In reviewing this grant project, we found the following four internal control weaknesses, (1) failure to submit the required status report in full and on time, (2) failure to submit the required final reports on time, (3) expected or actual completion dates that occurred after grant expiration, and (4) information in OIA's grant management database that did not match information in the grant file. These weaknesses and other problems affected project completion in several ways, including the loss of additional funding that OIA later awarded. In 2007, OIA granted additional funds for the HIES project to complete tabulation of the data that had been collected. However, because so much time had passed since the initial data collection effort, the Director of the ECC stated that it was not possible to complete the data collection as originally planned. Due to the lack of activity with the grant and the fact that no narrative status reports were submitted, OIA deobligated these additional grant funds in their entirety in February 2009. The final HIES report also was not completed until September 2009, more than 4 years after the initial grant was awarded. OIA has taken several important steps to improve grant project implementation and management but faces several obstacles in its efforts to compel insular areas to complete their projects in a timely and effective manner. Over the past 5 years, OIA has taken the following steps to improve grant project implementation and management: Competitive allocation system. In fiscal year 2005, OIA implemented a new competitive allocation system for the $27.7 million in capital improvement project grants that it administers to the insular areas. This system provides incentives for financial management improvements and project completion by tying a portion of each insular area's annual allocation to the insular governments' efforts in these areas--such as their efforts to submit financial and status reports on time. Through this system, OIA scores each insular area against a set of performance-based criteria and increases allocations to those insular areas with higher scores, thereby lowering allocations to insular areas with lower scores. Grant expiration dates. Beginning in 2005, to encourage expeditious use of funds, OIA established 5-year expiration dates in the terms and conditions of new capital improvement project grants. Beginning in 2008, OIA also notified insular area officials of expiration dates for grant projects that had been ongoing for more than 5 years with no or limited progress. OIA officials explained that while the expiration dates have not yet pushed all of the insular areas to complete projects, they have encouraged some areas to do so. The officials also stated that the expiration dates have helped OIA grant managers administer and manage grants--which they believe has improved accountability--and have been useful for insular area grantees whose agencies have high staff turnover and were unaware of the status of older grants. Technical assistance projects have shorter grant terms than capital improvement projects, with expiration dates within 1 to 2 years; we found that OIA extended the grant expiration date at least once for 18 of the 49 technical assistance grant projects in our sample. Actions to improve insular area grant management continuity. OIA has also taken steps to help with the continuity of grant administration at the insular level. For example, in March 2008, OIA awarded a $770,000 grant for capital improvement project administration in the CNMI, which provided funding for positions in the local central grant management office in that insular area. According to the grant manager for CNMI capital improvement projects, the grant was given to help ensure that the central grant management office had the staff necessary to help move implementation of projects forward. Despite OIA's efforts, some insular areas are still not completing their projects in a timely and effective manner, and OIA faces the following key obstacles in compelling them to do so: Lack of sanctions for delayed or inefficient projects. Current OIA grant procedures provide few sanctions for delayed or inefficient projects. For example, although OIA established grant expiration dates, they have little practical effect. In theory, a grant expiration date encourages timely completion of a project because if a project is not completed on time, the funds are taken away from the recipient. However, if an insular area's OIA grant funds expire, while the funds do not remain immediately available for the project, the insular area does not lose the funds because OIA treats its capital improvement project grants as mandatory funding with "no-year funds," based on the agency's interpretation of relevant laws. Thus, after a grant expires, OIA deobligates the funds and they are returned to the insular area's capital improvement project account to be reobligated for the same or other projects. Recently, OIA has taken steps to identify possible solutions and actions that could help provide effective sanctions for insular areas that do not efficiently complete projects and expend funds. In doing so, OIA has faced uncertainty regarding the authorities it has to change its current policies and practices, which are guided by many special agreements, laws, and regulations. OIA resource constraints. OIA officials report that resource constraints impede effective project completion and proactive monitoring and oversight. Although they could not provide us with data, numerous officials in OIA asserted that heavy workloads are a key challenge in managing grants. The effects of insufficient resources vary across grant type but include impacts on the ability to maintain files, adopt a proactive oversight approach that could aid project completion, conduct more detailed financial reviews of projects, and conduct site visits to more projects to better ensure that mismanagement is detected. Importantly, although grant managers for capital improvement projects noted that the most effective action they can take to move projects along is to conduct site visits, they also asserted that their current workloads only afford one visit per year. Despite their concurrence that additional resources are needed, OIA division directors confirmed that they have not formally communicated these needs to decision makers, or higher levels within Interior, and have not developed a workforce plan or other formal process that demonstrates a need for additional resources. Moreover, OIA does not track workload measures, such as the number of grants handled by each grant manager, to show changes over time that would help justify the need for additional resources. Inconsistent and insufficiently documented project redirection policies. OIA's current project redirection approval practices do little to discourage insular areas from redirecting project funds in ways that hinder project completion. We found that insular areas shift priorities and frequently redirect grant project funds, which in some cases expedites project completion and in other cases impedes it. Currently, OIA's policies for granting project redirection requests vary across insular areas. Specifically, in American Samoa, project redirection is limited to changes within a priority category because the insular area's grants are issued by priority areas. In contrast, the other insular areas each receive grants as one capital improvement grant and are able to redirect money between projects with widely different purposes. Furthermore, OIA's policies for granting project redirection requests are also not well-documented. Project redirection is a particular concern in instances where a project starts and federal money is expended but the project is never completed, leading to the waste of both federal resources and the local governments' limited technical capacity to implement projects. Inefficient grant management system. OIA's current data system for tracking grants is limited in the data elements it contains, leading to inconsistencies in the data that some grant managers rely on for monitoring and oversight activities. Grant managers vary in the degree to which they rely upon OIA's database, as well as the priority they place on keeping information in the database up to date. While grant managers for all grant types reported relying on the database for information on the amount of funds drawn down from grants and for responding to requests for data from outside parties (such as Interior's Office of Inspector General and GAO), some told us that they do not find OIA's database useful and therefore maintain their own separate spreadsheets to track some information, including expiration dates, grant status, and receipt dates for the most recent financial and narrative reports. As reported in the Domestic Working Group's Guide to Opportunities for Improving Grant Accountability, consolidating information systems can enable agencies to better manage grants. Along these lines, Interior is currently phasing in a centralized agencywide system--the Financial and Business Management System--that is scheduled to be implemented in OIA in 2011. Our March 2010 report contained three recommendations to the Secretary of the Interior designed to improve the department's management and oversight of grants to the insular areas, including one that would directly impact OIA's technical assistance grant programs. Specifically, we recommended that the Secretary of the Interior direct OIA to create a workforce plan and reflect in its plan the staffing levels necessary to adopt a proactive monitoring and oversight approach. Such proactive monitoring and oversight would apply to all of OIA's grant programs, including the technical assistance programs. OIA agreed with our report and told us that it will implement these recommendations. In conclusion, Madam Chairwoman, OIA has made important strides in implementing grant reforms, particularly in its efforts to establish disincentives for insular areas that do not complete grant projects in a timely and effective manner. However, the unique characteristics and situations facing insular area governments, and the need to mindfully balance respect for insular governments' self-governance and political processes with the desire to promote efficiency in grant project implementation, limit as a practical matter some of the actions that OIA can take to improve the implementation of grant projects. Nonetheless, OIA has not exhausted all of its available opportunities to better oversee grants and reduce the potential for mismanagement and we will continue to monitor its implementation of our recommendations. Madam Chairwoman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Anu K. Mittal at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Jeffery D. Malcolm and Emil Friberg, Assistant Directors; Elizabeth Beardsley; Keesha Egebrecht; and Isabella Johnson. 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.

U.S. insular areas face serious economic and fiscal challenges and rely on federal funding to support their governments and deliver critical services. The Department of the Interior, through its Office of Insular Affairs (OIA), provides about $70 million in grants annually, including technical assistance grants, to increase insular area self-sufficiency. In the past, GAO and others have raised concerns regarding insular areas' internal control weaknesses, which increase the risk of grant fund mismanagement, fraud, and abuse. In March 2010, GAO reported on insular area grants (GAO-10-347); this testimony summarizes that report and focuses on (1) whether previously reported internal control weaknesses have been addressed and, if not, to what extent they are prevalent among OIA grant projects, including technical assistance grant projects, as of March 2010; and (2) the extent to which OIA has taken action to improve the implementation and management grant projects, as of March 2010. For the March 2010 report, GAO reviewed a random sample of 173 OIA grant project files and interviewed OIA and insular area officials. For this testimony, GAO conducted additional analysis for the 49 technical assistance grant projects included in the sample. GAO's March 2010 report contained three recommendations. Interior agreed with the recommendations. This testimony statement contains no new recommendations. Internal control weaknesses previously reported by GAO and others continue to exist, and about 40 percent of grant projects funded through OIA have these weaknesses, which may increase their susceptibility to mismanagement. These weaknesses can be categorized into three types of activities: grant recipient activities, joint activity between grant recipients and OIA, and OIA's grant management activities. For the 49 technical assistance grant projects in GAO's sample, the most prevalent weaknesses were insufficient reporting and record-keeping discrepancies. Over the past 5 years, OIA has taken steps to improve project implementation and management. Most notably, OIA established incentives for financial management improvements and project completion by tying a portion of each insular area's annual allocation to the insular governments' efforts in these areas--such as their efforts to submit financial and status reports on time. In addition, OIA established expiration dates for grants to encourage expeditious use of the funds. Despite these and other efforts, some insular areas are still not completing their projects in a timely and effective manner, and OIA faces key obstacles in compelling them to do so. Specifically, (1) current OIA grant procedures provide few sanctions for delayed or inefficient projects, and the office is not clear on its authorities to modify its policies; (2) resource constraints impede effective project completion and proactive monitoring and oversight; (3) inconsistent and insufficiently documented project redirection policies do little to discourage insular areas from redirecting grant funds in ways that hinder project completion; and (4) OIA's current data system for tracking grants is limited and lacks specific features that could allow for more efficient grant management.

Many entities are involved in the production and distribution of television content to households, as shown in figure 1. Local television stations may acquire network content from the national broadcast networks that they are affiliated with, such as CBS; from syndicators for syndicated content, such as game shows and reruns; or from both. Stations also create their own content, including local news. Stations provide content to households directly through over the air transmission, which households can receive free of charge, and through retransmission by MVPDs, such as cable and satellite operators. Content producers, such as Sony and Disney, also distribute content through cable networks, such as ESPN, that are carried by MVPDs. "Over-the-top" providers, such as Netflix, provide content to consumers through Internet connections often provided by MVPDs. According to FCC, local television stations' affiliation agreements with networks and contracts with syndicators generally grant a station the right to be the exclusive provider of that network's or syndicator's content in the station's local market. Broadcasting industry stakeholders and economic theory note that exclusive territories can provide economic benefits to local television stations, broadcast networks, and viewers. Local television stations benefit from being the exclusive providers in their markets of high-demand network content, such as professional sports and primetime dramas. Being the exclusive provider supports stations' viewership levels, which strengthens their revenues, allowing them to invest in the production of local content, among other things. For broadcast networks, exclusivity can help increase the value of each local station and create efficiencies in the distribution of network content. Thus, while exclusive territories reduce competition between some stations (e.g., local NBC stations in different geographic markets do not compete), the exclusive territories could provide incentives for stations to invest more heavily in the development of content and thus promote greater competition between stations in the same geographic market (e.g., local ABC and NBC stations in the same market compete), which can benefit viewers. FCC's exclusivity rules are an administrative mechanism for local television stations to enforce their exclusive rights obtained through contracts with broadcast networks and syndicators. Network non-duplication. This rule protects a local television station's right to be the exclusive provider of network content in its market. FCC promulgated the rule in 1966 to protect local television stations from competition from cable operators that might retransmit the signals of stations from distant markets. FCC was concerned that the ability of cable operators to import the signals of stations in distant markets into a local market was unfair to local television stations with exclusive contractual rights to air network content in their local market. The rule allows exclusivity within the area of geographic protection agreed to by the network and the station, so long as that region is within a radius of 35 miles--for large markets--or 55 miles--for small markets--from the station (see fig. 2). Syndicated exclusivity. This rule protects a local television station's right to be the exclusive provider of syndicated content in its market. FCC first promulgated the rule in 1972 to protect local television stations and ensure the continued supply of content. This rule applies within an area of geographic protection agreed to by the syndicator and the station, so long as that region is within a 35-mile radius from the station. The exclusivity rules--when invoked by local television stations--require cable operators to block duplicative content carried on a distant signal imported into the station's protected area by cable operators. For example, these rules allow WJZ, the CBS-affiliated local television station in Baltimore, to prohibit a cable operator from showing duplicative network content on another market's CBS station that the cable operator imports into Baltimore. Similarly, the rules allow WJZ to prohibit a cable operator from showing any duplicated syndicated content on any other market's station the cable operator imports into Baltimore. Local television stations are able to invoke the exclusivity rules regardless of whether their signals are retransmitted by a cable operator or not. For example, even if WJZ is not retransmitted by a particular cable operator in Baltimore, WJZ can invoke its exclusivity rights against that cable operator, requiring it to block duplicative content. FCC has statutory authority to administratively review complaints of violation of these rules (e.g., if a local television station believes a cable operator imported a distant signal into its market even though the station invoked its exclusivity protections) when such complaints are formally brought before the Commission. FCC officials said that the Commission addresses such complaints on a case-by-case basis. The broadcast industry is governed by a number of other rules and statutes that interplay with the exclusivity rules. These rules and laws include the following: Must carry. Must carry refers to the right of a local television station to require that cable operators that serve households in the station's market retransmit its signal in that local market. The choice to invoke must carry is made every 3 years by stations. Cable operators carrying stations under the must-carry rule may not accept or request any fee in exchange for coverage. Retransmission consent. Retransmission consent refers to permission given by television stations who do not choose must carry to allow a cable or satellite operator to retransmit their signals. Stations invoke either retransmission consent or must carry. Retransmission consent was enacted in 1992; at the time, Congress determined that cable operators obtained great benefit from the broadcast signals that they were able to carry without broadcaster consent, which resulted in an effective subsidy to cable operators. Retransmission rights are negotiated directly between a local television station and cable and satellite operators. By opting for retransmission consent, stations give up the guarantee that cable and satellite operators will carry their signal under must carry in exchange for the right to negotiate compensation for their retransmission. Cable and satellite operators are unable to retransmit the signal of a local television station that has chosen retransmission consent without its permission. If, despite negotiations, a local television station and a cable or satellite operator do not reach agreement, the local television station may prohibit the cable or satellite operator from retransmitting its signal, commonly referred to as a "blackout." FCC rules require local television stations and cable or satellite operators to negotiate for retransmission consent in "good faith." FCC's rules set a number of good faith standards, including a requirement that parties designate an individual with decision-making power to lead negotiations. Compulsory copyright. Must carry and retransmission consent pertain to the retransmission of a local television station's signal. The content within that signal is protected by copyright. For example, the National Football League (NFL) holds the copyright for its games that are broadcast on CBS, Fox, and NBC. Generally, any potential user (other than the copyright holder) intending to transmit copyright protected content must obtain permission from the copyright holder beforehand. The compulsory copyright licenses, enacted in 1976, allow cable operators to retransmit all content on a local television station without negotiating with the copyright holders. To make use of the compulsory copyright, the cable operator must follow relevant FCC rules and pay royalties to the Copyright Office within the Library of Congress. The Copyright Act establishes the royalties that a cable operator must pay to carry television stations' signals. A cable operator pays a minimum royalty fee regardless of the number of local or distant television station signals it carries, and the royalties for local signals are less than those for distant signals. Compensation for television content flows through industry participants in a number of ways that are relevant to the exclusivity rules, as seen in figure 3. Households that subscribe to television service with an MVPD pay subscription fees; FCC reported that the average monthly fee for expanded-basic service was $64.41 on January 1, 2013. Those MVPDs, including cable and satellite operators, pay retransmission consent fees to local television stations that opt for retransmission consent; as discussed above, the fees are determined in negotiations between stations and MVPDs. Advertisers purchase time from local television stations, broadcast networks, and MVPDs. Local television stations provide compensation to their affiliated national broadcast networks and to the providers of syndicated content in exchange for the rights to be the exclusive provider of that content in their market. Local television stations also use their advertising and retransmission consent revenues to develop their own content, including local news. In 2014, FCC issued a FNPRM to consider eliminating or modifying the exclusivity rules, in part to determine if the rules are still needed given changes to the video marketplace since the rules were first promulgated. FCC asked for comments on, among other things, the potential effects of eliminating the rules. In response to the FNPRM, FCC received 72 records during the open comment period, including letters from individuals, and comments and reply comments from industry stakeholders. FCC officials said that the Media Bureau is working on a recommendation for the FCC Chairman's consideration on whether to repeal or modify the exclusivity rules; there is no firm timeframe for when the bureau may make a recommendation. All 13 broadcast industry stakeholders (local television stations, national broadcast networks, and relevant industry associations) we interviewed and whose comments to FCC we reviewed report that the exclusivity rules are needed to help protect stations' exclusive contractual rights to air network and syndicated content in their markets. Those stakeholders reported that the rules provide an efficient enforcement mechanism to protect the exclusivity that local television stations negotiate for and obtain in agreements with networks and syndicators; in the absence of the rules, enforcement of exclusivity would have to take place in the courts, which would be difficult and inefficient for several reasons. These stakeholders report that if a local television station believes that a cable operator improperly imported duplicative content on a distant signal into its market, the station will be unable to bring legal action to stop the airing of this duplicative content. Specifically, the cable operator may have an agreement with a station in a distant market that allows it to retransmit that station's signal in other markets. Since the affected local station might not have a contract with either the cable operator that is importing the distant station or the distant station, these stakeholders report that the local station cannot bring legal action. In 2012, for example, cable operator Time Warner Cable (TWC) did not reach a retransmission consent agreement with Hearst broadcast stations in five markets. TWC's contract with another broadcaster, Nexstar, did not explicitly prohibit retransmission of Nexstar's signals into distant markets, and TWC imported Nexstar stations into Hearst's markets. However, according to one broadcast industry stakeholder, because of a lack of contractual relationship between Hearst and TWC regarding the retransmission of Nexstar's signals, it would have been very difficult for Hearst to take a breach of contract action. Even if a local station could bring legal action, these broadcast industry stakeholders added that enforcing exclusivity through courts would be more time consuming and resource intensive than using FCC administrative review to determine or uphold exclusive rights that parties negotiated in contracts. Furthermore, all 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed report that exclusivity rules are needed to help protect stations' revenues. These stakeholders report that because the rules protect the contractual exclusivity rights of local television stations, stations can maintain their bargaining position in retransmission consent negotiations with cable operators, allowing them to obtain what they consider to be fair retransmission consent fees based on the value of the content in their signal. If a local station does not grant a cable operator retransmission consent, the cable operator cannot provide any network or syndicated content that the station provides, including high-demand content. By contrast, if cable operators could import duplicative content on a distant signal, even on a temporary basis to avoid not showing national network content during a retransmission consent impasse, these stakeholders report that the bargaining position of local television stations will decline, with a commensurate decline in retransmission consent fees and the value of the local television station, as the station will no longer be the exclusive content provider. In addition, because the rules ensure that local television stations' audiences are not reduced by the availability of duplicative content on signals from distant markets (for example, all households in a given market who watch popular NBC prime-time dramas will do so on their local NBC affiliate, as households are unable to do so on a NBC station from another market), they report that the rules help protect their audience share. This in turn, allows local television stations to obtain higher advertising revenues than they would if they were not the exclusive provider of network and syndicated content in their market. These broadcasting industry stakeholders also reported that by strengthening local stations' revenues, the rules help them invest in developing and providing local news, emergency alerts, and community-oriented content, in support of FCC's localism goals. However, the majority of cable industry stakeholders we interviewed and whose comments to FCC we reviewed reported that many local television stations have reduced their investments in local news in recent years despite the existence of the rules. In addition, we previously found that local television stations are increasingly sharing services, such as equipment and staff, for local news production. For example, stations can have arrangements wherein one station produces another station's news content and also provides operational, administrative, and programming support. In addition, viewership for local news has declined in recent years--according to the Pew Research Center's analysis of 2013 Nielsen data, the viewership for early evening newscasts had declined 12 percent since 2007. During this time, Americans have increasingly turned to other devices--such as computers and mobile devices--to access news on the Internet. For example, the Pew Research Center also reported in 2013 that 54 percent of Americans said they access news on mobile devices and 82 percent said they do on a desktop or laptop computer. Eight of 12 cable industry stakeholders we interviewed and whose comments to FCC we reviewed reported that because the rules help local television stations be the exclusive provider of network content in their market, the rules allow local television stations to demand increasingly higher retransmission consent fees from cable operators, which some said can lead to higher fees that households pay for cable television service. Because local television stations are the exclusive providers of network content in their markets (e.g., the NBC affiliate in San Diego is the only provider of popular NBC prime-time dramas in that market), cable operators report that they are forced to pay increasingly higher retransmission consent fees. They report that this occurs because if a local television station cannot reach agreement with the cable operator regarding retransmission consent and does not grant retransmission rights to the cable operator, the cable operator cannot import a signal from a distant market to provide network content and the cable operator's subscribers lose access to network content. This puts the cable operator at risk for losing subscribers to competitors, such as other cable and satellite operators, who continue to carry the local television station and its network content. While 5 of 12 cable industry stakeholders we interviewed and whose comments to FCC we reviewed said that they prefer to retransmit the local station instead of a distant market station, they feel that the exclusivity rules limit their ability to seek alternatives if they are unable to agree to retransmission consent fees with a local station. Eight cable industry stakeholders reported that as a result, the rules have led to sharp and rapidly increasing retransmission consent fees in recent years--a trend that they expect to continue--which can lead to higher cable fees for households. SNL Kagan, a media research firm, has projected that retransmission consent fees will increase from $4.9 billion in 2014 to more than $9.3 billion in 2020. However, 4 of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed stated that cable networks--such as ESPN, TBS, and AMC--also have exclusive distribution. For example, a cable operator wishing to carry ESPN can only obtain rights to do so from ESPN. Industry stakeholders we interviewed and whose comments to FCC we reviewed discussed different scenarios under which eliminating the exclusivity rules may lead to varying effects (see fig. 4). In one scenario, eliminating the exclusivity rules may provide cable operators with opportunities to import distant signals into local markets. This could potentially reduce the bargaining position of local television stations in retransmission consent negotiations, which could reduce station revenues with varying effects on the availability of content and households; however, the magnitude of these effects is uncertain. In two other scenarios, eliminating the exclusivity rules may have little effect as local television stations could maintain their position as the exclusive provider of network and syndicated content. As a result, retransmission consent negotiations may be unlikely to change, likely resulting in minimal effects on content and households. Eleven of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed said that in the absence of the exclusivity rules, some local television station contracts with cable operators may allow for retransmission of their signals to distant markets. This may happen if contracts between local television stations and cable operators do not clearly prohibit retransmission outside of the stations' local markets, as was the case in Nexstar's contract with TWC discussed earlier. Two of these stakeholders said this could happen with small broadcasters that might lack the financial resources to cover legal counsel during their negotiations with cable operators. Broadcast networks could provide such assistance. However, officials from all three broadcast networks we interviewed told us that they currently do not oversee their affiliates' retransmission consent agreements. In comments to FCC, one cable industry association suggested that FCC prohibit network involvement in the retransmission consent negotiations of their affiliates. Depending on how FCC interprets or amends its good-faith rules, broadcast networks may be unable to take a more active role in the retransmission consent negotiations between their affiliates and cable operators. Even if just one local television station allowed a cable operator to retransmit its signal outside its local market, the cable operator could retransmit that signal in any other market that it served; this could potential harm the exclusivity of local television stations affiliated with the same broadcast network in those markets served by the cable operator. The potential ability of a cable operator to import a distant signal, and the potential weakening of exclusivity that could result, may lead to a series of effects on the distribution of content--including local content--and on households and the fees they pay for cable television service (see fig. 5). The majority of both cable and broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed stated that as a result of the potential of a cable operator retransmitting a distant station's signal into a local market, local television stations may have reduced bargaining position during retransmission consent negotiations with cable operators. As stated earlier, the fact that local television stations are the exclusive provider in their markets of high-demand national content provides them with a strong bargaining position in negotiations with cable operators. However, if during retransmission consent negotiations, a cable operator can provide certain content by retransmitting the signal of a station affiliated with the same broadcast network in another market, the local station's bargaining position declines because it is no longer the exclusive provider of the national network content available to the cable operator in the station's market. This reduction in bargaining position may lead to fewer black outs and a reduction in retransmission consent fees. With the exclusivity rules in place, a local television station may be willing to pull its signal from a cable operator (that is, have a blackout) knowing that the cable operator has no alternative for providing high- demand network and syndicated content. However, without the rules, the local television station may be less willing to pull its signal from the cable operator, as the cable operator could provide the same high-demand content to its customers by importing a station from a distant market. For example, if a cable operator in Baltimore could import the Atlanta NBC affiliate into Baltimore when it does not reach a retransmission consent agreement with the Baltimore NBC affiliate, the Baltimore affiliate stands to gain little from pulling its signal, and thus not be retransmitted, since households served by the cable operator in Baltimore could still access NBC network content on the imported Atlanta station. With fewer blackouts, consumers would be less likely to lose access to broadcast network and syndicated content they demand. With reduced bargaining position, local television stations may agree to retransmission consent fees that are lower than they otherwise would be because local television stations want to avoid their signals being replaced by another television station's signal from a distant market. This may mean that retransmission fees could decrease or increase at slower rate than they would if broadcasters maintained the same bargaining position they have now. For example, the NBC affiliate in Baltimore may be willing to accept lower retransmission consent fees from a cable operator knowing that the cable operator can import NBC content from another market if they did not reach agreement on retransmission consent. In addition, to the extent that a cable operator does import a distant signal into a given market, the local station in that market may lose some viewers who watch duplicative content on the imported station. To the extent this happens, advertisers may spend less on advertising time given the reduction in audience and the advertising revenues of the local television station may decline. The potential reduction of local stations' retransmission consent and advertising revenues could affect the content stations can produce and distribute to households, including local content, in multiple ways, as described below. However, the nature of these effects is unknown. Local television stations may have fewer resources to pay in compensation to their affiliated broadcast networks. If so, the resulting reduction in revenues for national broadcast networks may reduce their ability to produce, obtain, and distribute high-cost and widely viewed content, such as national sports and primetime dramas. This potential outcome may result in the migration of some content to cable networks to the extent that cable networks outbid broadcast networks for this high-cost content (e.g., if ESPN outbids Fox for NFL coverage or more high-cost dramas are provided by the cable network AMC instead of broadcast networks). If this happens, consumers who rely on free over-the-air television and do not subscribe to cable television service may not be able to view certain content that has traditionally been available on over-the-air television unless they begin to subscribe to a cable operator's service. Twelve of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed said that local television stations may have fewer resources to invest in local content. This could reduce the quality or quantity of local content provided to viewing households. Nine of these stakeholders reported that local news is a major cost for local television stations. Local television stations may have fewer resources to pay for syndicated content. If so, syndicators could be less able to produce, obtain, and distribute syndicated content, which could affect the type and quantity of syndicated content that households are able to view. In addition to these potential changes in content, eliminating the exclusivity rules may affect the fees consumers pay for cable television service. However, because multiple factors may influence fees and the extent to which that happens is unknown, we cannot quantify the effect. To the extent that eliminating the exclusivity rules causes retransmission consent fees paid by cable operators to be lower than they otherwise would be, cable operators may pass some of these savings along to consumers in the form of lower subscription fees. However, as we have noted, eliminating the rules could lead to a migration of some highly viewed and high-cost content to cable networks from free over-the-air local television stations. This content migration could also affect fees for cable service; cable networks that obtain such content may experience additional costs for content and thus charge cable operators more to carry their networks. Thus, cable operator cost savings on retransmission consent fees could be offset to some extent by higher cable network fees. Furthermore, migration of such content could cause some households that do not subscribe to cable services to begin doing so, or cause some households to upgrade their service to obtain additional cable networks. This increased demand for cable service could also lead to some upward pressure on cable subscription fees. Eleven of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed stated that in the absence of the exclusivity rules, the compulsory copyright license for distant signals may allow a cable operator to retransmit a local television stations' signal into another market as the cable operator does not need to obtain approval from copyright holders. Nine of these 13 stakeholders stated that this compulsory copyright may not have been enacted if the exclusivity rules did not already exist. Six of these 13 stated that, as a result, if FCC eliminates the exclusivity rules, statutory changes would also be needed to eliminate the compulsory copyright license for distant signals. Assuming that retransmission of the content in a televisions station's broadcast retains copyright protection, if Copyright Law was amended to remove the compulsory copyright for distant signals, a cable operator wishing to retransmit a station's signal into a distant market would need to clear the copyrights with the copyright holders, such as the NFL, of all content included on the television station's signal. However, we have previously found that obtaining the copyright holders' permission for all this content would be challenging. Each television program may have multiple copyright holders, and rebroadcasting an entire day of content may require obtaining permission from hundreds of copyright holders. The transaction costs of doing so make this impractical for cable operators. Furthermore, as broadcast networks are also copyright holders for some content that their affiliated local television stations air, such as the network's national news, they may be unwilling to grant such copyright licenses to cable operators wishing to retransmit that content on an distant signal, given networks' interests in preserving their system of affiliate exclusivity, as discussed earlier. In such a scenario, cable operators may be unable to import distant signals and local television stations may not face the threat of duplicative network and syndicated content on a distant signal. Local television stations may retain the same bargaining position that they currently have during retransmission consent negotiations. As a result, there may not be any change in the likelihood of a blackout, retransmission consent fees, the quantity and quality of content, and fees for cable television service. Nine of 12 cable industry stakeholders we interviewed and whose comments to FCC we reviewed suggested that if the exclusivity rules were eliminated, there may be minimal effects as exclusivity would continue to exist in contracts. According to FCC, the affiliation agreements between local television stations and broadcast networks generally define exclusive territories for the affiliate stations and prohibit stations from granting retransmission consent outside their local markets. However, as we discussed earlier, only one local television station granting retransmission consent outside its local market to a cable operator could undermine the exclusivity of all the affiliates of a broadcast network in markets served by that cable operator. Broadcast industry stakeholders report that broadcast networks could take legal action against local television stations that violate terms of the affiliation agreements by granting retransmission consent outside their local market. However, two broadcast networks we interviewed said that they are reluctant to sue their affiliates because they prefer not to take legal action against their business partners; one added that such a suit could take a long time to be resolved. Depending on FCC's interpretation of or amendment to its good-faith rules, local television stations and broadcast networks may be able to take actions to protect against stations' granting retransmission consent outside their local markets, thereby protecting stations' exclusive territories. Assuming FCC's good faith rules permit such actions, broadcast networks may choose to take a more proactive role in their affiliates' retransmission consent negotiations with cable operators. As we discuss earlier, networks have an incentive to maintain stations' exclusive territories and potentially could provide input to stations' retransmission consent negotiations to help prevent stations' granting retransmission consent outside their local markets if that input is allowed under FCC's interpretation of the good-faith rules. For example, if FCC found it permissible, networks potentially could provide suggested contract language that clearly limits retransmission by cable operators to the station's local market. With contracts clearly protecting the exclusivity of local television stations and preventing cable operators from retransmitting signals to distant markets, cable operators may be unlikely to import distant signals as doing so would be a clear contractual violation of their retransmission consent contract. In this scenario, local television stations may retain their exclusivity and may not have any change to their bargaining position during retransmission consent negotiations. Therefore, stations' retransmission consent fees and revenue, the quantity and quality of content, and cable subscription fees may not change. FCC's exclusivity rules are part of a broader broadcasting industry legal and regulatory framework, including must carry, retransmission consent, and compulsory copyrights. The exclusivity rules predate many of these laws and rules, and in some instances, the development of these other laws was premised on the existence of the exclusivity rules. The effects of eliminating the exclusivity rules are uncertain, because the outcome depends on whether related laws and rules are changed and how industry participants respond. For example, if the compulsory copyright license for distant signals were eliminated, as some broadcast industry stakeholders suggest, removing the exclusivity rules may have little effect. In contrast, if FCC were to interpret good faith in its rules to limit the extent to which broadcast networks can influence retransmission consent negotiations between their affiliated stations and cable operators, as one cable industry association suggests, removing the exclusivity rules could lead to a series of events, the outcome of which could be a reduction in the quality or quantity of local content and potential changes in the fees households pay for cable television service. We provided a draft of this report to FCC for review and comment. FCC provided technical comments via email that we incorporated as appropriate. We are sending copies of this report to interested congressional committees and the Chairman of the FCC. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 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 significant contributions to this report are listed in appendix III. The objectives of this report were to examine (1) industry stakeholder views on the need for and effects of the exclusivity rules and (2) the potential effects that removing the exclusivity rules may have on the production and distribution of content, including local news and community-oriented content. To address both objectives, we reviewed all public comments filed by industry stakeholders with the Federal Communications Commission (FCC) as part of its further notice of proposed rulemaking (FNPRM)-- FCC docket 10-71--considering elimination or modification of the network non-duplication and syndicated exclusivity rules (exclusivity rules). We did not review comments filed by individuals and only reviewed those from industry stakeholders, such as local television stations or companies, multichannel video programming distributors (MVPD), including cable and satellite operators, national broadcast networks, industry associations representing such companies, and content copyright holders. In total, we reviewed 31 public comments. Of those 31 comments, 14 were from broadcasting industry stakeholders, 13 were from cable industry stakeholders, 1 was from a satellite industry stakeholder, 1 stakeholder was both a broadcaster and a cable operator, 1 was from a content provider, and 1 was from a related industry association. We reviewed these public comments for stakeholder views on the rules, the current effects of the rules, and the potential effects of eliminating the rules. In addition, we reviewed relevant rules and statutes, such as FCC's exclusivity rules and relevant rulemaking documents, such as FCC's FNPRM. We also reviewed affiliation agreements between broadcast networks and local television stations relevant to recent legal action regarding the exclusivity rules. We did not review retransmission consent agreements between local television stations and cable operators, however, as these agreements are not publicly available. We also conducted a literature review for studies related to FCC's exclusivity rules, including any studies focused on the potential effects of eliminating the rules. To identify existing studies from peer-reviewed journals, we conducted searches of various databases, such as EconLit and ProQuest. We searched these and other databases using search terms including "exclusivity," "network non-duplication," and "syndicated exclusivity" and looked for publications in the past 5 years. We reviewed studies that resulted from our search and found that none of them were directly relevant to our work. We reviewed prior GAO reports that cover relevant issues, such as retransmission consent and copyrights. We also conducted semi-structured interviews with the industry stakeholders that filed public comments with FCC as part of its FNPRM considering eliminating or modifying the exclusivity rules. In some cases, multiple stakeholders co-signed and co-filed public comments; in these instances, we interviewed at least one of those stakeholders. While we attempted to interview at least one stakeholder for each of the 31 formal comments filed, four stakeholders did not respond to our requests for interviews. We interviewed 1 content provider, 13 broadcast industry stakeholders, 12 cable industry stakeholders, and 1 satellite industry stakeholder. During these interviews, we asked stakeholders about their views of FCC's exclusivity rules, the effects of the rules, and the effects of potentially eliminating the rules on retransmission consent fees, broadcaster revenues, and the distribution of content, including locally- oriented content, among other things. In addition, we interviewed selected industry analysts who study the broadcasting and cable industries regarding the rules and the potential effects of eliminating the rules. We selected analysts to interview by identifying ones who analyze and make recommendations on the stocks of publicly traded companies that we interviewed as part of our review and whom we had interviewed as part of prior engagements. We also interviewed FCC officials regarding these rules and FCC's rulemaking process. For our second objective, in addition to gathering information about industry stakeholder views on the potential effects of eliminating the exclusivity rules, we also analyzed those views in light of general economic principles to understand more fully the potential effects of eliminating the exclusivity rules. Mark L. Goldstein, (202) 512-2834 or [email protected]. In addition to the contact above, Michael Clements, Assistant Director; Amy Abramowitz; Mya Dinh; Gerald Leverich; Josh Ormond; Amy Rosewarne; Matthew Rosenberg; and Elizabeth Wood made key contributions to this report.

Local television stations negotiate with content providers--including national broadcast networks, such as ABC--for the right to be the exclusive provider of content in their markets. FCC's network non-duplication and syndicated exclusivity rules ("exclusivity rules") help protect these contractual rights. In 2014, FCC issued a further notice of proposed rulemaking (FNPRM) to consider eliminating or modifying the rules in part to determine if the rules are still needed given changes in recent years to the video marketplace. GAO was asked to review the exclusivity rules and the potential effects of eliminating them. This report examines (1) industry stakeholder views on the need for and effects of the exclusivity rules and (2) the potential effects that removing the exclusivity rules may have on the production and distribution of content, including local news and community-oriented content. GAO reviewed all 31 comments filed by industry stakeholders with FCC in response to its FNPRM. GAO also interviewed 27 of those industry stakeholders and FCC officials. GAO also analyzed--in light of general economic principles--stakeholder views on the potential effects of eliminating the rules. FCC reviewed a draft of this report and provided technical comments that GAO incorporated as appropriate. Broadcast industry stakeholders that GAO interviewed (including national broadcast networks, such as ABC, and local television stations) report that the exclusivity rules are needed to protect local television stations' contractual rights to be the exclusive providers of network content, such as primetime dramas, and syndicated content, such as game shows, in their markets. These stakeholders report that by protecting exclusivity, the rules support station revenues, including fees from cable operators paid in return for retransmitting (or providing) the stations to their subscribers (known as retransmission consent fees). Conversely, cable industry stakeholders report that the rules limit options for providing high-demand content, such as professional sports, to their subscribers by requiring them to do so by retransmitting the local stations in the markets they serve. As a result, these stakeholders report that the rules may lead to higher retransmission consent fees, which may increase the fees households pay for cable service. Based on GAO's analysis of industry stakeholder views, expressed in comments to the Federal Communications Commission (FCC) and interviews, eliminating the exclusivity rules may have varying effects. If the rules were eliminated and cable operators can provide television stations from other markets to their subscribers (or "import" a "distant station"), local stations may no longer be the exclusive providers of network and syndicated content in their markets. This situation could reduce stations' bargaining position when negotiating with cable operators for retransmission consent. As a result, stations may agree to lower retransmission consent fees. This potential reduction in revenues could reduce stations' investments in content, including local news and community-oriented content; the fees households pay for cable television service may also be affected. Because multiple factors may influence investment in content and fees, GAO cannot quantify these effects. If the rules were eliminated, other federal and industry actions could limit cable operators' ability to import distant stations. For example, if copyright law was amended in certain ways, cable operators could face challenges importing distant stations. A cable operator could be required to secure approval from all copyright holders (such as the National Football League) whose content appears on a distant station the cable operator wants to import; with possibly hundreds of copyright holders in a day's programming, the transaction costs would make it unlikely that a cable operator would import a distant station. Also, broadcast networks may be able to provide oversight of retransmission consent agreements if FCC rules were to allow it. Cable operators may only import distant stations if retransmission consent agreements with those stations permit it, and stations' agreements with broadcast networks generally prohibit stations from granting such retransmission. If FCC rules allowed it, broadcast networks could provide oversight to help ensure such agreements do not grant retransmission outside the stations' local markets. Under these two scenarios, local stations may remain the exclusive providers of content in their markets, their bargaining position may remain unchanged, and there may be limited effects on content and fees for cable service.

FAA is the key federal agency responsible for certification of U.S. aviation products to be used in the United States and has a significant role in supporting approvals of U.S. products in other countries. Located in FAA's Office of Aviation Safety (Aviation Safety), the Aircraft Certification Service (Aircraft Certification) issues certificates, including type certificates and supplemental type certificates, for new aviation products to be used in the national airspace system. Certification projects, which involve the activities to determine compliance of a new product with applicable regulatory standards and to approve products for certificates, are typically managed by one of Aircraft Certification's local offices (generally known as aircraft certification offices, or ACOs).illustrates the range of U.S.-manufactured aviation products--including aircraft, helicopters, propellers, and engines--for which Aircraft Certification issues type certificates and supplemental type certificates once all requirements are met. Aircraft Certification is implementing and has set milestones for completing 14 initiatives in response to May 2012 recommendations of the Certification Process Committee. This Committee was chartered to make recommendations to Aircraft Certification to streamline and reengineer its certification process, improve efficiency and effectiveness within Aircraft Certification, and redirect resources for support of certification. Several of the initiatives were originally begun as part of earlier certification process improvement efforts. The initiatives range from developing a comprehensive road map for major change initiatives, to reorganizing the small aircraft certification regulations. Although we reported in 2013 that the Certification Process Committee's recommendations were relevant, clear, and actionable, it is too soon for us to determine whether FAA's 14 initiatives adequately address the recommendations. According to an update prepared by FAA in January 2015, eight initiatives have been completed, and two are on track to be completed within 3 years. However, according to this update, one initiative was at risk of not meeting planned milestones, and three initiatives will not meet planned milestones, including the update to 14 C.F.R. Part 21--the regulations under which aircraft products and parts are certificated. We reported in July 2014 that this initiative was in danger of not meeting planned milestones because the October 2013 government shutdown delayed some actions FAA had planned to move it into the rulemaking process.In its January 2015 update, FAA indicated that the formal rulemaking project timeline has been delayed to late fiscal year 2015 to allow for additional work with industry on developing guidance material and new certificate holder requirements. Figure 4 illustrates the evolving status of the 14 initiatives based on the publically-available periodic updates reported by FAA. We found in October 2013 that Aircraft Certification lacked performance measures for many of these initiatives. As of July 2014, FAA had developed metrics for measuring the progress of the implementation of 13 of the 14 initiatives. According to FAA officials, they plan to develop these metrics in three phases. For the first phase, which was documented in the July 2014 update of its implementation plan, FAA developed metrics to measure the progress of the implementation of the initiatives. For the second phase, FAA plans to develop metrics for measuring the outcomes of each initiative. For the third phase, working with the Aerospace Industries Association and General Aviation Manufacturers Association, FAA plans to develop metrics for measuring the global return on investment in implementing all of the initiatives, to the extent that such measurement is possible. FAA did not provide us a time frame for developing the second and third phase metrics. While we continue to believe that this plan for establishing performance measures is reasonable, and recognizing that FAA is in the early stages of implementation, it is critical for FAA to follow through with its plans for developing and utilizing metrics to evaluate improvements to the certification process. Without these metrics, FAA will be unable to fully determine whether its efforts have been successful in addressing the Certification Process Committee's recommendations as intended, identify areas that may need more attention, and modify efforts to sufficiently address any gaps. In our previous work, we have reported on instances where the implementation and metrics related to FAA efforts have not achieved the intended outcomes as expected, e.g., modernizing the air traffic control system under the Next Generation Air Transportation System (NextGen) and the integration of unmanned aerial systems into the national airspace system. Flight Standards has also developed initiatives in response to the six November 2012 recommendations of the Regulatory Consistency Committee, but the planned initiatives have not yet been released officially. This Committee was chartered to make recommendations to FAA to improve (1) the consistency in how regulations are applied in making certification decisions and (2) communications between FAA and industry stakeholders regarding such decisions. In late December 2014, FAA indicated that the draft plan to implement these recommendations was currently under review within FAA but the final plan is expected to be published by the end of January 2015, more than a year past the initial target publication date of December 2013. However, according to an October 2014 draft version of the plan that FAA provided to us, despite not having yet officially released the plan, FAA noted that it had closed 2 of the 6 recommendations and plans to complete the remaining four by July 1, 2016. FAA also noted that it had developed performance measures to measure the progress of the implementation of the remaining 4 recommendations. Table 1 provides a summary of the recommendations and FAA's plans for addressing them, based on the October 2014 draft plan that FAA provided to us. We reported in 2013 that the Regulatory Consistency Committee took a reasonable approach in identifying the root causes of inconsistent interpretation of regulations, and its recommendations are relevant to the root causes, actionable, and clear.determine whether FAA's planned actions adequately address the recommendations. In addition, FAA's draft plan stated that the resources required to implement the recommendations must be balanced with other important FAA activities, such as agency priorities and existing rulemaking initiatives, and that if future priorities change, it may be forced However, it is too soon for us to to modify elements of this implementation plan. As we reported in July 2014, it will be critically important for FAA to follow through with its initiatives aimed at improving the consistency of its regulatory interpretation as well as its plans for developing performance metrics to track the achievement of intended consistencies. We have previously reported that large-scale change management initiatives--like those recommended by the regulatory consistency committee--require the concentrated efforts of both leadership and employees to realize intended synergies and accomplish new organizational goals. Further, industry representatives have continued to indicate a lack of communication with and involvement of stakeholders as a primary challenge for FAA in implementing the committees' recommendations, particularly the regulatory consistency recommendations. FAA has noted that the processes for developing and updating its plans for addressing the certification process and regulatory consistency recommendations have been transparent and collaborative, and that FAA meets regularly with industry representatives to continuously update them on the status of the initiatives and for seeking their input. However, several industry --that representatives recently told us--and we reported in July 2014 FAA has not effectively collaborated with or sought input from industry stakeholders in the agency's efforts to address the two sets of recommendations, especially the regulatory consistency recommendations. For instance, some stakeholders reported that FAA does not provide an opportunity for them to review and comment on the certification process implementation plan updates, and did not provide an opportunity for them to review and offer input on the regulatory consistency implementation plan. However, FAA did meet with various industry stakeholders in October 2014 to brief them on the general direction and high-level concepts of FAA's planned actions to address each regulatory consistency recommendation. GAO-14-728T. Representatives of the selected 15 U.S. aviation companies we interviewed, as part of our ongoing work on foreign approvals, reported that their companies faced challenges related to process, communications, and cost in obtaining approvals from FCAAs. The processes involved included FCAAs' individual approval processes as well as the processes spelled out in the relevant BASAs. FAA is making some efforts to address these challenges, such as by holding regular meetings with some bilateral partners and setting up forums in anticipation of issues arising. According to FAA data, from January 2012 through November 2014, U.S. companies submitted approximately 1,500 applications for foreign approvals to a total of 37 FCAAs. applications submitted to the top ten and other markets for foreign approvals from January 2012 through November 2014. The total includes Hong Kong, which is counted separately from China. Others include the following bilateral partners, in descending order of the number of applications submitted: South Korea, South Africa, Taiwan, New Zealand, Malaysia, Israel, and Singapore. The percentages are based on an approximation of the total number of submitted applications by U.S. aviation companies. According to FAA, the number of applications may be undercounted because there is no formal requirement for U.S. aviation companies to submit applications to FAA for foreign approvals unless the country is a FAA bilateral partner. Thus, some applications may not have been entered into FAA's tracking system. Of the 15 companies we interviewed, representatives from 12 companies reported mixed or varied experiences with FCAAs' approval processes, and 3 reported positive experiences. Thirteen companies reported challenges related to delays, 10 reported challenges with approval process length, and 6 reported challenges related to FCAA staffs' lack of knowledge or uncertainty about the approval processes, including FCAA requests for data and information that, in the companies' views, were not needed for approvals. Representatives of three companies stated that, in their opinion, the EU's process is sometimes lengthy and burdensome, resulting in delays. Representatives of four companies noted examples of approval projects that, in their opinions, were expected to be granted within weeks or hours by FCAAs, in general, but instead took months or years. As an example, there were several media reports on the EU's 4- year process for the approval of the Robinson R66 helicopter, which was reportedly awarded by EASA in May 2014. However, because we were not provided the relevant factors and circumstances that could have affected the delays in the specific examples provided, we did not assess whether the approvals took longer than necessary. Eight companies also noted that China often makes requests for data and detailed product design information that in their view is not necessary for an approval, and sometimes holds up approvals until those requests are fulfilled. The 737 MAX is Boeing's newest family of single-aisle airplanes. It can accommodate up to 200 seats, and the first flight is scheduled in 2016 with deliveries to customers beginning in 2017. approvals, and is expected to be completed in fiscal year 2015.According to FAA officials, this IPA is also expected to reduce the level of involvement of the Civil Aviation Administration of China (CAAC) in conducting approvals and prevent its certification staff from doing extensive research for each approval project. Although representatives from 11 of the 15 U.S. companies and the 3 foreign companies we interviewed reported being satisfied with the overall effectiveness of having BASAs in place or with various aspects of the current BASAs, representatives of 10 U.S. companies reported challenges related to some BASAs lacking specificity and flexibility, 2 raised concerns that there is a lack of a formal dispute resolution process, and 1 noted a lack of a distinction between approvals of simple and complex aircraft. Companies suggested several ways to address these issues, including updating BASAs more often and making them clearer. FAA has taken action to improve some BASAs to better streamline the approval process that those countries apply to imported U.S. aviation products. For instance, according to FAA officials, they meet regularly with bilateral partners to address approval process issues and are working with these partners on developing a common set of approval principles. FAA also noted that there are basic dispute resolution clauses in most of the IPAs, and FAA is working toward adding specific dispute resolution procedures as contained in the agreement with the EU. FAA aims to complete negotiations to add a dispute resolution clause to the BASA with China in fiscal year 2015. FAA officials also indicated that they are working with longstanding bilateral partners--such as Brazil, Canada, and the EU--to identify areas where mutual acceptance of approvals is possible. Representatives from twelve U.S. companies reported challenges in communicating with FCAAs. Representatives from six U.S. companies reported, for example, that interactions with developing countries can be confusing and difficult because of language and cultural issues. Representatives from two companies noted that they hire local representatives as consultants in China to help them better engage CAAC staff with their approval projects and to navigate the CAAC's process. One company's representative also reported having better progress in communications with FCAAs in some Asian countries, such as India Japan, and Vietnam, when a local "third-party agent" (consultant) is involved because it provides a better relationship with the FCAAs' staff. They added this requires a lot of trust that the local agent will support the best interests of the company, and, at times, this arrangement becomes difficult because the company's experts would prefer to be in charge of the communications with FCAAs during the approval processes. Representatives from three companies also reported that, in general, some FCAAs often do not respond to approval requests or have no back- ups for staff who are unavailable. They noted that potential mitigations could include a greater FAA effort to develop and nurture relationships with FCAAs. According to FAA officials, they are working with the U.S.- China Aviation Cooperation Program to further engage with industry and Chinese officials. Representatives from twelve of the 15 U.S. companies and 2 of the 3 foreign companies indicated challenges with regard to approval fees charged by FCAAs. They specifically cited EASA and the Federal Aviation Authority of Russia (FAAR). For example, they noted that EASA's fees are significantly high (up to 95 percent of the cost of a domestic EASA certification)--especially relative to the amount levied by other FCAAs--are levied annually, and are unpredictable because of the unknown amount of time it takes for the approval to be granted. The fees are based on the type of product being reviewed for approval and can range from a few thousand dollars to more than a million dollars annually. Representatives from two companies also noted that EASA lacks transparency for how the work it conducts to grant approvals aligns with the fees it levies for recovering its costs. FAA officials indicated to us that a foreign approval should take significantly less time and work to conduct than the work required for an original certification effort--roughly about 20 percent--and that they have initiated discussions with EASA officials about making a significant reduction in the fees charged to U.S. companies. Representatives of two companies also indicated that some FCAAs (e.g., China and Indonesia) routinely conduct site visits to the United States to, for example, review data and conduct test flights. According to the companies we interviewed, these visits are paid for by the U.S. companies seeking the approvals and the cost of these visits are unpredictable because the logistics and duration are determined by the FCAA. For example, representatives from one company told us that one FCAA typically conducts 2-week visits, but they only need one and a half days to provide information. Four companies' representatives told us that they sometimes (1) offer to send their staff to the FCAA or another location because they can often do so less expensively or (2) schedule these site visits to better coincide with a more favorable budget environment for the company. As mentioned previously, FAA provides assistance to U.S. companies by facilitating the application process for foreign approvals of aviation products. U.S. companies seeking to export their aviation products to countries with BASAs in place submit application packages for foreign approvals to an appropriate ACO. ACO staff facilitates this process by reviewing the application package for completeness and to ensure that all country-specific requirements are met; and then forwarding the package along with an FAA cover letter to the applicable FCAA for review and approval. According to FAA officials, after the FCAA has reviewed the package, sometimes the authority will submit "certification review items"-- which document issues related to the original certification of a product that requires an interpretation on how compliance was met or additional clarifications, or represents a major technical or administrative problem-- to the responsible ACO for review and response. The assigned ACO staff reviews these items, determines whether a response is required from the applicant company, and coordinates the response to the FCAA. In some cases, ACO staff prepares issue papers which outline, among other things, the certification basis upon which the original type certification was issued. Also, according to FAA officials, FAA staff supports general and technical meetings between applicant companies and FCAAs for foreign approvals. According to FAA officials, the agency strives to make its process in place to support foreign approvals of aviation products as efficient as possible. In an effort to measure progress toward this goal, FAA has centrally tracked since January 2012 data on foreign approvals, including: the total number of foreign approval applications received and processed, the dates that applications are received by FAA, the dates packages are sent by FAA to the FCAA, and the date when the FCAA ultimately approves or finalizes the application. This data can be broken down by export country, applicant company and product type. As will be discussed later, however, FAA's data on foreign approvals has some limitations. According to FAA staff in two ACOs, each field office is responsible for setting its own time goals related to processing foreign approvals. Officials in three field offices told us that their goal is for each foreign approval package to be forwarded to the FCAA within 30 days of receipt by FAA. FAA also collects other information about foreign approvals in an effort to assess its bilateral relationships and the overall effectiveness of its process. For example, for some foreign approval projects, FAA field staff must complete a Bilateral Relationship Management (BRM) form to provide feedback on the interaction with a FCAA, which is submitted to FAA headquarters. As we will further discuss later, however, FAA officials acknowledged some issues with the BRM process which they plan to address. Although FAA seeks to provide an efficient process, companies we interviewed reported challenges that they faced related to FAA's role in the foreign approval process. FAA-related challenges cited by the companies we interviewed fell into three main categories: Process for facilitating foreign approvals. Most of the U.S. companies in our selection (12 out of 15) reported challenges related to FAA's process for handling foreign approvals. These included concerns about foreign approvals not being a high enough priority for FAA staff, a lack of performance measures for evaluating BASAs, and an insufficient use of FAA's potential feedback mechanisms. For example, representatives of three companies told us that sometimes FAA is delayed in submitting application packets to FCAAs because other work takes priority; one of these companies indicated that sometimes FAA takes several months to submit packets to FCAAs. In another example, representatives of four companies cited concerns that BASAs do not include any performance measures, such as any expectations for the amount of time that it will take for a company's foreign approval to be finalized. With regard to FAA using feedback mechanisms to improve its process for supporting foreign approvals, representatives of one company told us that applicant companies are not currently asked for post-approval feedback by FAA even though it would be helpful in identifying common issues occurring with foreign approvals. Available resources. Most of the U.S. companies in our selection (10 out of 15) reported challenges related to the availability of FAA staff and other resources. These include limited FAA travel funds and limited FAA staff availability to process foreign approval applications. According to FAA officials, FAA is responsible for defending the original type certification and, more broadly, for handling any disputes that arise with FCAAs during the foreign approval process. In doing so, FAA is also responsible for working with a FCAA in an authority- to-authority capacity, and communications should flow through FAA to the applicant company. However, representatives of five companies noted that due to a lack of FAA travel funds, FAA staff is generally not able to attend key meetings between U.S. companies and FCAAs conducted at the beginning of the foreign approval process. These representatives noted that this can complicate the process for companies, which then have to take on a larger role in defending the original type certificate issued for a product. Representatives of two companies also noted that when there is limited FAA staff availability at the time a foreign approval application is received that it contributes to delays in obtaining their approvals. Industry stakeholders have continued to suggest that FAA should more thoroughly utilize its delegation authority in several areas to better utilize available FAA resources. In fact, the Certification Process Committee made recommendations to encourage FAA to include the expansion of delegation in its efforts for improving the efficiency of its certification process. FAA's initiatives related to expanding the use of delegation appear to be moving in the right direction, but FAA's efforts have been slower than industry would like and has expected. Staff expertise. Some of the U.S. companies in our selection (7 out of 15) reported issues related to FAA staff expertise. These cited issues included limited experience on the part of FAA staff in dispute resolution as well as limited expertise related to intellectual property and export control laws. For example, representatives of three companies told us that FAA staff sometimes lack technical knowledge due to having little to no experience with some aviation products, while a representative of another company argued that increased training for FAA staff in dispute resolution could be very helpful, especially for disputes involving different cultural norms. In another example, representatives of two companies described situations in which FAA staff was ready to share information with a FCAA that the applicant company considered proprietary until the company objected and other solutions were found. FAA has initiatives under way aimed at improving its process for supporting foreign approvals that may help address some of the challenges raised by the U.S. companies in our review. Specifically, FAA's current efforts to increase the efficiency of its foreign approval process could help address reported challenges related to FAA's process and its limited staff and financial resources. For example, FAA is planning to address its resource limitations by focusing on improving the efficiency of its process with such actions as increasing international activities to support U.S. interests in global aviation, and by implementing its 2018 strategic plan, which includes the possibility of allocating more resources to strengthening international relationships. FAA has also initiated efforts to improve the robustness of its data on foreign approvals, to in turn further improve the efficiency of its process for supporting these approvals. With more complete data, FAA aims to track performance metrics such as average timeframes for foreign approvals and to better evaluate FAA's relationships with bilateral partners. As previously mentioned, in 2012, FAA started tracking data on foreign approval packages received and processed. In addition, according to FAA officials, FAA currently tracks the time needed from initial receipt of a foreign approval application by an ACO to the date the application is forwarded to the FCAA. However, currently, there is no formal written requirement for FAA field staff to enter foreign approval application information into the central tracking system, so not all applications are captured. FAA officials told us in December 2014 that the agency is developing formal requirements for field staff to enter data into this system, in order to ensure the integrity of data within its control, but they did not provide an expected time frame for completion. According to FAA staff in one field office, Aircraft Certification's International Policy Office-- which manages the central data system--recently updated this system with additional data fields to capture more data on the number of foreign approval projects in process and data for tracking performance metrics. As previously mentioned, FAA collects Bilateral Relationship Management (BRM) forms as a method for field staff to relay information on specific foreign approval projects--both positive and negative experiences--to headquarters. Based on discussions with us regarding policies related to BRM submissions, FAA officials told us that they plan to clarify BRM submission criteria and response policies for field and headquarters staff to enhance information gathered through this process. According to FAA, collecting, sharing, and taking appropriate action on information in BRM forms is necessary for FAA to recognize and resolve issues. Initially, FAA officials indicated that field staff is required to submit BRM forms whenever an employee meets with an official from a FCAA or foreign company, but that other issues can trigger the submission of BRM forms, such as when the FCAA is not adhering to the BASA, or is not actively engaged in certification activities. FAA officials also said that designated headquarters officials are required to respond to all BRM forms received within 48 hours. However, FAA officials at four ACOs we interviewed told us that field staff does not consistently submit BRM forms, and that when staff does submit BRM forms, field staff generally does not receive feedback from FAA headquarters about the information received in the form. For example, one ACO official indicated that his office's staff is only likely to submit the BRM form when there is a significant issue regarding an ongoing foreign approval package, and not to report any positive outcomes or circumstances. Further, the official said that the Aircraft Certification's International Policy Office does not provide feedback on issues raised in these forms. Two officials from a different ACO indicated that the submission of BRM forms varies greatly by project manager, with some managers submitting these routinely whereas others do not submit them at all; these officials also indicated that their staff do not typically receive feedback from headquarters on submitted forms. After hearing about these concerns about the BRM process raised by field staff, FAA headquarters officials indicated that they plan to clarify to field staff when BRM forms should be submitted and also clarify to designated headquarters staff that each BRM form requires feedback to the submitting field staff, but they did not provide an expected time frame for completion. These planned efforts should help improve the robustness and completeness of data shared in BRM forms. Some current FAA efforts to collect additional data on foreign approvals are aimed at improving FAA's ability to evaluate its relationships with its bilateral partners; such efforts could help to address domestic challenges raised by companies about FAA not having performance metrics to assess how well BASAs are working. For example, according to FAA officials, in November 2013, Aircraft Certification formally expanded its process for evaluating international partners to include risk-based evaluation methods. Officials noted that this evaluation process includes gathering quantitative and qualitative information about the effectiveness of bilateral partnerships. Officials explained that FAA uses a structured process to evaluate and to establish a risk factor for each foreign bilateral partner, based on information in the BRM forms, the number of foreign approval projects the respective authority has within FAA's system, and the authority's most recent ICAO airworthiness score, among other factors. FAA officials said that this evaluation system will continue to expand as FAA identifies new data sources. In conclusion, to its credit, FAA has made some progress in addressing the Certification Process and Regulatory Consistency Committees' recommendations, as well as in taking steps to address challenges faced by U.S. aviation companies in obtaining foreign approvals of their products. It will be critically important for FAA to follow through with its current and planned initiatives to increase the efficiency and consistency of its certification processes, and its efforts to address identified challenges faced by U.S. companies in obtaining foreign approvals. Given the importance of U.S. aviation exports to the overall U.S. economy, forecasts for continued growth of aviation exports, and the expected increase in FAA's workload over the next decade, it is essential that FAA undertake these initiatives to ensure it can meet industry's future needs. To demonstrate that it is making progress on these important initiatives, it is also important that FAA continue to develop and refine its outcome- based performance measures to determine what is actually being achieved through the current and future initiatives, and also through improvements to its data tracking for monitoring the effectiveness of its bilateral agreements and partnerships. Such outcome-based metrics will make it easier for FAA to determine the overall outcomes of its actions and relationships, hold field and headquarters staff accountable for the results, and demonstrate to industry stakeholders, congressional stakeholders, and others that progress is being made. 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. As we noted in our October 2013 statement, however, some improvements to the certification processes will likely take years to implement and, therefore, will require a sustained We are hopeful that our commitment as well as congressional oversight.findings related to previous and ongoing work in these areas will continue to assist this Committee and its Subcommittee on Aviation as they develop the framework for the next FAA reauthorization act. Chairman Shuster, Ranking Member DeFazio, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to questions at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony statement include Vashun Cole, Assistant Director; Jessica Bryant-Bertail, Jim Geibel, Josh Ormond, Amy Rosewarne, and Pamela Vines. Other contributors included Kim Gianopoulos, Director; Dave Hooper; Stuart Kaufman, and Sara Ann Moessbauer. 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.

FAA issues certificates for new U.S.-manufactured aviation products, based on federal aviation regulations. GAO and industry stakeholders have questioned the efficiency of FAA's certification process and the consistency of its regulatory interpretations. As required by the 2012 FAA Modernization and Reform Act, FAA chartered two committees--one to improve certification processes and another to address regulatory consistency--that recommended improvements in 2012. FAA also assists U.S. aviation companies seeking approval of their FAA-certificated products in foreign markets. FAA has negotiated BASAs with many FCAAs to provide a framework for the reciprocal approval of aviation products. However, U.S. industry stakeholders have raised concerns that some countries conduct lengthy processes for approving U.S. products. This testimony focuses on (1) FAA's progress in implementing the certification process and regulatory consistency recommendations and (2) challenges selected U.S. companies face in obtaining foreign approvals. It is based on GAO products issued from 2010 to 2014, updated in January 2015 based on FAA documents, and preliminary observations from GAO's ongoing work on foreign approvals. This ongoing work includes an analysis of FAA data on approval applications submitted January 2012 through November 2014 and interviews of a nongeneralizable sample of 15 U.S. companies seeking foreign approvals, selected on the basis of the number of applications submitted and aviation product types manufactured. The Federal Aviation Administration (FAA) has made progress in addressing the Certification Process and the Regulatory Consistency committees' recommendations, but challenges remain and could affect successful implementation of the committees' recommendations. FAA is implementing its plan for completing 14 initiatives for addressing the 6 certification process recommendations. According to a January 2015 FAA update, 10 initiatives have been completed or are on track to be completed, whereas the rest are at risk of not meeting or will not meet planned milestones. FAA has developed plans for addressing the six regulatory consistency recommendations. In late December 2014, FAA officials indicated that the final plan to implement the recommendations is under agency review and is expected to be published in January 2015. According to a draft version of the plan, FAA closed two recommendations--one as not implemented and one as implemented in 2013--and plans to complete the remaining 4 by July 2016. While FAA has made some progress, it is too soon for GAO to determine whether FAA's planned actions adequately address the recommendations. However, industry stakeholders continue to indicate concerns regarding FAA's efforts. These concerns include a lack of communication with and involvement of stakeholders as FAA implements the two committees' recommendations. As part of its ongoing work, representatives of 15 selected U.S. aviation companies GAO interviewed reported facing various challenges in obtaining foreign approvals of their products, including challenges related to foreign civil aviation authorities (FCAA) as well as challenges related to FAA. Reported FCAA-related challenges related to (1) the length and uncertainty of some FCAA approval processes, (2) the lack of specificity and flexibility in some of FAA's bilateral aviation safety agreements (BASA) negotiated with FCAAs, (3) difficulty with or lack of FCAA communications, and (4) high fees charged by some FCAAs. Although FAA's authority to address some of these challenges related to FCAAs is limited, FAA has been addressing many of them. For example, FAA has created a certification management team with its three major bilateral partners to provide a forum for addressing approval process challenges, among other issues. FAA has also taken action to mitigate the challenges related to some BASAs by holding regular meetings with bilateral partners and adding dispute resolution procedures to some BASAs. Reported FAA-related challenges primarily involved (1) FAA's process for facilitating approval applications, which sometimes delayed the submission of applications to FCAAs; (2) limited availability of FAA staff for facilitating approval applications; and (3) lack of FAA staff expertise in issues unique to foreign approvals, such as intellectual property concerns and export control laws. FAA has initiatives under way to improve its process that may help resolve some of these challenges raised by U.S. companies. For example, FAA is making its approvals-related data more robust to better evaluate its relationships with bilateral partners. FAA is also addressing its resource limitations by taking actions to improve the efficiency of its process.

The National Wildlife Refuge System comprises the only federal lands managed primarily for the benefit of wildlife. The refuge system consists primarily of National Wildlife Refuges (NWR) and Waterfowl Production Areas and Coordination Areas. The first national wildlife refuge, Florida's Pelican Island, was established by President Roosevelt in 1903 to protect the dwindling population of wading birds in Florida. As of July 1994, the system included 499 refuges in all 50 states and several U.S. territories and accounted for over 91 million acres. (See fig. 1.) The Fish and Wildlife Services' (FWS) Division of Refuges provides overall direction for the management and operation of the National Wildlife Refuge System. Day-to-day refuge activities are the responsibility of the managers of the individual refuges. Because the refuges have been created under many different authorities, such as the Endangered Species Act (ESA) and the Migratory Bird Conservation Act, and by administrative orders, not all refuges have the same specific purpose or can be managed in the same way. The ESA was enacted in 1973 to protect plants and animals whose survival is in jeopardy. The ESA's goal is to restore listed species so that they can live in self-sustaining populations without the act's protection. As of April 1994, according to FWS, 888 domestic species have been listed as endangered (in danger of extinction) or threatened (likely to become endangered in the foreseeable future). The ESA directs FWS to emphasize the protection of listed species in its acquisition of refuge lands and in its operation of all refuges. Under the ESA, the protection, recovery, and enhancement of listed species are to receive priority consideration in the management of the refuges. FWS' Division of Endangered Species provides overall guidance in the implementation of the ESA. FWS' regions are generally responsible for implementing the act. Among other things, the act requires FWS to develop and implement recovery plans for all listed species, unless such a plan would not benefit the species. Recovery plans identify the problems threatening the species and the actions necessary to reverse the decline of a species and ensure its long-term survival. Recovery plans serve as blueprints for private, federal, and state interagency cooperation in taking recovery actions. Of all the listed species, 215, or 24 percent, occur on wildlife refuges.(See app. I for the listed species that occur on refuges.) Figure 2 shows the types of listed species found on refuges. As the figure shows, more than two-thirds of the species are plants, birds, and mammals. Fishes (27) Mammals (40) 9% Reptiles (19) Note 1: Percentages have been rounded. Note 2: The total number of species is 215. Note 3: "Other" includes amphibians (2), clams (6), crustaceans (1), insects (7), and snails (1). Some refuges represent a significant portion of a listed species' habitat. According to FWS regional refuge officials, 66 refuges--encompassing a total of 26.7 million acres, including 22.6 million acres on two Alaska refuges--provide a significant portion of the habitat for 94 listed species. For example, Ash Meadows NWR in Nevada has 12 listed plants and animals that exist only at the refuge--the largest number of listed native species at one location in the United States. In addition, Antioch Dunes NWR in California contains virtually the entire remaining populations of three listed species--the Lange's metalmark butterfly, the Antioch Dunes evening-primrose, and the Contra Costa wallflower. (App. II lists the refuges that provide a significant portion of a listed species' habitat and the specific species that occur at these refuges.) Some listed species use the refuges on a temporary basis for migratory, breeding, and wintering habitat. As previously shown in figure 1, the refuges are often located along the primary north-south routes used by migratory birds. Migratory birds use the refuges as temporary rest-stops along their migration routes. The listed wood stork, for example, migrates in the spring from southern Florida to Harris Neck NWR in Georgia to nest in the refuge's freshwater impoundments. In addition, several refuges provide breeding habitat for listed species. The Blackbeard Island and Wassaw refuges in Georgia and the Merritt Island NWR in Florida, for example, provide beach habitat for the listed loggerhead sea turtle to lay its eggs. Wildlife refuges and refuge staff contribute to the recovery of listed species in a variety of ways. Foremost, refuges provide secure habitat, which is often identified as a key component in the recovery of listed species. In addition, refuge staff carry out, as part of their refuge management activities, specific actions to facilitate the recovery of listed species. Refuge staff also participate in the development and review of recovery plans for listed species. One of the primary efforts for the recovery of listed species is to stabilize or reverse the deterioration of their habitat. Refuges contribute to the recovery of listed species by providing secure habitat. Our review of 120 recovery plans for listed species occurring on refuges disclosed that 80 percent of the plans identified securing habitat as an action needed to achieve species recovery. As of March 1994, the refuge system included about 91 million acres of wildlife habitat. FWS has acquired over 310,000 acres to create 55 new refuges specifically for the protection of listed species. FWS' policy requires that a species recovery plan be prepared before lands are acquired for listed species. For example, the recovery plan for four Hawaiian waterbirds called for FWS to secure and manage a number of ponds and marshes that two or more of the waterbirds are known to use. One specific area described in the recovery plan, Kealia Pond, was subsequently acquired by FWS in 1992. However, overall we could not readily determine whether the acquisitions of lands for the 55 new refuges had been identified as needed acquisitions in species recovery plans. (App. III lists the refuges specifically established for listed species.) According to FWS' data, listed species found on refuges, and specifically on refuges established to protect listed species, appear to have a more favorable recovery status than listed species that do not occur on refuges. Table 1 provides an overview of FWS' data on the recovery status of listed species. This information was compiled on the basis of the knowledge and judgments of FWS staff and others familiar with the species. As the table shows, a greater proportion of the listed species that occur on refuges have a recovery status determined by FWS to be improving or stable than the listed species not found on refuges. According to FWS' guidance, species whose recovery is improving are those species known to be increasing in number and/ or for which threats to their continued existence are lessening in the wild. Species whose recovery is stable are those known to have stable numbers over the recent past and for which threats have remained relatively constant or diminished in the wild. Declining species are those species known to be decreasing in number and/or for which threats to their continued existence are increasing in the wild. Refuge staff carry out a variety of activities that contribute to the recovery of listed species. According to FWS' Refuges 2003: Draft Environmental Impact Statement, a total of 356 refuges had habitat management programs under way that directly benefited listed species. Refuge staff at the 15 refuges we visited were carrying out a number of specific actions in support of the protection and recovery of listed species. Such actions generally involved efforts to monitor the status of listed species' populations at the refuges and carry out projects designed to restore and manage the habitats and the breeding areas of listed species. Examples of specific actions being taken included the following: Carrying out prescribed burning of vegetation at the Okefenokee NWR (Georgia). Among other things, such burning helps restore and facilitate the growth of longleaf pine trees--the primary habitat for the listed red-cockaded woodpecker. Enclosing nesting areas at the Salinas River NWR (California). The enclosures protect the listed western snowy plover's nests and chicks from predation by red foxes. Undertaking protective actions at the Hakalau Forest NWR (Hawaii). Specifically, to protect and assist in the recovery of five listed forest birds, the refuge manager has restricted public use, fenced off the forest to keep out wild pigs and cattle, and created new nesting habitat for the listed birds by protecting indigenous plants and eliminating nonnative/exotic plants. Developing artificial nesting structures for wood storks at the Harris Neck NWR (Georgia). According to the refuge biologist, each structure at the refuge was occupied by up to three nests for these birds in both 1993 and 1994. Providing economic incentives to protect habitat and provide a food source for the listed bald eagle at Blackwater NWR (Maryland). Specifically, refuge management pays muskrat trappers to kill a rodent (the nutria) that is destroying the refuge wetlands. The carcasses are then left for bald eagles to eat. Managing vegetation growth to provide feeding pastures for the listed Columbian white-tailed deer at the Julia Butler Hansen Refuge for Columbian White-tailed Deer (Oregon and Washington). The vegetation in the deer's feeding pastures is kept short by allowing cattle to graze on portions of refuge lands under cooperative agreements with local farmers. Refuge staff also participate on teams tasked with developing recovery plans for listed species. While the responsibility for developing and implementing the plans rests with FWS' regional offices, recovery teams often include species experts from federal and state agencies (including the refuges), conservation organizations, and universities. For example, a biologist at the San Francisco Bay NWR is helping develop a revised recovery plan for the salt marsh harvest mouse, the California clapper rail (a species of bird), and other coastal California wetlands species. On the basis of their knowledge of the listed species, refuge staff are also asked to comment on draft recovery plans developed by others. For example, refuge staff at the Moapa Valley NWR in Nevada were asked to review the draft recovery plan for the Moapa dace (a species of fish) developed by a recovery team made up of representatives from a variety of organizations, including the Department of the Interior's Bureau of Reclamation; the University of Nevada, Las Vegas; and the Nevada Division of Wildlife. Refuge staff at the locations we visited told us they use the recovery plans to guide their activities to protect listed species. They also told us that recovery plans are good reference tools and help outline the management actions necessary for species recovery. They noted, however, that recovery plans have their limitations--plans can become outdated quickly and that refuges often lack the funding necessary to undertake all of the prescribed recovery tasks. While refuge staff have taken some actions to protect and aid the recovery of listed species on their refuges, we found that efforts were at times not undertaken. According to refuge managers and staff, their ability to contribute to species recovery efforts are constrained by the level of available funding. Two 1993 Interior reports discussed overall concerns about refuge funding and concluded that refuge funding was inadequate to meet the missions of refuges. In its Refuges 2003: Draft Environmental Impact Statement, FWS reported that the refuge system's current annual funding is less than half the amount needed to fully meet established objectives. From October 1, 1988, through fiscal year 1993, appropriations for the Division of Refuges increased from $117.4 million to $157.5 million per year. If the current level of annual funding continues, according to FWS, funding will be inadequate to address the existing backlog of major refuge maintenance projects or the programs and construction projects necessary for any expanded wildlife or public use activities. In addition, FWS stated that recent increases in refuge funding have not been sufficient to address the rising costs of basic needs, such as utilities, fuel, travel, and training. In August 1993, Interior's Inspector General reported that "refuges were not adequately maintained because Service funding requests for refuge maintenance have not been adequate to meet even the minimal needs of sustaining the refuges." According to the Inspector General, the maintenance backlog totaled $323 million as of 1992. The Inspector General also reported that "new refuges have been acquired with increased Service responsibilities, but additional sufficient funding was not obtained to manage the new refuges." Between 1988 and 1992, according to the Inspector General, $17.2 million was necessary to begin operations at the 43 new refuges acquired during this period. However, only $4.7 million was appropriated for all new and expanded refuges. This appropriation level for refuge funding resulted in a $12.5 million deficit, according to the Inspector General, some of which contributed directly to the maintenance backlog. In response to the Inspector General's findings, FWS has agreed to develop a plan to reduce refuges' maintenance backlogs and to report on efforts to ensure consideration of the operations and maintenance costs in all future acquisitions. The budget resources are insufficient to undertake all of the efforts necessary to recover listed species, according to refuge managers. In general, refuge operations and maintenance budgets are earmarked for items such as salaries, utilities, and specific maintenance projects. As a consequence, many efforts to recover listed species are not being carried out. At 14 of the 15 locations we visited, refuge managers and staff said funding constraints limited their ability to fully implement recovery actions for listed species and other protection efforts. For example, refuge staff at the Savannah Coastal Refuge Complex in Georgia explained that they have enough resources to conduct only one survey of the bald eagle population per year, rather than the three they feel are necessary to adequately monitor the eagle's status. A biologist at the San Francisco Bay Refuge Complex reported that no money is available to conduct genetic studies on the listed salt marsh harvest mouse, even though such studies are called for in the species recovery plan. In commenting on a draft of this report, the Assistant Secretary for Fish and Wildlife and Parks, Department of the Interior, generally concurred with the findings (app. IV contains Interior's comments). In particular, the Assistant Secretary stated that funding limitations constrain the National Wildlife Refuge System's ability to fully protect and recover endangered species; however, in light of other budgetary priorities, refuges have been funded at the highest affordable level. The Assistant Secretary also provided a number of comments that were technical in nature. In response, we revised the report, where appropriate, to refer to all components of the National Wildlife Refuge System rather than just the refuges and made other editorial changes. We conducted our work between May 1993 and July 1994 in accordance with generally accepted government auditing standards. To obtain information on FWS' policies and procedures for refuges and implementation of the ESA, we reviewed relevant FWS documents, including the May 1990 Policy and Guidelines for Planning and Coordinating Recovery of Endangered and Threatened Species; the Refuge Manual; Refuges 2003: Draft Environmental Impact Statement; the 1990 and draft 1992 Report to Congress: Endangered and Threatened Species Recovery Program; and 120 species recovery plans. We also interviewed officials at the Division of Refuges and Division of Endangered Species at FWS headquarters and at the FWS Portland regional office. In addition, we visited and met with officials from 15 refuges--including refuges created specifically for listed species and those that were created for other purposes--to determine how each refuge contributed to recovery efforts for listed species. The 15 refuges included, in California, Antioch Dunes, San Francisco Bay, and San Pablo Bay; in Georgia, Harris Neck and Okefenokee; in Hawaii, Hanalei, Huleia, James C. Campbell, Kilauea Point, and Pearl Harbor; in Maryland, Blackwater; in Maryland and Virgina, Chincoteague; in Nevada, Ash Meadows, Moapa Valley; and in Oregon and Washington, Julia B. Hansen Columbian White-tailed Deer. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of the Interior; the Assistant Secretary, Fish and Wildlife and Parks; and the Director of the Fish and Wildlife Service. We will also make copies available to others on request. Please call me at (202) 512-7756 if you or your staff have any questions. Major contributors to this report are listed in appendix V. As of April 1994, the number of listed animal and plant species occuring on wildlife refuges totaled 215. As of June 30, 1994, recovery plans had been approved for 157 of these species (as indicated by an asterisk). Cambarus aculabrum (crayfish with no common name) *Cavefish, Ozark *Chub, bonytail *Chub, humpback Chub, Oregon Chub, Yaqui *Dace, Ash Meadows speckled *Dace, Moapa *Darter, watercress *Gambusia, Pecos Madtom, Pygmy Minnow, Rio Grande Silvery *Poolfish (killifish), Pahrump *Pupfish, Ash Meadows amargosa *Pupfish, Devils Hole *Pupfish, Warm Springs *Shiner, Pecos bluntnose *Squawfish, Colorado *Sucker, Lost River Sucker, razorback *Sucker, short-nose *Topminnow, Gila (including Yaqui) Aleutian Canada goose, Aleutian shield-fern Ozark cavefish, Gray bat, Indiana bat, Cambarus aculabrum (crayfish with no common name) Yaqui topminnow, Yaqui chub, Yaqui catfish, Beautiful shiner Lange's metalmark butterfly, Contra Costa wallflower, Antioch Dunes evening primrose Lost River and short-nosed suckers Light-footed clapper rail, California least tern Light-footed clapper rail, California least tern Loggerhead, green, leatherback, and hawksbill sea turtles American crocodile, Key Largo cotton mouse, Key Largo woodrat Rice (silver rice) rat Loggerhead and green sea turtles (continued) Chincoteague (also in Virginia) Mississippi Sandhill Crane Mississippi sandhill crane (continued) Black-footed ferret (to be reintroduced) Julia Butler Hansen Refuge for Columbian White-tailed Deer (also in Washington) Chincoteague (also in Maryland) (continued) Julia Butler Hansen Refuge for Columbian White-tailed Deer (also in Oregon) Indiana bat, gray bat Indiana bat, gray bat Gila (Yaqui) topminnow, Yaqui chub, Peregrine falcon Gila (Yaqui) topminnow, Yaqui chub, Yaqui catfish, beautiful shiner Lange's metalmark butterfly, Antioch Dunes evening-primrose, Contra Costa wallflower Valley elderberry longhorn beetle, bald eagle, least bell's vireo California clapper rail, California least tern, salt marsh harvest mouse Light-footed clapper rail, California least tern Loggerhead and green sea turtles Loggerhead and green sea turtles (continued) Dusky seaside sparrow (extinct) Julia Butler Hansen Refuge for Columbian White-tailed Deer (also in Washington) (continued) Julia B. Hansen Refuge for Columbian White-tailed Deer (also in Oregon) Kim Gianopoulos The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO provided information on the Fish and Wildlife Service's (FWS) National Wildlife Refuge System, focusing on the extent to which wildlife refuges contribute to the protection and recovery of endangered species. GAO found that: (1) of about 900 endangered species, 215 occur or have habitat on national wildlife refuges; (2) the endangered species found on wildlife refuges represent a diversity of wildlife; (3) although many listed endangered species inhabit wildlife refuges, many other endangered species use refuge lands temporarily for breeding or migratory rest stops; (4) FWS refuges contribute to the protection and recovery of endangered species by providing safe and secure habitats, implementing recovery projects that are tailored to each endangered species, and identifying specific actions that can contribute to species recovery; (5) FWS efforts to manage wildlife refuges have been inhibited because funding levels have not kept pace with the increasing costs of managing new or existing refuges; and (6) at 14 of the 15 locations reviewed, refuge managers and staff believed that funding constraints limited their ability to enhance habitat and facilitate the recovery of endangered species.

HHS is charged with ensuring that HHAs meet conditions of participation in the Medicare program that are adequate to protect the health and safety of beneficiaries. As shown in table 1, Medicare has 12 conditions of participation covering such areas as patient rights; acceptance of patients, plans of care, and medical supervision; and skilled nursing services. Most conditions, in turn, comprise more detailed standards; for example, the skilled nursing condition has two standards--one addresses the duties of registered nurses and the other the duties of licensed practical nurses. The conditions and standards are further clarified in interpretive guidelines, which explain relevant statutes and regulations. in compliance with its conditions of participation. This survey and certification process is administered by HCFA through state survey agencies--usually components of the state health departments. HCFA funds these survey agencies to assess HHAs against Medicare's conditions of participation and associated standards. Surveys are conducted on-site at the HHA and involve activities such as clinical records review and home visits with patients. HCFA's State Operations Manual provides guidance to state surveyors on conducting their surveys. Once an HHA passes its initial survey and meets certain other requirements, HCFA certifies it as a Medicare provider and issues a provider number, which the agency uses to bill Medicare. To retain its certification, an HHA must remain in compliance with all of the conditions of participation. Each HHA is supposed to be recertified every 12 to 36 months following the same process used in the initial survey process, with the frequency depending upon factors such as whether ownership changed and the results of prior surveys. But complaints about HHA services may trigger an earlier survey. HHAs can lose their certification and be terminated from the program if they do not comply with one or more conditions; for example, an HHA providing substandard skilled nursing care that threatens patient health and safety can be terminated. However, HHAs not complying with a condition of participation can avoid termination by implementing corrective actions. Practically anyone who meets state or local requirements to start an HHA can be virtually assured of Medicare certification. It is rare that any new HHA is found not to meet Medicare's three fundamental certification requirements: (1) being financially solvent; (2) complying with title VI of the Civil Rights Act of 1964, which prohibits discrimination; and (3) meeting Medicare's conditions of participation. HHAs self-certify their solvency, agree to comply with the act, and undergo a very limited initial certification survey that few fail. Currently, HCFA certifies about 100 new HHAs each month. deterrent to agency certification unless that criminal activity specifically prohibits the individual from Medicare participation. Each certified HHA must provide skilled nursing services and one other covered service--physical, speech, or occupational therapy; medical social services; or home health aide services. HHAs can offer all of these services if they choose to do so. Only one of an HHA's services must be delivered exclusively by its staff; any additional covered services the HHA offers can be provided either directly or under contract with another health care organization that does not have to be Medicare certified. During the initial certification process, surveyors conduct what is called a standard survey; this survey is required by statute to assess the quality of care and scope of services the HHA provides as measured by indicators of medical, nursing, and rehabilitative care. The standard survey addresses an HHA's compliance with 5 of the 12 conditions of participation plus one of the standards associated with a sixth condition that HCFA believes best evaluate patient care (see table 1). If surveyors identify substandard care during the standard survey, they are to conduct a more in-depth review of the HHA's compliance with the other conditions of participation. These initial surveys often take place so soon after an HHA begins operating that surveyors have little information with which to judge the quality of care an HHA provides or the HHA's potential for providing such care. We found that initial surveys frequently are made when HHAs have served as few as one patient for less than 1 month and have not yet provided all the services for which they are to be certified. The surveyor may never see any patients or otherwise assess the care the HHA is providing, even though visiting patients is recognized by HCFA and state surveyors as the best way to evaluate an HHA's care. Furthermore, the HHAs are typically caring for non-Medicare beneficiaries at the time of their initial survey; these patients may have medical conditions that differ from those of Medicare beneficiaries needing home health care. been (1) enrolling patients who were either ineligible for the Medicare home health benefit or who had been referred for care without a physician's orders and (2) hiring home health aides on the condition that they first recruit a patient. Approximately 10 months following initial certification, state surveyors substantiated the complaints and also found that the HHA was not complying with four conditions and multiple standards, including four standards that the HHA had been cited for violating during its initial survey. The surveyors also identified 13 cases in which they suspected the HHA provided unnecessary services or served ineligible beneficiaries; the surveyors referred these cases to the Medicare claims processing contractor. One month later, the surveyors conducted a follow-up survey and found that the agency had implemented corrective actions, as it had following its initial survey. No further surveys had been conducted at the time of our review. Another individual with no home health care experience started a California HHA, which was Medicare certified in 1992. Within 1 year of certification, state surveyors and the Medicare claims processing contractor received numerous complaints alleging that the HHA had served patients ineligible for the Medicare benefit, falsified medical records, falsified the credentials of the director of nursing, and used staff inappropriately. A recertification survey about 15 months after initial certification found that the HHA was not complying with multiple conditions of participation and had endangered patient health and safety. By September 1993, after Medicare had paid the HHA over $6 million, the HHA closed. The owner, a former drug felon, and an associate later pled guilty to defrauding Medicare of over $2.5 million. officials said that this would not be a reasonable requirement for all HHAs seeking certification. In some rural states, 10 patients may represent an entire year's patient workload. Setting a 10-patient minimum on a national basis could therefore result in denying beneficiaries access to home health care services if they live in sparsely populated areas of the county, according to the HCFA officials. Medicare's recertification process does not ensure that only those HHAs that provide quality care in accordance with Medicare's conditions of participation remain certified. The primary problems are that (1) HHAs do not have to periodically demonstrate compliance with all of Medicare's conditions of participation; (2) surveyors do not fully review an HHA's branch office operations; (3) rapidly growing HHAs do not receive more frequent surveys, even though rapid growth has been linked to difficulties in complying with Medicare's conditions; and (4) HHAs repeatedly cited for serious deficiencies identified during a standard survey are rarely terminated or otherwise penalized. HCFA initially certifies and then recertifies most HHAs without requiring them to ever demonstrate compliance with all the conditions of participation. Instead, HCFA asks the surveyors to initially limit their evaluation of HHAs to the standard survey and then expand the survey to the other conditions only if they find problems. As a result, HCFA and Medicare patients usually do not know whether an HHA is complying with conditions not included in the standard survey. that address the HHA's operations and the care it provides to Medicare beneficiaries. Nearly three-quarters of the HHAs failed to comply with at least one of the conditions not covered in the standard survey, and 21 of the 44 HHAs either voluntarily withdrew their certification or had their certification terminated by HCFA. Although this project targeted HHAs suspected of problems, it does demonstrate that criteria other than those used in the limited standard survey may be better predictors of compliance with all the conditions of participation. HCFA defines a branch office of an HHA as a unit within the geographic area served by the parent office that shares administration, supervision, and services with the parent office. Since the mid-1980s, many HHAs have created branch offices. As shown in figure 1, about 2,200 HHAs operated nearly 5,500 branch offices in January 1997--over four times the number in November 1993. In Texas, for example, we identified 106 HHAs with 3 or more branches, and 1 HHA had 25 branch offices. Since they are considered to be an integral part of an HHA, branches are not required to independently meet the conditions of participation. Further, HCFA does not require surveyors to visit patients served by each branch office. Since new branch offices do not undergo an initial certification survey, HCFA cannot be assured that they meet Medicare's definition of a branch office. And, most importantly, not directly surveying branch operations means that quality-of-care issues within an HHA's overall operations may be missed. When branches have been surveyed because the HHA wanted to convert them to parent offices, significant problems have been found. Several examples follow: In California, surveyers found that one branch of an HHA cared for 581 patients over the 12 months ending September 1996--more than the average number of patients cared for by an HHA in the state during that time. Moreover, the branch was not complying with one condition of participation, and the surveyers recommended denial of the HHA's initial certification. Among its problems was that the branch had no system in place to ensure that its contractor staff had the appropriate qualifications and licenses. Similarly, a branch office of a Massachusetts HHA had cared for 69 patients since the HHA's last survey. The branch was denied initial certification as a parent office because it failed to meet nine standards associated with several conditions of participation. For example, the surveyors found that the branch office, in 10 of 12 cases examined, did not follow the plan of care and provide services as frequently as ordered by a physician. At the time of our review, the HHA had not yet submitted its correction plan and had not been certified as a parent office. While HCFA's guidance allows surveyors to conduct the entire recertification survey of an HHA at a branch office, state surveyors told us that this is seldom, if ever, done. Branch offices typically do not maintain all the personnel files or clinical information that surveyors need in their evaluation. As a practical matter, surveyors told us that they may not have time to conduct home visits with branch office patients and still finish the survey within their allotted time and resources. growing rapidly or maintaining a stable level of operations--information state surveyors generally would not have before conducting their survey. New HHAs have the potential for rapid growth and, as a result, are more likely to have difficulties complying with Medicare's conditions of participation. As shown in table 2, we found that nearly one-fourth of the HHAs initially certified in 1993 in California and Texas received Medicare payments exceeding $1 million in 1994--their first full year of Medicare certification--and the average number of patients they treated in a year at least tripled between 1993 and 1995. For example, in 1993, one California HHA treated 11 patients and received $33,000 from Medicare; in 1995, the HHA treated 1,810 patients and received $12.7 million in Medicare payments. Also, the percentage of these rapidly growing HHAs cited for noncompliance with the conditions of participation exceeded the national norm. Nationwide, about 3 percent of all HHAs each year are cited for failing to meet Medicare's conditions of participation. In contrast, 40 percent of the high-growth HHAs in California and 11 percent of the high-growth Texas HHAs did not meet the conditions in their most recent surveys. HCFA issued its survey frequency criteria in May 1996, after legislation authorized it to increase the maximum interval between surveys from 15 months to 3 years. As previously noted, HCFA's criteria consider factors such as an HHA's prior survey results, changes in ownership, and complaints. By not considering an HHA's rate of growth when setting survey frequency, however, HCFA is missing an opportunity to more quickly identify and correct compliance deficiencies. Such information is available from Medicare contractors and HCFA. Once certified as a Medicare provider, an HHA is virtually assured of remaining in the program even if repeatedly found to be violating Medicare's conditions of participation and associated standards. There are no penalties short of termination because HCFA has not developed intermediate sanctions as it was authorized by the Congress to do a decade ago. HCFA officials told us that they wanted experience with the skilled nursing facility intermediate sanctions, which became effective in July 1995, before implementing intermediate sanctions against HHAs. Until the advent of ORT, the likelihood of an HHA's being terminated from the Medicare program was remote. In fiscal years 1994, 1995, and 1996, about 3 percent of all certified HHAs were terminated, and most of these were voluntary terminations arising from either mergers or closures. Only about 0.1 percent of all certified HHAs in fiscal years 1994 and 1995 and 0.3 percent in fiscal year 1996 were involuntarily terminated as a result of noncompliance with the conditions of participation. California accounted for almost half of the 32 involuntary terminations nationwide in 1996, with 8 of its 15 involuntary terminations that year stemming from the ORT project. To terminate an HHA, the surveyors must find that it did not comply with one or more conditions and remained out of compliance 90 days after a survey first identified the noncompliance. If an HHA threatened with termination takes corrective action and state surveyors verify through site visits that this action has brought the HHA back into compliance, HCFA will cancel the termination process. Under Medicare's termination procedures, HHAs remain in the program, to the potential detriment of beneficiaries, even if they repeatedly fail to comply with Medicare's conditions of participation. the three most recent surveys, this HHA had been cited for not following physicians' orders in the written plan of care. The HHA remains certified despite its repeated problems. Moreover, on a Texas HHA's first recertification survey, 1 year after initial certification, the state surveyor found four standards not met and referred several cases of possible fraud to the Medicare contractor. Within 10 months of that survey, state surveyors resurveyed the HHA and found it was not in compliance with seven conditions of participation, and the previously cited deficiencies in meeting standards had not been corrected. HCFA issued a termination letter, but within 2 months of the last survey the HHA had corrected the deficiencies, and the termination process was halted. On a complaint investigation 6 months after the deficiencies had been corrected, the surveyors found the HHA was again out of compliance with three of the same seven conditions. On this most recent survey, the surveyors attributed the death of one patient directly to this HHA. At the time her attorney advised her to surrender her state license and Medicare certification, the owner/operator of this HHA had already hired a nurse consultant to bring the HHA back into compliance. HHAs are not threatened with termination if they are complying with the conditions of participation but are violating one or more standards and subsequently submit a corrective action plan. But surveyors often do not revisit the HHA to verify that it has implemented the plan and actually corrected the deficiencies. For example, Illinois surveyors did not revisit 13 of 21 HHAs that had submitted plans to correct their violations of Medicare's standards. available to HCFA to penalize deficient HHAs is to terminate them from the program. HHAs provide valuable services that enable a growing number of beneficiaries to continue living at home. Accompanying this increase in beneficiaries have been sharply increasing Medicare payments and rapidly rising numbers of certified HHAs. HCFA's HHA survey and certification process, however, fails to provide beneficiaries with reasonable assurance that their HHA meets Medicare's conditions of participation and provides quality care. Yet, certification represents Medicare's "seal of approval" on the services provided by an HHA. Our ongoing work suggests that it is simply too easy to become Medicare certified. Before they are certified, HHAs do not have to demonstrate a sustained capability to provide quality care to a minimum number of patients for all types of services. And because the requirements are minimal, HCFA certifies nearly all HHAs seeking certification. While many HHAs are drawn to the program with the intent of providing quality care, some are attracted by the relative ease with which they can become certified and participate in this lucrative, growing industry. HHAs can remain in the program with little fear of losing their certification. Most will never have to demonstrate compliance with all of the participation conditions, and, even if they are found out of compliance, temporary corrective actions are sufficient to allow them to continue to operate. These problems suggest that HCFA needs to pay closer attention to how it surveys and certifies HHAs. We expect that our upcoming report will contain specific recommendations on how HCFA can strengthen the survey and certification process so that it provides greater assurance that only those HHAs that provide quality care in accordance with requirements participate in Medicare. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or Members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed how Medicare: (1) controls the entry of home health agencies (HHA) into the Medicare Program; and (2) ensures that HHAs in the program comply with Medicare's conditions of participation and associated standards. GAO noted that: (1) it is finding that Medicare's survey and certification process imposes few requirements on HHAs seeking to serve Medicare patients and bill the Medicare program; (2) the certification of an HHA as a Medicare provider is based on an initial survey that takes place so soon after the agency begins operating that there is little assurance that the HHA is providing or capable of providing quality care; and (3) moreover, once certified, HHAs are unlikely to be terminated from the program or otherwise penalized, even when they have been repeatedly cited for not meeting Medicare's conditions of participation and for providing substandard care.

The American Recovery and Reinvestment Act of 2009 (Recovery Act) created the Recovery Board composed of Inspectors General to promote accountability by overseeing recovery-related funds. The board was to do so, in part, by providing the public with easily accessible information. The Recovery Act appropriated $84 million for the Recovery Board to carry out its duties and set a termination date of September 30, 2013, for its oversight activities. The act provided the Recovery Board with the following specific powers and functions: audit and review spending on its own or in collaboration with federal OIGs; issue subpoenas to carry out audit and review responsibilities; refer instances of fraud, waste, and mismanagement to federal OIGs; hold public hearings and compel testimony through subpoenas; enter into contracts with public agencies and private entities; review whether there are sufficient and qualified personnel overseeing Recovery Act funds; and make recommendations to federal agencies on measures to prevent fraud, waste, and mismanagement of Recovery Act funds. To fulfill its mandate under the Recovery Act, the Recovery Board utilized data analytics to carry out its oversight responsibilities and increase accountability. Data analytics is a term typically used to describe a variety of techniques that can be used to analyze and interpret data to, among other things, help identify and reduce fraud, waste, and abuse. Specifically, predictive analytic technologies can be used to identify potential fraud and errors before payments are made, while other techniques, such as data mining and data matching of multiple databases, can identify fraud or improper payments that have already been awarded, thus assisting agencies in recovering these dollars. In October 2009, the Recovery Board established the ROC to analyze the use of Recovery Act funds by employing data analytics, specifically to provide predictive analysis capability to help oversight entities focus limited government oversight resources, based on risk indicators such as programs previously identified as high-risk, high-dollar-value projects, past criminal history of key parties involved in a project, and tips from citizens; and in-depth fraud analysis capability using public information to identify relationships between individuals and legal entities. The ROC served as a centralized independent repository of tools, methods, and expertise for identifying and mitigating fraud, waste, and mismanagement of Recovery Act funds and the associated parties through the use of such predictive and other analytic technologies. The Recovery Board's assets supporting the ROC include human capital, hardware, data sets, and software. (See fig. 1 for a description of the ROC's assets.) Subsequent legislation expanded the Recovery Board's mandate to include oversight of other federal spending, including those funds appropriated for purposes related to the effects of Hurricane Sandy. In addition to expanding its authority, the legislation extended the termination date of the Recovery Board from September 30, 2013, to September 30, 2015. Figure 2 illustrates the timeline of legislation authorizing the Recovery Board and any corresponding appropriations. As we reported in our July 2015 testimony describing the progress made in the initial implementation of the DATA Act, the ROC has provided significant analytical services to its clients, including many OIGs, in support of their antifraud and other activities. Specifically, on the basis of the ROC's client-service performance data that we reviewed, as part of the ROC's analysis supporting investigations and audits, the ROC researched roughly 1.7 million entities associated with $36.4 billion in federal funds during fiscal years 2013 and 2014 at the request of various OIGs and other entities. As described below, examples of such research include Appalachian Regional Commission OIG audits of high- risk grantees and Department of Homeland Security OIG oversight of debris-removal contracts following Hurricane Sandy. The largest single user of ROC assistance over this time was the Appalachian Regional Commission OIG in fiscal year 2012 and the Department of Homeland Security OIG in fiscal years 2013 and 2014 (see fig. 3). The ROC developed specialized data-analytic capabilities to better ensure federal spending accountability. Since January 2012--after the Recovery Board's mandate was expanded to address federal funds beyond those authorized by the Recovery Act--over 50 federal OIGs and agencies have asked for assistance from the center. Two major tools the ROC used on behalf of the OIGs included (1) link analysis and (2) unstructured text mining: Link analysis assists analysts in making connections by visually representing investigative findings. Link-analysis charts visually depict how individuals and companies are connected, what awards an entity has received, and how these actors may be linked to any derogatory information obtained from multiple data sets. Such tools, when combined with enhanced Geographic Information System capabilities, enable ROC analysts to conduct geospatial analysis by displaying data from multiple data sets on maps to help them make linkages and discover potential problems. (See figs. 4 and 5 for an example of link analysis and two visualizations of the data.) Although link analysis can be applied to a wide range of subjects, the ROC often applied this tool to issues that involved law-enforcement-sensitive data that the Recovery Board had authority to handle. The figure below shows an example of a request made by a federal agency to investigate Subject Company 1 as a delinquent federal debtor. Analysis by the ROC included checking entities identified against relevant events and associations, which include debarments, criminal history, and other factors. The initial review of Subject Company 1 determined that it was the recipient of an award under the Recovery Act totaling $6.4 million from a federal government agency. Further review of this company determined that it was not registered in the System for Award Management and had not previously received any federal awards. ROC analysts identified a news article that explained that this company had been created as a joint venture between Subject Company 2 and an individual, Subject 1. Analysis of Subject Company 2 revealed that four of its employees were previously indicted for fraud in 2006 and three of them were placed on the Excluded Parties List System, debarring them from receiving federal contracts. As part of the same analysis as in figure 4, the ROC determined Subject 1 was listed as the Registered Agent of 42 companies with vague names in a variety of industries. Geospatial analysis, represented in figure 5 below, determined that 15 of the companies were registered at the individual's home address in Florida. The other 27 companies were registered in Gary, Indiana, at the same address as Subject Company 1. Geospatial analysis identified the address as a vacant lot in an industrial area. In another example, the Environmental Protection Agency OIG used the ROC's data visualizations of a link analysis that identifies relationships among entities involved in activities such as collaborating to commit fraud. An Environmental Protection Agency OIG official said that the visualization of these relationships made it easier for juries to understand how entities had collaborated in wrongdoing. The ROC's unstructured/structured text mining tools were developed to proactively identify high-risk entities. This tool uses key words or phrases to rapidly filter through thousands of documents and pinpoint high-risk areas to uncover trends and conduct predictive analysis across agencies, programs, and states and to identify and assign weights to risk factors or concepts. The Appalachian Regional Commission OIG used the results of the ROC's unstructured text-mining analyses to identify the highest-risk grantees for review by analyzing text from A-133 Single Audit data to search for indications of risk, such as when a material finding was identified in the audit. A Single Audit includes an audit and an opinion on compliance with legal, regulatory, and contractual requirements for major programs as well as the auditor's schedule of findings and questioned costs. The unstructured text tool could be directed to identify entities such as grantees that had previous negative audit findings and that therefore could represent a higher risk for using grant funding. This approach allowed the Appalachian Regional Commission OIG to better identify grantees subject to risk and facilitate the establishment of risk based priorities to allocate audit and investigative resources. According to a commission OIG official, this allowed the OIG to establish risk-based priorities to allocate audit and investigative resources. In addition to these examples, OIGs highlighted using the ROC's analytic capabilities to identify fraud, waste, and abuse in federal spending in the following ways: In fiscal year 2013, the Department of Homeland Security OIG submitted 104 entities receiving debris-removal contracts totaling $329 million from 32 cities in New York and New Jersey to the ROC for further research. The ROC analysts' review was forwarded to the department OIG for appropriate investigative or audit follow-up actions. ROC analysts also provided a risk analysis of these entities to the department OIG for use in planning future audits. Findings submitted to the department OIG included identification of the following: Debris-removal firms whose owners had federal and state tax liens. Firms previously listed on the Excluded Parties List System, indicating potential financial problems. Two companies that received contracts despite having filed for Chapter 7 bankruptcy in December 2010 and having federal tax liens totaling more than $1 million since 2011. Organizations with previous fraudulent activities receiving debris- removal contracts from cities where there was an indication the company heads had relationships with city officials. In part on the basis of these findings, the Department of Homeland Security OIG opened three criminal investigations involving Hurricane Sandy Public Assistance program funds, and the Department of Homeland Security OIG Emergency Management Office conducted four Hurricane Sandy-related audits. The ROC assisted the Department of Housing and Urban Development OIG with information confirming allegations that a loan guarantee specialist had sold HUD-owned properties for less than fair market value to shell companies that he owned and operated, stealing over $843,000 in federal funds. Due in part to the analysts' efforts, the employee pleaded guilty to wire fraud for his involvement and was sentenced to 26 months in jail. In May 2015, Treasury officials told us that the department did not plan to exercise its discretionary authority to establish a data-analysis center or expand an existing service under the DATA Act. Officials explained that transferring the ROC assets would not be cost-effective or add value to Treasury operations that identify, prevent, and recover improper payments and identified the following principal concerns regarding the utility of transferring ROC assets: Hardware. Treasury officials viewed hardware, such as monitors and servers, as being feasible to transfer, but raised questions about whether it was cost-effective to do so because the ROC's hardware is aging, lessening the value of these assets. In addition, they noted that hardware requires software support contracts to be functional, and as discussed below such contracts are not transferrable. Human capital (personnel). Federal personnel rules would not allow a direct transfer of ROC staff to Treasury. Instead Treasury would have to advertise and hire for these positions using the competitive hiring process, which can be time-consuming. In addition, because some ROC personnel were term-limited hires or contractors, a competitive hiring process would not guarantee that ROC staff would ultimately be selected for employment. Data sets. The ROC obtained access to federal datasets through memorandums of understanding (MOU), which neither Treasury officials nor ROC officials believed could be transferred. Instead Treasury would have to negotiate new MOUs with the federal agency that owned a data set Treasury wished to use. Commercially procured data sets also are not transferrable but would instead have to go through a procurement process. Software contracts. Because the Recovery Board extended its software contracts on a sole-source basis when it was reauthorized 2 years ago, Treasury would need to use a competitive procurement process to obtain these data-analytic tools again. Such processes can be time-consuming and lengthy. In July 2015, Treasury's Fiscal Assistant Secretary testified before the House Committee on Oversight and Government Reform's Subcommittee on Government Operations and Subcommittee on Information Technology and addressed the point mentioned above that while the DATA Act authorized Treasury to transfer the Recovery's Board's assets, the act did not transfer the Recovery Board's authorities to Treasury. For instance, the Recovery Board was granted law enforcement authorities available under the Inspector General Act of 1978, which allowed the Recovery Board to negotiate relevant access so that the ROC could handle, analyze, and store law-enforcement-sensitive data, including evidence to support grand jury investigations. Similarly, the Recovery Board had special hiring authority that allowed it to select and employ term-limited hires, which provided the Recovery Board greater flexibility in selecting individuals with specific technical expertise and experience. Treasury officials noted that the DATA Act did not transfer the specific mission of the Recovery Board to Treasury, and that, combined with the absence of law-enforcement authority, created a barrier to fulfilling an identical role as that of the ROC. Although Treasury officials identified cost and other practical challenges to transferring ROC assets, it has an opportunity to transfer information and documentation that could support Treasury's efforts to prevent improper payments--particularly, information on the design of data sharing agreements and requests for software contracts for analytic tools. Treasury officials told us that they believe the ROC's most-valuable asset is its expertise and said they sought opportunities to informally leverage the ROC knowledge base in several ways. These efforts centered on sharing knowledge between the ROC and Treasury's Do Not Pay Center Business Center (DNP), which assists federal agencies in preventing improper payments and leverages some of the same analytical methodologies as the ROC. Some of these efforts include the following: Leveraging the knowledge of ROC staff by applying their skills to similar analytic challenges facing DNP. For example, officials stated that the current Director of Outreach & Business Process for DNP is the former Assistant Director for Data and Performance Metrics at the Recovery Board. Her responsibilities at the Recovery Board included the assessment and testing of several prototype systems to support the work of the ROC and its external users in the oversight community. The capabilities of these systems were very similar to the capabilities of the DNP systems, in that entity names were matched against open-source databases to identify high-risk vendors. Officials also noted that another Recovery Board employee was hired to DNP, where she uses her knowledge of the root causes of improper payments to help agencies utilize DNP services more efficiently. Documenting business processes, procedures, and lessons learned. DNP is also working with the Recovery Board to document business processes and procedures, and lessons learned, as appropriate, in order to incorporate best practices into Treasury's improper-payment prevention infrastructure. Treasury officials provided documentation of the timeline for obtaining information from the ROC through several meetings and indicated that they were in the process of documenting this information. Treasury officials said they considered DNP as a possible host of the ROC's assets but ultimately concluded that the transfer of ROC assets to Treasury would not be cost-effective or add value to Treasury's efforts. Officials explained that Treasury already provides services, such as those provided by DNP and Treasury's Philadelphia Financial Center to agencies and OIGs to assist in the identification, prevention, and recovery of improper payments. In addition, we note that while Treasury and the ROC were similar in that both sought to address improper and potentially fraudulent payments, there are differences in the particular types of challenges addressed by both entities. For instance, as part of its mission, DNP scrutinizes various data sources at the preaward, prepayment, payment, and postpayment stages and analyzes them for indications of potential improper payments and fraud. It does this regularly and on a large scale, matching up to $2.5 trillion in payments each year. DNP's primary tools for doing this include batch matching payment information to various excluded parties and other "bad-actor" lists, and conducting analysis on payment files to examine irregularities, such as duplicates or the same unique identifier associated with different names. The ROC also used data-matching techniques to identify risk, but it generally applied this technique to issues other than payment data, such as assisting law-enforcement investigations to identify instances when several entities were collaborating to commit fraud. Treasury officials have noted that the DATA Act did not grant Treasury the same authorities that the Recovery Board had to support law-enforcement efforts. See figure 6 for a summary of DNP and ROC key activities. While Treasury has taken some steps to transfer expertise to DNP, it may be missing an opportunity to transfer other information and documentation from the ROC to DNP. In May 2014, Recovery Board officials provided Treasury with a transition plan that outlined its assets, including the data sets used by the ROC. The plan indicated that the Recovery Board had used MOUs with the federal agency owning certain data sets to arrange access to the data. We note that some of the ROC's documentation--particularly the MOUs that it had to develop to gain access to certain data sets--represent expertise that may be transferred to supplement DNP's resources and help support its mission; Treasury might benefit by reconsidering its decision not to assume some of these assets. For example, Treasury is responsible for developing MOUs for data sharing with original source agencies and periodically reviewing the MOUs to determine whether the terms are sufficient. The development of data-sharing agreements is difficult and time-consuming. The Recovery Board maintains information of potential use to Treasury in this regard--namely, it currently retains copies of all MOUs between the Recovery Board and the original source agency. Some information will be archived or destroyed when the Recovery Board sunsets. These documents may provide Treasury with a template for future data-sharing agreements--for instance, by providing language on how data might be shared, secured, used, and disposed of that the agency owning the data found acceptable. In addition, as part of procuring the software to develop the ROC's analytic capabilities, Recovery Board staff worked with the General Services Administration to draft requests for proposals that included technical specifications for the software. This documentation along with other guidance or technical information that the ROC developed or retained could serve as templates as DNP expands its capabilities over time. Standards for Internal Controls in the Federal Government provides guidance on the importance of managers achieving results through effective stewardship of public resources. Taking advantage of the opening created by the DATA Act to expand its data-analysis capabilities by transferring the expertise gained through the operation of the ROC could assist DNP in its mission to reduce improper payments. In addition, documenting the rationale for any future decisions on transferring information and documentation would ensure transparency and would be consistent with Standards for Internal Controls in the Federal Government guidance on recording and communicating information, including to external stakeholders that may have a significant effect on the agency achieving its goals. The ROC provided analytic services to its clients, including many OIGs, in support of their audits and investigations supporting fraud prevention and detection. As part of an oversight mission, these entities are often required to improve the efficiency and accountability of federal spending and address fraud, waste, and abuse. However, because Treasury currently does not plan to transfer the assets of the ROC, the center's users will need to consider alternatives when the Recovery Board closes. Some large OIGs that previously used the ROC told us that they intend to develop their own analytic capabilities. For instance, Department of Homeland Security OIG officials said they hired analysts familiar with link analysis and the relevant software as well as rebidding contracts in an attempt to replicate some of the resources currently offered at the ROC. Expanding the analytic capabilities of OIGs could help to strengthen the rigor of oversight, allow OIGs to develop tools that are the most useful for their portfolios, and broaden the types of audit and investigative activities OIGs can undertake. However, it is unknown whether OIGs developing these capacities on their own may lead to potential duplication and fragmentation as well as whether the expansion of these capabilities across many entities would offer the same level of expertise and efficiency that OIG officials obtained from the ROC. In addition, such an expansion could also be duplicative if each OIG purchased the same types of software and support resources, which may not be the most efficient use of federal funds. While OIGs with the financial resources to do so may pursue replication of the ROC's tools, the ROC's termination may have more effect on the audit and investigative capabilities of some small- and medium-sized OIGs that do not have the resources to develop independent data analytics or pay fees for a similar service, according to some OIG officials. According to these officials, the loss of the ROC's analytical capabilities could also result in auditors and investigators working much longer to research the same types of linkages as opposed to verifying the information that the ROC could provide more efficiently and in a shorter time frame. According to CIGIE officials, maintaining a centralized data-analytics center like the ROC might help reduce unnecessary duplication of effort across the OIG community, and help ensure that all OIGs continue to have these resources at their disposal, especially the small- to medium- sized offices that do not have the funding to obtain separate capabilities. Established by the Inspector General Act of 2008, CIGIE currently provides oversight resources and guidance to the OIG community and has taken steps to expand the analytic capabilities of the OIGs. For instance, CIGIE developed a virtual platform that allows OIG community members to both contribute and use shared resources such as algorithms, best practices, models, and support documentation. While these resources are helpful, the ROC provided more advanced, customized data-analytics services to the OIGs, and also allowed them to leverage ROC software that otherwise would not have been available. In 2013, CIGIE explored the viability of assuming some of the ROC's assets as a way to provide some additional analytic capabilities to the OIG community. At the time, CIGIE estimated that it would cost about $10 million per year to continue to operate the ROC. Because CIGIE is primarily funded by membership dues, CIGIE determined the additional cost to operate the ROC would be too burdensome for the organization. A CIGIE official indicated the organization has continued to look for opportunities to provide centralized data-analytic resources to OIGs. However, this official said that, given its financial resources (about $6.5 million in operating funds in fiscal year 2016), even if CIGIE were able to do so, this capability would be at a significantly scaled-back level compared to the ROC. Through the DATA Act, Congress provided Treasury the option to transfer the ROC's assets. The act specifically identifies improving the efficiency and transparency of federal spending and the reduction and prevention of improper payments as functions of a data analysis center or expanded service, if Treasury chose to establish or expand one. In this regard, the Chairmen and Ranking Members of the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Oversight and Governmental Reform wrote a joint letter to the Secretary of the Treasury in July 2015 expressing their concern that the ROC's powerful analytical capabilities would be lost at the end of the fiscal year, and underscored their interest in preserving these capabilities. In highlighting the ROC's evolution since the Recovery Act to assume multiple roles in improving efficiencies in federal spending, the committees stressed that the ROC's various data-analytics capabilities are essential to detect and prevent fraud and reduce improper payments. Specifically, the committees noted that federal agencies agree fraud detection and prevention could be significantly improved with greater access to data and analytical tools, such as those provided by the ROC. A legislative proposal that explicitly articulates the relative costs and benefits of developing an analytics center with a mission and capabilities similar to the ROC could help Congress decide whether to authorize and fund such an entity. Given its close connection to the oversight community, and the research it has already undertaken pertaining to the ROC, CIGIE is a logical entity to develop that proposal. If it were to do so, CIGIE could identify and recommend the resources needed--particularly in terms of employees and technology--to establish a ROC-like entity under its auspices. A proposal might also outline the data-analytic services that center could offer the OIG community and the potential results those services might provide. In addition, a proposal could outline any additional authorities, such as the ability to handle law-enforcement- sensitive data--that Treasury noted was a barrier for DNP to provide similar services to the ROC. That element of the proposal would help ensure such a new entity would effectively support the oversight community in matters related to law enforcement. By creating a legislative proposal, CIGIE could thus present Congress the detailed information Congress would need to make an informed decision about the merits of creating a CIGIE-led data-analytics center. CIGIE officials stated that they have not developed such a proposal absent specific direction from Congress, but these officials expressed concerns about the effect of the September 30, 2015, sunset of the Recovery Board on the OIG community and, as noted above, have sought options within their current budget to increase analytic resources available to OIGs. Further, CIGIE officials stated that with Congress's support they could develop such a proposal, which would be intended to (1) expand analytic resources for the oversight community and (2) help refine the tools Congress and the oversight community use to address improper payments and fraud, waste, and abuse. Agencies seeking to address improper payments and fraud, waste, and abuse face challenging prospects, especially in an environment in which estimated improper payments rose by $19 billion to $124.7 billion in fiscal year 2014. To help address such challenges, agencies need sophisticated capabilities to help narrow the window of opportunity for improper payments, including fraud. Such capabilities include data- analytic tools such as those that permit Treasury to perform large-scale analysis of payment data at DNP, as well as the ROC's link analysis and unstructured-text-mining tools that identify and target risk and that, in conjunction with the Recovery Board's investigative authority, aid the government in preventing and reducing improper payments. Although cost and other challenges may limit the viability of transferring certain of the ROC's assets to Treasury, other assets--especially information and documentation that could serve as templates for data sharing or developing the technical specifications for procuring additional software-- may assist DNP as it expands its services and capabilities to address improper payments. The ROC's May 2014 transition plan may serve as a basis for Treasury to further assess whether certain data sets could be of assistance to DNP, and documentation of MOUs could help Treasury more quickly replicate such arrangements. Such action by Treasury will not ultimately prevent some loss of capabilities for the oversight community as DNP and the ROC generally serve different communities of users and deploy their analytic tools to address different types of problems. Thus, maintaining a separate centralized form of analytic and investigative support for the oversight community would help prevent OIGs from losing valuable tools useful for targeting oversight resources in a data-driven, risk-based manner. In addition, a centralized analytics resource could help prevent a potentially inefficient use of funds that could result if OIGs proceeded to duplicate similar oversight tools upon the loss of the ROC. Further, a centralized analytics resource could help maintain high-quality analyses by ensuring regular use of those tools and expertise. Given that congressional oversight committees have shown substantial interest in the ROC's capabilities, recognized its value in helping combat fraud, waste, and abuse in federal spending, and demonstrated intent in preserving this value for its users, a legislative proposal could begin the process of reestablishing a ROC-like capability to help OIGs sustain their oversight of federal expenditures. To help preserve a proven resource supporting the oversight community's analytic capabilities, Congress may wish to consider directing CIGIE to develop a legislative proposal to reconstitute the essential capabilities of the ROC to help ensure federal spending accountability. The proposal should identify a range of options at varying scales for the cost of analytic tools, personnel, and necessary funding, as well as any additional authority CIGIE may need to ensure such enduring, robust analytical and investigative capability for the oversight community. To capitalize on the opportunity created by the DATA Act, we recommend that the Secretary of the Treasury reconsider whether certain assets-- especially information and documentation such as MOUs that would help transfer the knowledge gained through the operation of the ROC--could be worth transferring to DNP to assist in its mission to reduce improper payments. Additionally, the Secretary should document the decision on whether Treasury transfers additional information and documentation and what factors were considered in this decision. We provided Treasury, CIGIE, and the Recovery Board with a draft of this report for review and comment. Treasury and CIGIE provided written comments, and the Recovery Board did not provide official comments on our draft report. In its written comments, which are reproduced in appendix II, Treasury concurred with our recommendation that it should consider additional knowledge transfers from the ROC to assist in the DNP's mission to reduce improper payments and will document its rationale and final decision in this regard. In its response, Treasury noted that it has taken steps to preserve the knowledge gained through the operation of the ROC, including hiring ROC personnel. Furthermore, Treasury noted that it has a robust program in place that is meeting the needs of federal agencies in preventing, reducing, and recovering improper payments including DNP and the Philadelphia Financial Center. In its written comments, which are reproduced in appendix III, CIGIE agreed that the ROC provided valuable assistance to many OIGs in support of their investigative, audit, evaluation, and inspection efforts and this support will be missed when the Recovery Board closes. In its response, CIGIE noted that the OIG community has long recognized the importance of using a variety of techniques, including data analysis, to assist in its oversight responsibility and there may be efficiencies achieved in the development of analytics capabilities by CIGIE that could support the entire OIG community. CIGIE stated that it has already undertaken steps to develop an array of scalable options for such data- analytic capabilities with appropriate regard to both the costs and benefits of such options and the current needs of the OIG community. However, to expand these efforts, it would need additional resources to develop and maintain data-analytic activities. CIGIE also stated that it is essential that CIGIE have a steady stream of funding for it to develop and maintain any kind of data-analysis function. Treasury, the Recovery Board, and CIGIE also provided technical comments that were incorporated into the report, as appropriate. We are sending copies of this report to relevant congressional committees, the Secretary of the Treasury, the Chair of the Council of the Inspectors General on Integrity and Efficiency (CIGIE), and the Chair of the Recovery Accountability and Transparency Board (Recovery Board). This report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To determine the analytic value of the Recovery Operations Center's (ROC) assets and capabilities to the oversight community, we interviewed Recovery Accountability and Transparency Board (Recovery Board) officials who worked on ROC operations. We also obtained documentation on the types of data sets, analytic tools, and other capabilities the ROC offers to its primary users--namely, the oversight community, which included the Offices of Inspector General (OIG) but also other government entities tasked with ensuring the appropriate use of federal funds, such as law-enforcement agencies and sometimes agency programs. To gather information on how the oversight community used the ROC's assets, we developed criteria to select ROC users to interview based on agency size and, based on an analysis of client- service data from fiscal years 2014 through March 2015, including the frequency and consistency with which the organizations used the ROC. On the basis of these criteria, we interviewed officials from the OIGs of the Department of Homeland Security, the Appalachian Regional Commission, the Environmental Protection Agency, the Department of Housing and Urban Development, the Export-Import Bank, the National Science Foundation, the United States Postal Service, and the Department of Justice, as well as officials from the National Intellectual Property Rights Coordination Center. To examine the Department of the Treasury's (Treasury) plans for a transfer of ROC assets, we interviewed Treasury officials responsible for making decisions on transferring the ROC's assets as well as Recovery Board officials for their observations on transition activities undertaken by Treasury. We reviewed relevant transition-plan documents developed by the Recovery Board that included milestones and guidelines for the transition of ROC assets, which they provided to Treasury. We also reviewed documentation from the Recovery Board on the ROC's resources, including hardware, software contracts, data sets, and human capital, as well as information on its staffing levels over time, to develop a complete picture of the capabilities that Treasury could obtain through a transition. To evaluate the effect of the ROC's capabilities on its audit and investigative user communities, we reviewed documentation from the Recovery Board on the ROC's outcomes, how its clients made use of its resources, and what they achieved. We also conducted interviews with OIGs to understand under what circumstances they used the ROC's assets. We analyzed these interviews, characterizing themes that were similar and different based on the size of the OIG, the frequency with which the OIG used the ROC, and whether the OIG has any in-house data-analytics capabilities. We also discussed plans the OIGs had to replace any ROC capabilities should Treasury opt not to assume all of the ROC's assets. We also interviewed the Council of the Inspectors General on Integrity and Efficiency (CIGIE) officials to obtain their perspectives on how the closure of the ROC may affect the oversight community. We also reviewed their budget information and their estimate of the cost of ROC resources and budget information. We did not verify the accuracy of CIGIE's estimate of the cost of ROC resources and did not conduct an analysis of whether CIGIE's budget appears to be sufficient for covering these costs. In addition to the contact mentioned above, the following staff members made significant contributions to this report: Joah Iannotta, Assistant Director; Lauren Kirkpatrick, Analyst-in-Charge; Giny Cheong; Beryl Davis; Peter Del Toro; Kathleen Drennan; Vijay D'Souza; Colin Fallon; Shirley Hwang; Maria McMullen; Paula Rascona; Brynn Rovito; and Andrew Stephens. DATA Act: Progress Made in Initial Implementation but Challenges Must be Addressed as Efforts Proceed. GAO-15-752T. Washington, D.C.: July 29, 2015.

Improper payments government-wide increased approximately $19 billion in fiscal year 2014, resulting in an estimated total of $124.7 billion. The DATA Act authorized Treasury to establish a data-analysis center or expand an existing service. Congress included a provision in the DATA Act for GAO to review the implementation of the statute. This report addresses (1) the value of the ROC's capabilities provided to the oversight community; (2) Treasury's plans for transferring assets from the ROC, and (3) the potential effect, if any, of Treasury's plans on the ROC's users. GAO reviewed documentation on the ROC's assets, a transition plan developed by the ROC, and its performance data from fiscal year 2012 through March 2015. On the basis of factors such as frequency of requests for assistance and agency size, GAO interviewed various ROC users about their views. GAO also interviewed Treasury and CIGIE officials to obtain their perspectives on the ROC's capabilities and its future status. The Recovery Accountability and Transparency Board's (Recovery Board) Recovery Operations Center (ROC) provided significant analytical services primarily to Offices of the Inspector General (OIG) to support antifraud and other activities. Congress initially established the Recovery Board to oversee funds appropriated by the American Recovery and Reinvestment Act of 2009. Subsequently, it expanded the Recovery Board's mandate to include oversight of other federal spending, and most recently through the Digital Accountability and Transparency Act of 2014 (DATA Act) authorized the Department of the Treasury (Treasury) to transfer ROC assets to Treasury by September 30, 2015, when the Recovery Board closes. On the basis of the ROC's client-service performance data that GAO reviewed, the center researched roughly 1.7 million entities associated with $36.4 billion in federal funds in fiscal years 2012 and 2013. The ROC developed specialized data-analytic capabilities that, among other things, helped OIGs identify high-risk entities and target audit and investigative resources to those entities; identified organizations with previous fraudulent activities that nevertheless received contracts during Hurricane Sandy; and identified entities involved in activities such as collaborating to commit fraud, and visually depicted relationships among these entities for juries. Treasury does not plan to transfer the ROC's assets, such as hardware and software, citing cost, lack of investigative authority, and other reasons. However, Treasury could transfer additional information to its Do Not Pay Center Business Center (DNP), which assists agencies in preventing improper payments. For instance, transferring documentation of data-sharing agreements, which can be difficult and time-consuming to establish, could serve as a template for DNP efforts to expand the number of data sets it uses to identify improper payments. Although cost and other challenges may limit the viability of transferring certain of the ROC's assets to Treasury, other assets--especially those that could serve as templates for negotiating access to and procuring additional data--may assist DNP as it expands its services and capabilities. Because Treasury does not plan to transfer the ROC's assets, the ROC's users will need to consider alternatives when the Recovery Board closes. Specifically, officials from some large OIGs that have used the ROC told GAO they intend to develop their own analytical capabilities. However, officials from some small- and medium-sized OIGs said they do not have the resources to develop independent data analytics or pay for a similar service, thus foregoing the ROC's capabilities. The Council of the Inspectors General for Integrity and Efficiency (CIGIE) could reconstitute some of the ROC's analytic capabilities and has explored options to do so. However, CIGIE officials stated that CIGIE does not currently have the resources to accomplish this reconstitution. A legislative proposal that articulates for Congress the relative costs and benefits of developing an entity with a mission and capabilities similar to the ROC could be an appropriate first step in preserving the essence of the center's proven value to its users. CIGIE officials stated that they have not developed such a proposal absent congressional direction, but noted that they support Congress's expressed interest in preserving and expanding analytic resources for the oversight community. If Congress wants to maintain the ROC's analytic capabilities, it should consider directing CIGIE to develop a proposal to that effect to help ensure federal spending accountability. GAO also recommends that Treasury consider transferring additional information to enhance Treasury's DNP. Treasury concurred with GAO's recommendation, and CIGIE is supportive of assuming additional analytical functions for the OIG community with additional funding.

In February 2011, Boeing won the competition to develop the Air Force's next generation aerial refueling tanker aircraft, the KC-46. This program is one of a few weapon system programs to use a fixed price incentive (firm target) contract for development in recent years. Defense officials stated that a fixed price incentive (firm target) contract was appropriate for the program because KC-46 development is considered to be a relatively low-risk effort to integrate mostly mature military technologies onto an aircraft designed for commercial use. The KC-46 development contract is designed to hold Boeing accountable for cost associated with the development of four test aircraft and includes options to manufacture the remaining production lots. The contract limits the government's financial liability and provides the contractor incentives to reduce costs in order to earn more profit. Barring any changes to KC-46 requirements by the Air Force, the contract specifies a target price of $4.4 billion and a ceiling price of $4.9 billion, at which point Boeing must assume responsibility for all additional costs. We previously reported that both the program office and Boeing have estimated that development costs would exceed the contract ceiling price. As of March 2014, Boeing and the program office estimated costs would be over the ceiling price by about $271 million and $787 million, respectively. The program office estimate is higher because it includes additional costs associated with performance as well as cost and schedule risk. In all, 13 production lots are expected to be delivered. The contract includes firm fixed price contract options for the first production lot in 2015 and the second production lot in 2016, and options with not-to-exceed firm fixed prices for production lots 3 through 13. The contract also requires Boeing to deliver 18 operational aircraft by August 2017. In addition, all required training must be complete, and the required support equipment and sustainment support in place by August 2017. Contract provisions also specify that Boeing must correct any required deficiencies and bring development and production aircraft to the final configuration at no additional cost to the government. After the first two production lots, the program plans to produce aircraft at a rate of 15 aircraft per year, with the final 6 aircraft procured in fiscal year 2027. Separate competitions may occur for later acquisitions, nominally called the KC-Y and KC-Z, to replace the rest of the KC-135 fleet and the KC-10 fleet (the Air Force's large tanker). Boeing plans to modify the 767 aircraft in two phases to produce a militarized aerial refueling tanker: In the first, Boeing is modifying the 767 with a cargo door and an advanced flight deck display borrowed from its new 787 and calling this modified version the 767-2C. The 767-2C will be built on Boeing's existing production line. In the second, the 767-2C will proceed to the finishing center to become a KC-46. It will be militarized by adding air refueling capabilities, an air refueling operator's station that includes panoramic three-dimensional displays, and threat detection and avoidance systems. The Federal Aviation Administration (FAA) has previously certified Boeing's 767 commercial passenger airplane and will certify the design for both the 767-2C and the KC-46. Boeing established plans for the FAA to accomplish the 767-2C and the KC-46 certifications concurrently rather than consecutively, which is the typical procedure. The Air Force also has to certify the KC-46 and will use the FAA's findings to make the overall airworthiness determination. See Figure 1 for a depiction of the conversion of the 767 aircraft into the KC-46 tanker. The new KC-46 tanker is expected to be more capable than the KC-135 it replaces in several respects. Unlike the KC-135, it will allow for two types of refueling to be employed in the same mission--a refueling boom that is integrated with a computer assisted control system, as well as a permanent hose and drogue refueling system. The KC-135 has to land and switch equipment to transition from one mode to another. Also, the KC-46 is expected to be able to refuel in a variety of night-time and covert mission settings and will have countermeasures to protect it against infrared missile threats. The KC-135 is restricted in tactical missions and does not have sufficient defensive systems relative to the KC-46. Designed with more refueling capacity, improved efficiency, and increased cargo and medical evacuation capabilities than its predecessor, the KC-46 is intended to provide aerial refueling to Air Force, Navy, Marine Corps, and allied aircraft. Appendix II compares, in more detail, the current capabilities of the KC-135 with the planned capabilities of the new KC-46 tanker. KC-46 total program acquisition costs (development, production, and military construction costs) have remained relatively stable since program start, changing less than 1 percent since February 2011, and the program is meeting schedule and performance goals. Boeing set aside $354 million in contract funds to address identified, but unresolved development risks. As of December 2013, Boeing had about $75 million remaining to address these risks. Based on Boeing's monthly usage, we calculate that the management reserves will be depleted about 3 months before the KC-46's first flight and approximately 3 years before the development contract is completed. The government, however, would bear no financial risk for future work if Boeing uses all of its management reserves as long as the Air Force does not make changes to the KC-46 requirements, schedule, or other relevant terms and conditions of the contract. Our prior work has found that flight testing is likely to uncover problems that will require management reserves to address. The KC-46 total acquisition cost estimate has remained relatively stable since February 2011 although there have been some minor fluctuations among the development, procurement, and military construction costs that make up this estimate. The largest change is in the program's development cost estimate, which has decreased by about $345 million, or about 5 percent. Development cost reductions can be attributed to fiscal year 2013 sequestration cuts, support for DOD's Small Business Innovative Research fund, and cuts to a fund dedicated to tanker replacement. According to program officials, these reductions have not affected the program because it had set aside funds to address engineering changes, which have not occurred thus far. Overall, total acquisition and unit costs have decreased less than 1 percent and quantities have remained the same. Table 1 summarizes the initial and current estimated quantities, costs, and milestone dates for the KC-46 program. The October 2013 development cost estimate of about $6.8 billion includes several contracts for various activities. For example, the program office awarded Boeing a contract for $4.9 billion to develop 4 test aircraft and budgeted over $0.3 billion for the development of aircrew and maintenance training systems. An estimated $1.6 billion is needed to cover other government costs, such as program office support, test and evaluation support, contract performance risk, and other development risks associated with the aircraft and training systems. The procurement cost estimate of $40.3 billion is to procure 175 production aircraft, initial spares, and other support equipment. The military construction estimate of $4.2 billion includes the projected costs to build aircraft hangars, maintenance and supply shops, and other facilities to house and support the KC-46 fleet at 10 main operating bases, 1 training base, and the Oklahoma City Air Logistics Complex depot. Boeing is also meeting the high level schedule milestones. Most recently, it conducted the critical design review (CDR) in July 2013, on schedule. However, there are indications that the start of initial operational test and evaluation, which is scheduled for May 2016, may slip. DOD's Office of the Director, Operational Test and Evaluation, which is responsible for approving operational and live fire test and evaluation within each major defense acquisition program, recently issued its 2013 annual report and continued to recommend that the Air Force plan for a 6- to 12-month delay to the start of initial operational test and evaluation to allow more time to train aircrew and maintenance personnel and verify maintenance procedures. The KC-46 program office agrees that the test schedule is aggressive, but does not believe the delays are certain. The program office projects that the KC-46 aircraft will meet the requirements of all nine key performance parameters by the end of development. Satisfying these key performance parameters will ensure that the KC-46 will be able to accomplish its primary mission of providing worldwide, day and night, adverse weather aerial refueling as well as its secondary missions. See appendix III for a list of the KC-46 key performance parameters. The program office has developed a set of metrics to help gauge its progress towards meeting the performance parameters. For example, one metric tracks operational empty weight because in general, every pound of excess weight equates to a corresponding reduction in the amount of fuel the aircraft can carry to accomplish its primary mission. Boeing currently projects that the aircraft will meet the weight target of 204,000 pounds. At the outset of development, Boeing set aside $354 million from contract funds in a management reserve account, about 7 percent of the contract ceiling price, to address identified, yet unresolved, development risks. Last year we reported that Boeing had accomplished approximately 28 percent of the development work and had allocated about 80 percent of the contract's management reserves. We raised concerns about the high rate at which the management reserves were being used because doing so early in a program is often an indicator of future contract performance problems. Since then, there have been two major actions related to management reserves in 2013. First, in January 2013, Boeing returned $72 million to the management reserves account because program officials determined that the program would pay for fuel for test flights rather than Boeing, new labor rates were lower than planned, and Boeing calculated costs associated with some types of labor incorrectly. Second, in August 2013, Boeing allocated about $42 million of its management reserves, with the largest portion, $24 million, used for a wet fuels laboratory. Boeing initially planned on using corporate funding for the wet fuels laboratory, which was intended for general wet fuels research. However, since the laboratory became more focused on meeting the specific needs of the KC-46 program, Boeing determined it was more appropriate to use management reserves. The other $18 million was used for a variety of other efforts, including minor design and architectural changes. The following figure illustrates management reserve allocation since program start and projects when reserves will be depleted. As of December 2013, about $75 million in unallocated reserves remain. If the current usage trend continues--a monthly average of over $9 million--the program office projects management reserves will be depleted in September 2014, about 3 months before the start of KC-46 developmental flight testing and approximately three years before the development contract is completed. According to GAO's Cost Estimating and Assessment Guide, significant use of management reserves early in a program may indicate contract performance problems and decreases the amount of reserves available for future risks, particularly during the test and evaluation phase when demand may be the greatest. Barring any changes to KC-46 requirements, schedule, or other relevant terms and conditions of the contract by the Air Force, Boeing would be solely responsible for the cost of future changes if it uses all of its management reserves, so the government bears no financial risk. The program office and Boeing held the program's CDR in July 2013 and released over 90 percent of the total engineering design drawings, a key indicator that the design is stable. The program is now focused on completing software development and integration, as well as test plans in preparation for developmental flight testing. Software development plans changed over the course of the past year in large part because the program solidified requirements at CDR and Boeing brought two of the program's software intensive system components in-house and found ways to use some of its existing software. Overall, software development is progressing largely according to plan; however, software verification testing has not yet started and software problem reports are increasing. The flight test program is also a concern because it depends on coordination among several separate government entities, requires timely access to receiver aircraft (the aircraft the KC-46 will refuel while in flight), and requires a more aggressive pace than on past programs. The program office is conducting a series of rehearsal test exercises and is working with Air Force officials to finalize agreements related to receiver aircraft availability to mitigate these risks. The program office held its CDR in July 2013, with Boeing releasing over 90 percent of the total engineering design drawings. The 90 percent drawing release met a contractual requirement and is consistent with acquisition best practices that use this metric as an indicator that the design is stable. According to program officials, as of December 2013, Boeing had released 98.6 percent of the expected engineering design drawings and the remaining drawings relate almost exclusively to aircraft interiors and are not considered to be complex. Figure 3 shows the number of design drawings completed since Boeing began tracking it in May 2011. Prior to CDR, the program office and Boeing took a number of steps to ensure the program had a stable design. This included holding a series of sub-system CDRs, replacing two system components that were not sufficiently mature, and addressing previously identified risks, such as aircraft weight. Currently, Boeing is working to alleviate lingering instability in key physical components related to aerial refueling--the centerline drogue system and wing aerial refueling pod. Boeing still considers the instability of these components to be a moderate program risk, and its strategy is to conduct modeling and simulation studies and perform ground tests to help mitigate this risk. As of January 2014, Boeing estimates that 15.8 million lines of code will be needed for the KC-46. Boeing plans to rely primarily on reused software from its commercial aircraft for the 767-2C and more heavily on modified or new software for the military subsystems on the KC-46. As shown in table 2, the most recent plan is for Boeing to reuse existing software for 83 percent of its software needs, which has helped reduce risks associated with software development. According to program officials, the changes in reused, modified, and new software between 2011 and 2013 are largely the result of the program solidifying requirements for CDR and Boeing's effort to reduce the risk associated with the development of two software-intensive system components related to situational awareness. According to these officials, there were limitations with the original software developer's software and Boeing ultimately decided to bring the development effort in-house, leveraging existing software code to mitigate risk. Overall, we found that software development is currently progressing mostly according to Boeing's plan. As shown in figure 4, as of January 2014, Boeing reported that 73 percent of software had been delivered compared to its plan for having 76 percent at this time (96 percent of the planned activities). A large portion of the software that has been delivered to this point is reused software that is needed for the initial build of the 767-2C aircraft. A small amount of development work related to the aerial refueling software, about 3 percent, is behind schedule. The remaining software, related to key military subsystems for remote vision and situational awareness, among other capabilities, is expected to be delivered to Boeing through the beginning of June 2014. While the program's progress for software development is encouraging, program officials are expecting software verification testing, which has not yet begun, to be challenging. Notably, Boeing must verify the software code to determine if it works as intended. Approximately 735,000 lines of the code are new and relate in large part to key military unique systems. Moreover, Boeing's software integration lab that simulates the KC-46 cockpit will be at near capacity between February and June 2014. Boeing could have difficulty completing all testing if more retests are needed than expected. In addition to capacity concerns, we found that software problem reports are increasing. There were over 600 software problem reports as of January 2014 that needed to be addressed, which will add pressure to an integration lab already operating at near capacity. Thirty-five percent of the problem reports were considered urgent or high priority problems that need to be fixed as quickly as possible. Program officials stated that avionics flight management computer software has been a major contributor to the problem reports to date and that Boeing is working closely with this supplier to ensure problems are addressed. This particular supplier has recently increased the number of staff working on this software effort from 3 to 24 people to address the backlog of problem reports. The program's flight test schedule continues to be a concern due to the need for extensive coordination among government entities, the need for timely access to receiver aircraft, and its aggressive pace. The following is a summary of the various testing concerns and the steps, if any, the program office and Boeing are taking to address them. Coordinating on concurrent test activities: Government agencies and Boeing have agreed to a "test once" approach, whereby many of the test activities for FAA certification, developmental testing, aerial refueling, and operational testing will be combined to achieve greater efficiency. Currently, Boeing, the program office, the Air Force, Navy, FAA, and officials from the Office of the Secretary of Defense organizations for developmental and operational testing are finalizing detailed test plans, which are needed to guide flight test activities that are scheduled to begin in June 2014 for the 767-2C and in January 2015 for the KC-46. The program office is conducting a series of rehearsal test exercises before any flight tests take place to ensure that all parties understand their roles and responsibilities during testing. Program officials report that three of four such exercises have been completed, with the next scheduled for September 2014. Officials said this exercise will focus on preparing for the KC-46's first flight. Ensuring receiver aircraft availability: To meet the test schedule, receiver aircraft, such as the F-22 A and the F/A-18 C, are needed at certain locations and times to participate in the program's test activities. The program office has finalized one memorandum of agreement with Air Force officials for access to 14 receiver aircraft and stated that it is currently in the process of developing two additional agreements with the Navy for two additional types of aircraft and the United Kingdom for their respective aircraft. If the receiver aircraft are not available when needed, the Air Force risks affecting Boeing's test schedule. Maintaining flight test pace: The program office and Boeing report that maintaining the program's flight test pace is among the program's greatest risks. Program officials explained that this risk captures both the 65 hour per month commercial test pace for the 767-2C aircraft and the 50 hour per month military test pace for the KC-46 aircraft. To adhere to the aggressive test schedule, Boeing officials stated that they plan to fly development aircraft 5 to 6 days per week with roughly 5 to 6 hours per mission (which DOD test organizations have shown is more aggressive for the military flight testing than other programs have demonstrated historically). Boeing officials believe they can achieve the test pace required because of Boeing's testing experience with other commercial aircraft and the KC-10 tanker program. In addition, Boeing has local maintenance and engineering support available to support the test program as well as control over flight test priorities for the commercial testing since the development aircraft are being tested at Boeing facilities. The program has made progress in readying the KC-46 for low rate initial production in 2015. Boeing has started manufacturing all four development aircraft on schedule, but has experienced some delays with the first aircraft. The program office and Boeing have also taken several steps to capture the necessary manufacturing knowledge to make informed decisions as the program transitions from design into production. This includes identifying and assessing critical manufacturing processes to determine if they are capable of producing key military subsystems in a production representative environment. The program also established a reliability growth curve and Boeing will begin tracking its progress towards reaching reliability goals once testing begins. Boeing is making progress manufacturing most of the military unique subsystems, but a test article for a critical aerial refueling subsystem has been delayed by almost a year due to parts issues. Boeing has started manufacturing all four development aircraft on schedule, but has experienced some delays with the first aircraft. The Air Force plans to eventually field a total of 179 aircraft no later than January 2031. Figure 5 displays the time line for the manufacture of the development, low rate production, and full rate production aircraft. Boeing began producing the first development aircraft (a 767-2C) in June 2013, and Boeing officials said the aircraft was 76 percent complete as of mid January 2014. The aircraft was scheduled to be powered on for the first time in early December 2013, but program officials told us that activity has slipped until the end of April 2014. Boeing officials attributed the schedule slip to late supplier deliveries. Completion of major assembly operations has also slipped from mid January until mid March. Program officials told us that Boeing has been able to resequence tasks thus far to avoid affecting the critical path, such as adding the body fuel tanks to the first 767-2C earlier and in a different facility than originally planned. Program officials are assessing whether these delays will affect the timing of the first flight of the 767-2C, scheduled for June 2014. Boeing and program officials said that manufacturing of the second development aircraft was going better than on the first aircraft, reporting that the aircraft was 65 percent complete as of mid January 2014. Officials added that there had been a 75 percent reduction in overall parts shortages. The third and fourth aircraft just began production in late October 2013 and mid January 2014, respectively. From the first to the fourth development aircraft, Boeing is anticipating improvement in its ability to manufacture the aircraft. For example, the first aircraft is scheduled to take about 11 and a half months from the start of major assembly until first flight while the fourth aircraft is only scheduled to take about 7 months. Once complete, the four development aircraft will then enter the finishing center at various points between June 2014 and September 2015 to be converted to a KC-46 tanker. The program office and Boeing have taken several initial steps to help ensure that the KC-46 will be ready for low rate production in August 2015 and that the aircraft will be reliable. In our prior work, we identified the activities required to capture manufacturing knowledge. These activities include (1) identifying key system characteristics and critical manufacturing processes; (2) establishing a reliability growth plan and goals; (3) conducting failure modes and effects analysis; (4) conducting reliability growth testing; and (5) determining whether processes are in control and capable. Table 3 provides a description of these activities and progress the program has made for each. Since the 767-2C will be manufactured on Boeing's existing 767 production line, the program office and Boeing have focused their attention on identifying the key system characteristics and critical manufacturing processes for the military unique subsystems. Prior to CDR, the program office and Boeing completed assessments of 12 critical manufacturing processes, such as the assembly of aerial refueling components. These assessments indicated that key military subsystems could be manufactured in a production representative environment. The program office and Boeing plan on conducting another assessment prior to August 2015 to determine if the program is ready to begin low rate initial production. The program office has established a reliability growth curve and goal. To assess reliability growth, the program is tracking the mean time between unscheduled maintenance events due to equipment failure, which is defined as the total flight hours divided by the total number of incidents requiring unscheduled maintenance. These failures are caused by a manufacturing or design defect and require the use of Air Force resources, such as spare parts or manpower, in order to fix them. The program has set a reliability goal of 2.83 flight hours between unscheduled maintenance events, but does not expect that goal to be achieved until the program has logged 50,000 flight hours. Figure 6 below depicts how the program office expects the aircraft's reliability to improve over the program's initial 5,000 flight hours. The program expects to be above the idealized reliability growth curve at the start of testing because initial testing will be on a 767-2C, a derivative of a commercial aircraft that has been flying since the 1980s. Reliability is projected to fall below expectations once the military sub-systems are added to the aircraft. The program then expects the reliability to steadily improve to the point where the aircraft could fly about 2 hours between unscheduled maintenance events at the start of initial operational test and evaluation. As shown in figure 6 above, the program will be on the idealized reliability growth curve at that point. Boeing has also initiated a failure modes and effects analysis that covers 41 subsystems. Boeing and the program office rely on this analysis to determine which subsystems on the aircraft are likely to fail, when and why they fail, and whether those subsystems' failures might threaten the aircraft's safety. Boeing is also using this information to develop a tool to detect and log equipment failures. The program office plans to share the analysis with aircraft maintenance staff. The program has not yet begun two critical manufacturing and reliability assessment activities. First, the program is not currently tracking reliability growth because the 767-2C first flight is not scheduled to take place until June 2014 and no flight hours have been accrued yet. Second, the program has not determined whether manufacturing processes are in control and capable of producing parts consistently with few defects. The program plans to review and verify that process controls are in place to ensure the quality of the manufacturing process as part of its next assessment of critical manufacturing processes prior to the low rate production decision in August 2015. Program officials said their review would be focused on whether these process controls are in place rather than analyzing the data to determine if the processes are actually in control. Boeing is making progress manufacturing most of the military unique subsystems, such as the aerial refueling operator station, but the test refueling boom's schedule has slipped by almost a year due to parts delays. Boeing's original design included parts that proved challenging to fit within the boom's space constraints, and other parts were redesigned to improve the boom's safety. Boom parts suppliers, however, have experienced delays in delivering the redesigned parts to Boeing, which has prompted Boeing to send staff to help one of the suppliers minimize further schedule slips. Boeing officials told us they decided to build a test boom as a risk reduction effort and plan to apply lessons learned from producing the test boom to future boom production. However, program officials currently estimate that boom parts delays have also led to an approximately 1-month schedule slip in the first development aircraft's boom. Boeing is facing some schedule pressure on this boom because it is now scheduled to be completed only a few days before the start of ground vibration testing. Boeing officials said they needed the boom for this testing and would like to complete ground vibration testing before the 767-2C's first flight. The second development aircraft's boom is scheduled to be built in only 5 months. Based on its current schedule, Boeing needs to have this boom completed by June 2014 in order to meet the KC-46's first flight, scheduled for January 2015. The KC-46 program has made good progress to date--acquisition costs have remained relatively stable, high-level schedule and performance goals have been met, the critical design review was successfully completed, and the contractor is building development aircraft. The next 12 months will be challenging as the program must accomplish a significant amount of work and the margin for error is small. For example, the program is scheduled to complete software integration and the first test flights of the 767-2C and KC-46. The remaining software development and integration work is mostly focused on military software and systems and is expected to be more difficult relative to the prior work completed. The program's test activities continue to be a concern due to its aggressive test schedule. Detailed test plans must be completed and the program must maintain an unusually high test pace to meet this schedule. Perhaps more importantly, agencies will have to coordinate to concurrently complete multiple air worthiness certifications. While efficient, this approach presents significant risk to the program. The program office must also finalize agreements now in progress to ensure that receiver aircraft are available when and where they are needed to support flight tests. Any discoveries made in testing that require design changes may negatively affect program schedule and delivery to the warfighter. Parts delays on the first development aircraft and a critical aerial refueling subsystem are also causing increased schedule pressure. With these risks in its near future, the KC-46 program will continue to bear watching. While all of the risks currently appear to be recognized, any slips in software testing, flight testing, and manufacturing as the program moves forward could cause delays in the program. Due to existing schedule risks and the fact that the program is entering a challenging phase of testing, we recommend that the Secretary of Defense direct the Air Force to study the likelihood and potential effect of delays on total development costs, and develop mitigation plans, as needed, related to potential delays. DOD provided us with written comments on a draft of this report, which are reprinted in appendix V. DOD concurred with our recommendation. The KC-46 program office conducts an annual analysis of cost and schedule risks to quantify the potential effect of delays on program costs and officials told us they will consider the risks we identified in that analysis. We also incorporated technical comments from DOD as appropriate. We are sending copies of this report to the Secretary of Defense; the Secretary of the Air Force; and the Director of the Office of Management and Budget. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff contributing to this report are listed in appendix VI. This report examines the Air Force's continued development of the KC-46 tanker program. Specifically, we examined (1) progress toward cost, schedule, and performance goals; (2) development challenges, if any, and steps to address them; and (3) progress in manufacturing the aircraft. To assess progress toward cost, schedule and performance goals in the calendar year of this review (2013), we reviewed briefings by program and contractor officials, financial management documents, program budgets, defense acquisition executive summary reports, selected acquisition reports, monthly activity reports, technical performance indicators, risk assessments, and other documentation. To evaluate cost information, we analyzed earned value management data and the contractor's use of management reserves. To assess development schedule progress, we compared program milestones established at program start to current estimates and reviewed Defense Contract Management Agency monthly assessments of KC-46 schedule health and program office schedule analyses. We also interviewed program officials to determine the status of Department of Defense (DOD) efforts to implement our prior recommendations aimed at improving the program's integrated master schedule. To measure progress toward performance goals, we reviewed current estimates of key performance parameters, key system attributes, and technical performance metrics and compared them to threshold and objective requirements. We discussed results of the initial KC-46 operational assessment with officials from the Air Force Operational Test and Evaluation Center and the Director of Operational Test and Evaluation. We also interviewed relevant officials from the KC-46 program office, Boeing, and the Department of Defense. To assess development challenges and steps to address them, we examined program documentation, such as critical design review briefings, risk assessments and briefings, software metrics reports, integrated test team meeting minutes, and updates to key documents such as the technology maturation, software development, and integrated test plans. We also analyzed pertinent DOD documents including the Defense Contract Management Agency's monthly program assessment reports, the first operational assessment by the Air Force Operational Test and Evaluation Center, and annual reports issued by the Deputy Assistant Secretary of Defense for Developmental Test and Evaluation and the Director of Operational Test and Evaluation. When possible, we attended integrated test team and program management meetings to obtain additional insight on any challenges or mitigation efforts being discussed by Boeing and program officials. In addition, we examined the program's progress in completing design drawings and maturing critical technologies at the critical design review. Furthermore, we interviewed officials from Boeing, the program office, the Office of the Secretary of Defense, and the Department of the Navy to assess development challenges and the suitability of steps taken to address them. To assess progress in manufacturing aircraft, we analyzed program office and Boeing documents, such as the manufacturing program plan; quarterly manufacturing and quality briefings; and program schedules. We used these documents to compare Boeing's initial schedule for completing aircraft and boom manufacturing to its actual performance and to identify challenges, if any. We also evaluated whether the program captured manufacturing knowledge recommended in prior GAO best practices work. This included reviewing manufacturing readiness assessments and comparing the results and future plans to DOD guidance and manufacturing best practices identified in prior GAO work. Lastly, we interviewed Boeing and program officials to discuss manufacturing progress and challenges and conducted a site visit of Boeing's 767 production line and its temporary and permanent boom production facility and finishing center. We conducted this performance audit from May 2013 to April 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix III: Description of Key Performance Parameters Description Aircraft shall be capable of accomplishing air refueling of all Department of Defense current and programmed (budgeted) receiver aircraft. The aircraft shall be capable of conducting both boom and drogue air refueling on the same mission. Aircraft shall be capable of carrying certain amounts of fuel (to use in air refueling) certain distances. Operate in Civil and Military Airspace Aircraft shall be capable of worldwide flight operations in all civil and military airspace. Aircraft shall be capable of transporting certain amounts of both equipment and personnel. Aircraft shall be capable of receiving air refueling from any compatible tanker aircraft. Aircraft shall be able to operate in chemical and biological environments. Aircraft must be able to have effective information exchanges with many other Department of Defense systems to fully support execution of all necessary missions and activities. Aircraft shall be capable of operating in hostile threat environments. Aircraft shall be capable of conducting drogue refueling on multiple aircraft on the same mission. Appendix IV: KC-46 Critical Technology Elements Description The display screens at boom operator stations inside the aircraft provide the visual cues needed for the operator to monitor the aircraft being refueled before and after contact with the refueling boom or drogue. The images of the aircraft on the screens are captured by a pair of cameras outside the aircraft that are meant to replicate the binocular aspect of human vision by supplying an image from two separate points of view, replicating how humans see two points of view, one for each eye. The resulting image separation provides the boom operator with greater fidelity and a more realistic impression of depth, or a 3rd dimension. Testing to date Similar technology has been used on two foreign-operated refueling aircraft and a representative model in tests with other Boeing tankers. The route generation engine is a component of the reactive threat avoidance sub-system. This sub-system monitors for ground and surface threats based on the aircraft's location and the active flight route. It identifies threats that impact the current route, provides a safer alternative route, and alerts the pilot that a new route is available for review and acceptance. A recent version of the route generation engine was flown and demonstrated on a Navy aircraft, but improvements have been made that have not been flight tested. In addition to the contact name above, the following staff members made key contributions to this report: Cheryl Andrew, Assistant Director; Jeff Hartnett; Katheryn Hubbell; John Krump; LeAnna Parkey; and Robert Swierczek.

Aerial refueling allows U.S. military aircraft to fly farther, stay airborne longer, and transport more weapons, equipment, and supplies. Yet the mainstay of the U.S. tanker forces--the KC-135 Stratotanker--is over 50 years old. It is increasingly costly to support and its age-related problems could potentially ground the fleet. As a result, the Air Force initiated the $51 billion KC-46 program to replace the aerial refueling fleet. The program plans to produce 18 tankers by 2017 and 179 aircraft in total. The National Defense Authorization Act for Fiscal Year 2012 mandated GAO to annually review the KC-46 program through 2017. This report addresses (1) progress made in 2013 toward cost, schedule, and performance goals, (2) development challenges, if any, and steps to address them, and (3) progress made in manufacturing the aircraft. To do this, GAO reviewed key program documents and discussed development and production plans and results with officials from the KC-46 program office, other defense offices, and the prime contractor, Boeing. The KC-46 program has made good progress over the past year--acquisition costs have remained relatively stable, the critical design review was successfully completed, the program is on track to meet performance parameters, and the contractor started building development aircraft. As shown, total program acquisition costs--which include development, production, and military construction costs--and unit costs have changed less than 1 percent since February 2011. As of December 2013, Boeing had about $75 million of its management reserves remaining to address identified, but unresolved development risks. There are indications that the start of initial operational test and evaluation, which is scheduled for May 2016, may slip 6 to 12 months. According to the Director of Operational Test and Evaluation, more time may be needed to train aircrew and maintenance personnel and verify maintenance procedures. The program released over 90 percent of the KC-46 design drawings at the critical design review, indicating that the design is stable. Overall, development of about 15.8 million lines of software code is progressing mostly according to plan. The next 12 months will be challenging as the program must complete software development, verify that the software works as intended, finalize developmental flight test planning, and begin developmental flight tests. Software problem reports are increasing and Boeing could have difficulty completing all testing if more retests are needed than expected. Developmental flight testing activities are also a concern due to the need for extensive coordination among government agencies, the need for timely access to receiver aircraft (aircraft the KC-46 will refuel while in flight), and the aggressive test pace. The program office is conducting test exercises to mitigate risks and working with Navy and United Kingdom officials to finalize agreements to have access to necessary receiver aircraft. The program has also made progress in ensuring that the KC-46 is ready for low rate initial production in 2015. Boeing has started manufacturing all four development aircraft on schedule. The program office has identified its critical manufacturing processes and verified that the processes are capable of producing key military subsystems in a production representative environment. In addition, the program has established a reliability growth curve and will begin tracking its progress towards reaching reliability goals once testing begins. Boeing is experiencing some manufacturing delays due to late supplier deliveries on the first aircraft and parts delays for a test article of a critical aerial refueling subsystem, but the program has not missed any major milestones. GAO recommends that the Air Force determine the likelihood and potential effect of delays on total development costs, and develop mitigation plans, as needed, related to potential delays. DOD concurred with the recommendation.

In 1943, Public Law 78-16 authorized the vocational rehabilitation program to provide training to veterans with service-connected disabilities. Between 1943 and 1980, program features and criteria underwent several legislative changes. In 1980, the Congress enacted the Veterans' Rehabilitation and Education Amendments (P.L. 96-466), which changed the program's purpose to providing eligible veterans with services and assistance necessary to enable them to obtain and maintain suitable employment. The vocational rehabilitation process has five phases. In the first phase, VA receives the veteran's application, establishes eligibility, and schedules a meeting with the veteran. In phase two, a counselor determines if the veteran has an employment handicap and, if so, the counselor and the veteran jointly develop a rehabilitation plan. The veteran then moves into training or education (phase three), if needed, and on to employment services (phase four) if training or education is not needed or after it is completed. During phase four, VA, state agencies, the Department of Labor, and private employment agencies help the veteran find a job. In phase five, the veteran is classified as rehabilitated once he or she finds a suitable job and holds it for at least 60 days. Veterans are eligible for program services if they have a 20-percent or higher service-connected disability and they have been determined by VA to have an employment handicap. The law defines an employment handicap as an impairment of a veteran's ability to prepare for, obtain, or retain employment consistent with his or her abilities, aptitudes, and interests. Veterans with a 10-percent service-connected disability also may be eligible if they have a serious employment handicap. The eligibility period generally extends for 12 years, beginning on the date of the veteran's discharge. Veterans found eligible for services can receive up to 48 months of benefits during the 12-year period. While in the program, most veterans receive services and equipment that may be required for beginning employment. For instance, veterans generally receive diagnosis and evaluation, as well as counseling and guidance, and some receive such aids as prostheses, eyeglasses, and educational supplies. They may also receive educational and vocational training; special rehabilitative services, such as tutorial assistance and interpreter services; a subsistence allowance; and employment assistance. Similar to the 1980 amendments, which affect the VA program, the Rehabilitation Act of 1973, as amended, authorized the Department of Education to provide eligible people (usually nonveterans) with services and assistance to enable them to obtain and maintain suitable employment. Education provides federal funds to help people with disabilities become employed, more independent, and better integrated into the community. The federal funds are chiefly passed to state vocational rehabilitation agencies that directly provide services and assistance to eligible people. The federal share of funding for these services is generally about 80 percent; the states pay the balance. In fiscal year 1995, about $2 billion in federal funds went to the state program, and about 1.3 million people received program services. The state vocational rehabilitation process, like the VA program process, comprises five phases, and state vocational rehabilitation clients who obtain and maintain a suitable job for at least 60 days are also classified as rehabilitated. However, in the state vocational program, suitable employment may not always involve wages or salary and may include, for example, working as an unpaid homemaker or family worker. To be eligible for the program, people must have a disability that is a substantial impediment to employment. However, when states are unable to serve all eligible applicants, priority is given to serving individuals with the most severe disabilities. The state vocational rehabilitation program offers a wide range of services to help its clients achieve their vocational goals. Examples of specific rehabilitation services include diagnosis and evaluation, counseling and guidance, vocational and educational training, physical restoration, adjustment training, on-the-job training, and employment assistance. If needed, services such as transportation to enable the individual to arrive at appointments for rehabilitation services or to get to work and income maintenance to cover additional costs incurred while the individual is receiving specific rehabilitation services are also provided. The 1980 Veterans' Rehabilitation and Education Amendments made a significant change in VA's vocational rehabilitation program by requiring VA to assist veterans in obtaining and maintaining suitable employment. This change expanded the scope of vocational rehabilitation beyond just training and marked a fundamental change in the focus and purpose of the program. However, despite previous GAO recommendations that VA fully implement this amendment and VA's agreement to emphasize employment services, few veterans in the vocational rehabilitation program obtain jobs. Instead, VA staff continue to focus on providing training services because, among other reasons, they lack adequate training and expertise in job placement. In addition, our analysis of national program data revealed that the percentage of veterans in the program with serious employment handicaps has been steadily declining over the last 5 years. Our discussions with program officials also revealed that VA does not have readily available cost data associated with rehabilitating veterans. We found, on the basis of our review of select case files, that VA typically spends about $20,000 to rehabilitate each veteran. In our 1992 report, we noted that approximately 202,000 veterans were found eligible for vocational rehabilitation program services between October 1983 and February 1991. About 62 percent dropped out of the program before ever receiving a rehabilitation plan, and an additional 9 percent dropped out after receiving a plan. VA rehabilitated 5 percent of the eligible veterans, while the remaining veterans (24 percent) continued to receive program services. From October 1991 to September 1995, 201,000 veterans applied to the vocational rehabilitation program. VA classified approximately 74,000 (37 percent) veterans eligible. Of these veterans, 21 percent dropped out before receiving a plan, and another 20 percent dropped out or temporarily suspended their program after receiving a plan. VA rehabilitated 8 percent of the eligible veterans, and the remaining veterans (51 percent) were still receiving program services at the time of our analysis. VA officials told us that the vocational rehabilitation program has not been effective in placing veterans in suitable jobs. The primary reason for the low percentage of rehabilitations is the lack of focus on employment services, according to VA officials. The director of VA's vocational rehabilitation program also acknowledged that the program's rehabilitation rate needs to be improved and has established a program goal of doubling the number of successful rehabilitations over the next 2 years. Our analysis of current program participants showed that almost half of those veterans who were rehabilitated obtained employment in the professional, technical, and managerial occupations--fields such as engineering, accounting, and management. In addition, we found that the average starting salary of these veterans was about $18,000 a year. Moreover, veterans who were rehabilitated spent an average of 30 months in the program, while those who dropped out spent 22 months in the program. VA's vocational rehabilitation program is primarily focused on sending veterans to training rather than on finding them suitable employment, according to VA officials. In 1992, VA issued guidance that emphasized the importance of finding suitable jobs for veterans and suggested that field offices begin employment planning as soon as a veteran's eligibility for the program services was established. However, regional officials told us that staff do not generally begin exploring employment options until near the end of a veteran's training. In 1992, we reported that 92 percent of veterans who received a plan between October 1983 and February 1991 went from the evaluation and planning phase directly into training programs, while only 3 percent went into the employment services phase. The remaining 5 percent went into a program designed to help them live independently or were placed in a controlled work environment. These figures remained virtually unchanged for the period we examined. For example, from October 1991 to September 1995, 92 percent of veterans who received a plan went from the evaluation and planning phase into training programs, while 4 percent went directly into the employment services phase. The remaining 4 percent entered an independent living program or were placed in extended evaluation, as shown in figure 1. Moreover, our analysis of national program data on current program participants showed that the vast majority of veterans in training were enrolled in higher education programs. For example, about 91 percent of such veterans were enrolled in a university or college. The remaining 9 percent were enrolled in vocational/technical schools or participated in other types of training programs, such as apprenticeships and on-the-job training. VA regional officials offered several reasons why staff continue to emphasize training over employment services. First, VA officials told us that it is difficult for staff to begin exploring employment options early because veterans entering the program expect to be able to attend college. Veterans acquire this expectation, according to VA officials, because the program is often marketed as an education program and not a jobs-oriented program. This image of the program as education oriented was also evident among some VA management. For instance, the director at one regional office we visited described the vocational rehabilitation program as the "best education program in VA." A second reason for emphasizing training over employment, according to VA officials, is that program staff generally lack adequate training and expertise in job placement activities. At one office, for example, a counseling psychologist told us that program staff are not equipped to find veterans jobs because they lack employer contacts and detailed information on local labor markets. In fact, counseling psychologists at the regional offices we visited described the employment services phase as "the weakest part of the program." Third, VA officials told us that large caseloads make it difficult for program staff to spend time exploring employment options with veterans. As one counseling psychologist responsible for managing over 300 cases said, "with such a large caseload it's just easier to place veterans in college for 4 years than it is to find them a job." According to VA's Vocational Rehabilitation Service's Chief of Program Operations, the optimal caseload per staff person is about 125. In recent years, there has been a shift in the type of disabled veteran participating in VA's vocational rehabilitation program. For example, during the period 1991 to 1995, the percentage of program participants classified by VA as having a serious employment handicap declined from 40 percent to 29 percent, as shown in figure 2. During the same period, the percentage of program participants with disabilities rated at 50 percent or higher declined from 26 percent to 17 percent. Meanwhile, the percentage of program participants with disabilities rated at 10 and 20 percent increased from 34 percent to 42 percent. Figure 3 shows the changes in program participants' characteristics for the period 1991 to 1995. In addition, our analysis of national program data provided demographic information on current program participants. For example, over 90 percent of the veterans who applied for program services were male, and the median age was 44 years. Also, at the time of their application, over 90 percent of the veterans had completed high school; of these, almost 25 percent had also completed 1 or more years of college. VA headquarters and regional agency officials did not know the costs associated with providing rehabilitation services to individual veterans. VA officials told us that, although cost information is located in individual veterans' case files, it is not compiled or analyzed. Our review of 59 rehabilitated case files at four regional offices showed that VA spent, on average, about $20,000 to rehabilitate each veteran. The exact cost associated with rehabilitating veterans depends on the type and duration of services provided. Our analysis also showed that, generally, over half of the total cost of rehabilitation services consisted of subsistence allowances. Following are specific examples of costs associated with rehabilitating some clients. VA spent about $23,000 to rehabilitate a veteran who had a 10-percent disability for lower back strain. While in the program, the veteran obtained a BS degree in education and eventually obtained a job as an elementary school teacher earning $25,000 a year. VA spent over $20,000 to rehabilitate a veteran who had a 20-percent disability for lower back strain. The veteran, who was attending college under the Montgomery G.I. Bill and working part time before entering the program, obtained a bachelor's degree in sociology and, ultimately, a position as an advocate for the elderly, earning less than $20,000 a year. Our review of 43 program dropout case files--"discontinued" case files--showed that VA spent, on average, about $10,000 each on veterans who did not complete the program. Following are specific examples of costs associated with veterans who did not complete the program. VA spent over $46,000 on tuition and subsistence to rehabilitate a veteran who had a 10-percent disability. The veteran dropped out of college after 4 years because of medical treatment for depression and marginal academic progress. VA spent over $6,000 on a 20-percent-disabled veteran who dropped out of the program after about a year. The veteran stopped attending college classes because of unsatisfactory academic progress. The state vocational rehabilitation program places over one-third of its clients in employment. Our analysis of 1993 national program data, the most current data available, showed that state agencies provide a mix of services to meet their clients' rehabilitation needs. Our analysis also showed that most clients in the state program had severe disabilities. Furthermore, the state program spends, on average, about $3,000 on each rehabilitated client. From October 1991 through June 1995, about 2.6 million individuals were found eligible for state vocational rehabilitation program services. About 10 percent of these individuals dropped out of the state program before a rehabilitation plan could be initiated, and an additional 22 percent dropped out after a plan was initiated. The state agencies rehabilitated 37 percent of the eligible individuals, and the remaining individuals (31 percent) were still receiving program services at the time of our analysis. Clients in the state program are considered successfully rehabilitated even if they achieve outcomes other than employment that provides a wage or salary. For example, in fiscal year 1993, clients who obtained unpaid work or attained homemaker status composed about 9 percent of all rehabilitations. However, the majority of clients rehabilitated under the state program obtained such salaried positions as janitor, baker, office clerk, or cashier. On average, a person rehabilitated under the state program typically earned a starting salary of about $10,000 a year. Moreover, clients who were rehabilitated spent on average 17 months in the program, and clients who dropped out of the program after receiving a plan and at least one rehabilitative service spent 23 months. The state vocational rehabilitation program provides a wide range of services designed to help people with disabilities prepare for and engage in gainful employment to the extent of their capabilities. In fiscal year 1993, the state agencies provided evaluation and counseling services to almost all program participants. Additional services provided included restoration (33 percent of participants); transportation (33 percent); job finding services, such as resume preparation and interview coaching (31 percent); and college/university (12 percent), business/vocational training (12 percent), and on-the job training (6 percent). Our analysis of 1993 national program data showed that people with severe disabilities make up the majority of clients in the state vocational rehabilitation program. For example, people with severe disabilities composed 73 percent of the state program's total client population. Our analysis of national data also provided demographic information on the clients who applied to the program. For example, almost 60 percent of the clients who applied for program services were male, and the median age was 34 years. In addition, at the time of their application, 43 percent of the clients had not completed high school, while 17 percent had completed 1 or more years of college. Our analysis of national program data showed that in fiscal year 1993, the state vocational rehabilitation agencies spent, on average, about $3,000 on each client who was rehabilitated. State agency staff spent funds providing or arranging services on behalf of clients, including assessment, training, medical services, transportation, and personal assistance. These costs exclude costs incurred for program administration and for salaries of counselors and other staff, and the state vocational program does not provide clients money for basic living expenses. Following are examples of costs associated with rehabilitating clients, which we obtained from our review of case files of 41 rehabilitated clients at four regional offices. In one case, the state program spent about $4,000 to rehabilitate an illiterate client suffering from mild retardation. The client was severely disabled and had not completed high school. The client was provided adjustment training and obtained a job working 3 hours a week as a stock person at a hardware store making $4.50 an hour. In a second case, the state program spent about $6,000 to rehabilitate a client with a learning disability and chronic back pain. The client was severely disabled but had graduated from high school. The client was provided clerical training and obtained a job working full time as a food service attendant making $4.50 an hour. The national data also showed that the state program spent, on average, about $2,000 on each client who did not complete the program after receiving a plan. Following are examples of costs associated with clients who did not complete the program, which we obtained from our review of 40 discontinued case files. In one case, the state program spent about $4,500 on a client who dropped out because she became pregnant. The client was deaf and classified as severely disabled. She had problems communicating and had not completed high school. The client's rehabilitation goal involved pursuing an associate's degree and obtaining a job as an office clerk. In a second case, the state program spent about $3,500 on a client who dropped out because he lacked the motivation to continue in the program. The client, who suffered from epilepsy and moderate retardation and was classified as severely disabled, was provided work adjustment training. In response to prior GAO and VA reports that recommended that VA emphasize finding jobs for veterans, VA has begun to reengineer its vocational rehabilitation program. The overall objective of VA's reengineering effort is to increase the number of veterans who obtain suitable employment through improvements in program management. Under new program leadership, VA's Vocational Rehabilitation and Counseling Service established a design team in 1995 to restructure the program by focusing on finding veterans suitable employment, making use of automation, and identifying factors that detract from program efficiency. VA consulted with state and private-sector vocational rehabilitation officials, veterans' service organizations, the Department of Labor, and private contractors to help it identify needed program improvements. VA's design team has identified several key initiatives aimed at improving program effectiveness. For example, VA plans to emphasize employment by exploring job options with veterans before sending them to training. VA also plans to develop marketing strategies that emphasize employment services. This initiative may involve revising existing pamphlets and brochures and developing informational videos. Further, VA plans to assess and develop program staff skills to ensure that staff have the necessary expertise to provide employment services. VA is also piloting an automated data management system designed to capture key information on program participants, such as the cost of providing rehabilitation services. VA officials told us that this information would be helpful in targeting ways to make the program more cost effective. VA also plans to conduct nationwide telephone surveys to determine why veterans drop out of the program. Officials told us that knowing this information will help them better identify problems veterans encounter with program services and develop plans that enhance veterans' chances of successfully completing the program. VA is in the early stages of its reengineering effort and has not implemented any of the design team's initiatives. The Chairman of VA's design team told us that VA plans to begin implementing these initiatives nationwide by the end of fiscal year 1997. Despite a legislative mandate enacted 16 years ago requiring VA to help program participants obtain suitable jobs and prior GAO reports documenting VA's limited success, VA's vocational rehabilitation program continues to rehabilitate few disabled veterans. Currently, new program leadership recognizes the need to refocus the program toward the goal of employment and has taken steps to improve the program's effectiveness. However, the concerns addressed in this letter are long standing, and VA's reengineering efforts have not been completed. The success of VA's efforts will depend on which initiatives VA adopts and how they are implemented. We received comments from the Department of Education and VA on a draft of this report. Education agreed with our findings and offered some technical suggestions, which we incorporated where appropriate. VA said it generally agreed with our findings and that its current reengineering initiative will successfully address all of the concerns we raised. However, VA cited a number of concerns with the information contained in the draft. For example, VA took issue with our finding that 8 percent of eligible veterans are rehabilitated. Instead, VA claims that 32 percent are rehabilitated and that this rate compares favorably with the 37-percent rehabilitation found in the state program. We disagree. VA based their rehabilitation percentage on the number of veterans who left the program (about 19,000)--a combination of veterans who dropped out or interrupted their program of services, as well as those who were rehabilitated--as opposed to the total number of eligible veterans (about 74,000). VA's approach inflates the VA rehabilitation rate. Using VA's approach, the state program would have an even higher rehabilitation rate--more than 60 percent. The fact remains, however, that of the 74,000 veterans found eligible for program services, 6,000 successfully completed the program. VA also took exception with our discussion of its lack of focus on employment services. VA contends it has consistently focused on the necessity of providing meaningful employment services, a goal that is outlined in policy directives and reinforced with comprehensive staff training. Our report acknowledges that VA issued guidance in 1992 that emphasized employment services. However, VA staff that administered and implemented the program in the four locations we visited told us that they do not emphasize employment until near the end of a veteran's training. Furthermore, the Chairman of VA's design team, an individual charged with evaluating and restructuring the program, told us that the primary reason for the program's low rehabilitation rate is VA's lack of focus on employment services. Regarding VA's claim it provides comprehensive staff training, the Program Operations Chief told us that other than a week-long seminar on employment services presented about 2 to 3 years ago, VA headquarters has not sponsored staff training in employment assistance. Further, as already reported, staff in the regional offices that we visited told us they are not adequately trained in job placement activities. VA also took issue with our discussion of its lack of knowledge of the costs associated with providing rehabilitation services to individual veterans. VA claims that it has this information and can retrieve it at any time, although doing so is a laborious process. However, we saw no evidence that VA officials knew the costs associated with providing rehabilitation services. Neither the Chief of Program Operations nor officials located in the four regional offices that we visited could provide us with the costs associated with rehabilitating a veteran. Instead, we were always directed to the case files and, in some regional offices, to the finance section to obtain this information. VA also expressed concern that our random sample of program participant cases was not representative of the veterans that VA serves. VA asserted that "a more appropriate sample could readily come up with examples of veterans with more profound disabilities who are earning handsome salaries as a result of their participation in VA's vocational rehabilitation program." As we have pointed out, the results of our sample of 102 individual veteran case files are neither representative nor generalizable to all program participants. Our purpose in sampling program participants was to furnish examples of costs associated with providing rehabilitation services, not to demonstrate the severity of disabilities represented in the program or the average salaries of program participants. We addressed the issues of disability severity and salary using VA's national database and discussed them in other sections of the report. VA's comments in their entirety appear as appendix II. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of Veterans Affairs and other interested parties. This work was performed under the direction of Irene Chu, Assistant Director, Veterans' Affairs and Military Health Care Issues. If you or your staff have any questions, please contact Ms. Chu or me on (202) 512-7101. Other major contributors to this report are listed in appendix III. We designed our study to collect national information on the characteristics of VA and state vocational rehabilitation clients, the services they received, and the outcomes they achieved. We also obtained information on the costs associated with providing rehabilitation services to clients in each program. In doing our work, we examined VA and Department of Education databases. We also interviewed VA and Education officials at the national and regional levels during site visits at VA and state vocational rehabilitation facilities in four judgmentally selected locations. We examined VA and Education vocational rehabilitation databases to obtain national information on the percentage of clients rehabilitated, client characteristics, and services provided. However, we did not verify the information included in the databases. To determine the percentage of veterans rehabilitated, we analyzed VA's Chapter 31 Target System database for the period October 1991 through September 1995. We also compiled information on client characteristics of and services provided to veterans currently participating in the program. We define current participants as veterans who were not rehabilitated or discontinued prior to the beginning of fiscal year 1995 and were in one of the program's five phases on February 7, 1996. For the state vocational rehabilitation program, we analyzed data from two Education databases. To address the percentage of the clients rehabilitated, we reviewed Education's Quarterly Cumulative Caseload Reports for October 1991 through June 1995. This report provides aggregate data on the cases handled by state rehabilitation agencies. To obtain information on demographic characteristics and services provided, we analyzed Education's Case Service Reports. The Case Service Reports contain information collected from the state agencies at the end of each fiscal year on the characteristics of each client whose case was closed that year, as well as on the general types of services that each client received and his or her employment status in the week of case closure. At any particular time, Education may be waiting for original or corrected data from one or more states for 1 or more years. At the time we began our study, the most recent full year for which largely complete data were available was fiscal year 1993. We conducted site visits at VA regional offices and state vocational rehabilitation agencies at four locations from January 1996 through March 1996. We visited VA and state vocational rehabilitation facilities in Milwaukee, Wisconsin; New Orleans, Louisiana; Roanoke, Virginia; and Portland, Oregon. We selected the sites judgmentally to include VA and state agencies that (1) were located in different regions, (2) were varied in staff size and workload, and (3) had ongoing initiatives to improve their vocational rehabilitation program. During these site visits, we interviewed vocational rehabilitation officials on various aspects of the program operations, reviewed selected case files, and discussed the specific cases with program specialists. At each VA regional office and state agency visited, we randomly selected and reviewed 9 to 12 case files of program participants who had been rehabilitated or had dropped out of the program between January 1 and June 30, 1995. Because the total number of rehabilitated cases available at VA's field office in Portland, Oregon, was relatively small, we reviewed all 30 cases. We reviewed a total of 183 vocational rehabilitation cases: 102 at VA's regional offices and 81 at the state agencies. These cases did not compose a representative sample of each site's rehabilitation or dropout cases; thus, our results cannot be generalized. From case file reviews and discussions with program specialists, we obtained detailed information on client characteristics; services provided; and, when applicable, the type of employment obtained and starting salary. Also from the case files, we determined the costs associated with providing rehabilitation services to program participants, such as how much was spent for basic education and vocational training, readjustment training, physical restoration, and other support services. Irene Chu, Assistant Director, (202) 512-7101 Jaqueline Hill Arroyo, Evaluator-in-Charge, (202) 512-6753 Julian Klazkin, Senior Attorney Steve Morris, Evaluator Michael O'Dell, Senior Social Science Analyst Jeffrey Pounds, Evaluator Pamela Scott, Communications Analyst Joan Vogel, Senior Evaluator (Computer Science) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs' (VA) vocational rehabilitation program, focusing on: (1) the percentage of rehabilitated veterans; (2) the services provided; (3) the characteristics of clients served; (4) the cost of rehabilitation; and (5) VA efforts to improve program effectiveness. GAO found that: (1) despite the 1980 legislation requiring VA to focus its rehabilitation program on finding disabled veterans suitable employment and subsequent GAO reports recommending that VA implement this legislation, VA continues to place few veterans in jobs; (2) VA officials told GAO that the percentage of veterans classified as rehabilitated is low because the program does not focus on providing employment services; (3) instead, VA continues primarily to send veterans to training, particularly to higher education programs; (4) GAO's analysis of national program data showed that the characteristics of program participants are changing and that VA does not have readily available cost data associated with providing rehabilitation services to individual veterans; (5) GAO's review of over 100 case files, however, showed that VA spent, on average, about $20,000 on each veteran who gained employment and about $10,000 on each veteran who dropped out of the program; (6) generally, over half of the total costs of rehabilitation services consisted of payments to assist veterans in covering their basic living expenses; (7) with regard to Education's state vocational rehabilitation program, GAO's analysis of national program data showed that over the last 5 years (1991-1995) state agencies rehabilitated 37 percent of the approximately 2.6 million individuals eligible for vocational rehabilitation program services, while about 31 percent continued to receive program services; (8) the state agencies provide a wide range of rehabilitative services, from physical restoration and transportation to college education and on-the-job training; (9) in addition, a majority of the program participants had severe disabilities; (10) moreover, national program data showed that state vocational rehabilitation agencies spent, on average, about $3,000 on each client who achieved employment and about $2,000 on each client who dropped out of the program; (11) the state program does not provide funds to cover client living expenses; (12) in response to prior GAO and VA findings and recommendations, VA recently established a design team to identify ways of improving program effectiveness; (13) the team's overall objective is to increase the number of veterans who obtain suitable employment through improvements in program management; (14) the team is also looking at ways to improve staff skills in job finding and placement activities; and (15) VA hopes to begin implementing program changes in fiscal year 1997.

In 2000, a report of the Surgeon General noted that tooth decay is the most common chronic childhood disease. Left untreated, the pain and infections caused by tooth decay may lead to problems in eating, speaking, and learning. Tooth decay is almost completely preventable, and the pain, dysfunction, or on extremely rare occasion, death, resulting from dental disease can be avoided (see fig. 1). Preventive dental care can make a significant difference in health outcomes and has been shown to be cost- effective. For example, a 2004 study found that average dental-related costs for low-income preschool children who had their first preventive dental visit by age 1 were less than one-half ($262 compared to $546) of average costs for children who received their first preventive visit at age 4 through 5. The American Academy of Pediatric Dentistry (AAPD) recommends that each child see a dentist when his or her first tooth erupts and no later than the child's first birthday, with subsequent visits occurring at 6-month intervals or more frequently if recommended by a dentist. The early initial visit can establish a "dental home" for the child, defined by AAPD as the ongoing relationship with a dental provider who can ensure comprehensive and continuously accessible care. Comprehensive dental visits can include both clinical assessments, such as for tooth decay and sealants, and appropriate discussion and counseling for oral hygiene, injury prevention, and speech and language development, among other topics. Because resistance to tooth decay is determined in part by genetics, eating patterns, and oral hygiene, early prevention is important. Delaying the onset of tooth decay may also reduce long-term risk for more serious decay by delaying the exposure to caries risk factors to a time when the child can better control his or her health behaviors. Recognizing the importance of good oral health, HHS in 1990 and again in 2000 established oral health goals as part of its Healthy People 2000 and 2010 initiatives. These include objectives related to oral health in children, for example, reducing the proportion of children with untreated tooth decay. One objective of Healthy People 2010 relates to the Medicaid population: to increase the proportion of low-income children and adolescents under the age of 19 who receive any preventive dental service in the past year, from 25 percent in 1996 to 66 percent in 2010. Medicaid, a joint federal and state program that provides health care coverage for low-income individuals and families; pregnant women; and aged, blind, and disabled people, provided health coverage for an estimated 20.1 million children aged 2 through 18 in federal fiscal year 2005. The states operate their Medicaid programs within broad federal requirements and may contract with managed-care organizations to provide Medicaid benefits or use other forms of managed care, when approved by CMS. CMS estimates that as of June 30, 2006, about 65 percent of Medicaid beneficiaries received benefits through some form of managed care. State Medicaid programs must cover some services for certain populations under federal law. For instance, under Medicaid's early and periodic screening, diagnostic, and treatment (EPSDT) benefit, states must provide dental screening, diagnostic, preventive, and related treatment services for all eligible Medicaid beneficiaries under age 21. Children in Medicaid aged 2 through 18 often experience dental disease and often do not receive needed dental care, and although receipt of dental care has improved somewhat in recent years, the extent of dental disease for most age groups has not. Information from NHANES surveys from 1999 through 2004 showed that about one in three children ages 2 through 18 in Medicaid had untreated tooth decay, and one in nine had untreated decay in three or more teeth. Compared to children with private health insurance, children in Medicaid were substantially more likely to have untreated tooth decay and to be in urgent need of dental care. MEPS surveys conducted in 2004 and 2005 found that almost two in three children in Medicaid aged 2 through 18 had not received dental care in the previous year and that one in eight never sees a dentist. Children in Medicaid were less likely to have received dental care than privately insured children, although they were more likely to have received care than children without health insurance. Children in Medicaid also fared poorly when compared to national benchmarks, as the percentage of children in Medicaid ages 2 through 18 who received any dental care-- 37 percent--was far below the Healthy People 2010 target of having 66 percent of low-income children under age 19 receive a preventive dental service. MEPS data on Medicaid children who had received dental care-- from 1996 through 1997 compared to 2004 through 2005--showed some improvement for children ages 2 through 18 in Medicaid. Comparisons of recent NHANES data to data from the late 1980s and 1990s suggest that the extent that children ages 2 through 18 in Medicaid experience dental disease has not decreased for most age groups. Dental disease is a common problem for children aged 2 through 18 enrolled in Medicaid, according to national survey data (see fig. 2). NHANES oral examinations conducted from 1999 through 2004 show that about three in five children (62 percent) in Medicaid had experienced tooth decay, and about one in three (33 percent) were found to have untreated tooth decay. Close to one in nine--about 11 percent--had untreated decay in three or more teeth, which is a sign of unmet need for dental care and, according to some oral health experts, can suggest a severe oral health problem. Projecting these proportions to 2005 enrollment levels, we estimate that 6.5 million children in Medicaid had untreated tooth decay, with 2.2 million children having untreated tooth decay involving three or more teeth. Compared with children with private health insurance, children in Medicaid were at much higher risk of tooth decay and experienced problems at rates more similar to those without any insurance. As shown in figure 3, the proportion of children in Medicaid with untreated tooth decay (33 percent) was nearly double the rate for children who had private insurance (17 percent) and was similar to the rate for uninsured children (35 percent). These children were also more than twice as likely to have untreated tooth decay in three or more teeth than their privately insured counterparts (11 percent for Medicaid children compared to 5 percent for children with private health insurance). These disparities were consistent across all age groups we examined. According to NHANES data, more than 5 percent of children in Medicaid aged 2 through 18 had urgent dental conditions, that is, conditions in need of care within 2 weeks for the relief of symptoms and stabilization of the condition. Such conditions include tooth fractures, oral lesions, chronic pain, and other conditions that are unlikely to resolve without professional intervention. On the basis of these data, we estimate that in 2005, 1.1 million children aged 2 through 18 in Medicaid had conditions that warranted seeing a dentist within 2 weeks. Compared to children who had private insurance, children in Medicaid were more than four times as likely to be in urgent need of dental care. The NHANES data suggest that the rates of untreated tooth decay for some Medicaid beneficiaries could be about three times more than national health benchmarks. For example, the NHANES data showed that 29 percent of children in Medicaid aged 2 through 5 had untreated decay, which compares unfavorably with the Healthy People 2010 target for untreated tooth decay of 9 percent of children aged 2 through 4. Most children in Medicaid do not visit the dentist regularly, according to 2004 and 2005 nationally representative MEPS data (see fig. 4). According to these data, nearly two in three children in Medicaid aged 2 through 18 had not received any dental care in the previous year. Projecting these proportions to 2005 enrollment levels, we estimate that 12.6 million children in Medicaid have not seen a dentist in the previous year. In reporting on trends in dental visits of the general population, AHRQ reported in 2007 that about 31 percent of poor children (family income less than or equal to the federal poverty level) and 34 percent of low-income children (family income above 100 percent but less than or equal to 200 percent of the federal poverty level) had a dental visit during the year. Survey data also showed that about one in eight children (13 percent) in Medicaid reportedly never see a dentist. MEPS survey data also show that many children in Medicaid were unable to access needed dental care. Survey participants reported that about 4 percent of children aged 2 through 18 in Medicaid were unable to get needed dental care in the previous year. Projecting this percentage to estimated 2005 enrollment levels, we estimate that 724,000 children aged 2 through 18 in Medicaid could not obtain needed care. Regardless of insurance status, most participants who said a child could not get needed dental care said they were unable to afford such care. However, 15 percent of children in Medicaid who had difficulty accessing needed dental care reportedly were unable to get care because the provider refused to accept their insurance plan, compared to only 2 percent of privately insured children. Children enrolled in Medicaid were less likely to have received dental care than privately insured children, but they were more likely to have received dental care than children without health insurance. (See fig. 5.) Survey data from 2004 through 2005 showed that about 37 percent of children in Medicaid aged 2 through 18 had visited the dentist in the previous year, compared with about 55 percent of children with private health insurance, and 26 percent of children without insurance. The percentage of children in Medicaid who received any dental care--37 percent--was far below the Healthy People 2010 target of having 66 percent of low-income children under age 19 receive a preventive dental service. The NHANES data from 1999 through 2004 also provide some information related to the receipt of dental care. The presence of dental sealants, a form of preventive care, is considered to be an indicator that a person has received dental care. About 28 percent of children in Medicaid had at least one dental sealant, according to 1999 through 2004 NHANES data. In contrast, about 40 percent of children with private insurance had a sealant. However, children in Medicaid were more likely to have sealants than children without health insurance (about 20 percent). While comparisons of past and more recent survey data suggest that a larger proportion of children in Medicaid had received dental care in recent surveys, the extent that children in Medicaid experience dental disease has not decreased. A comparison of NHANES results from 1988 through 1994 with results from 1999 through 2004 showed that the rates of untreated tooth decay were largely unchanged for children in Medicaid aged 2 through 18: 31 percent of children had untreated tooth decay in 1988 through 1994, compared with 33 percent in 1999 through 2004 (see fig. 6). The proportion of children in Medicaid who experienced tooth decay increased from 56 percent in the earlier period to 62 percent in more recent years. This increase appears to be driven by younger children, as the 2 through 5 age group had substantially higher rates of dental disease in the more recent time period, 1999 through 2004. This preschool age group experienced a 32 percent rate of tooth decay in the 1988 through 1994 time period, compared to almost 40 percent experiencing tooth decay in 1999 through 2004 (a statistically significant change). Data for adolescents, by contrast, suggest declining rates of tooth decay. Almost 82 percent of adolescents aged 16 through 18 in Medicaid had experienced tooth decay in the earlier time period, compared to 75 percent in the latter time period (although this change was not statistically significant). These trends were similar for rates of untreated tooth decay, with the data suggesting rates going up for young children, and declining or remaining the same for older groups that are more likely to have permanent teeth. According to CDC, these trends are similar for the general population of children, for which tooth decay in permanent teeth has generally declined and untreated tooth decay has remained unchanged. CDC also found that tooth decay in preschool aged children in the general population had increased in primary teeth. At the same time, indicators of receipt of dental care, including the proportion of children who had received dental care in the past year and use of sealants, have shown some improvement. Two indicators of receipt of dental care showed improvement from earlier surveys: The percentage of children in Medicaid aged 2 through 18 who received dental care in the previous year increased from 31 percent in 1996 through 1997 to 37 percent in 2004 through 2005, according to MEPS data (see fig. 7). This change was statistically significant. Similarly, AHRQ reported that the percent of children with a dental visit increased between 1996 and 2004 for both poor children (28 percent to 31 percent) and low-income children (27 percent to 34 percent). The percentage of children aged 6 through 18 in Medicaid with at least one dental sealant increased nearly threefold, from 10 percent in 1988 through 1994 to 28 percent in 1999 through 2004, according to NHANES data, and these changes were statistically significant. The increase in receipt of sealants may be due in part to the increased use of dental sealants in recent years, as the percentage of uninsured and insured children with dental sealants doubled over the same time period. Adolescents aged 16 through 18 in Medicaid had the greatest increase in receipt of sealants relative to other age groups. The percentage of adolescents with dental sealants was about 6 percent in the earlier time period, and 33 percent more recently. The percentage of children in Medicaid who reportedly never see a dentist remained about the same between the two time periods, with about 14 percent in 1996 through 1997 who never saw a dentist, and 13 percent in 2004 through 2005, according to MEPS data. More information on our analysis of NHANES and MEPS for changes in dental disease and receipt of dental care for children in Medicaid over time, including comments we received from HHS on a draft of the report and our response, more detailed data tables, and confidence intervals can be found in the report released today. The information provided by nationally representative surveys regarding the oral health of our nation's low-income children in Medicaid raises serious concerns. Measures of access to dental care for this population, such as children's dental visits, have improved somewhat in recent surveys, but remain far below national health goals. Of even greater concern are data that show that dental disease is prevalent among children in Medicaid, and is not decreasing. Millions of children in Medicaid are estimated to have dental disease in need of treatment; in many cases this need is urgent. Given this unacceptable condition, it is important that those involved in providing dental care to children in Medicaid--the federal government, states, providers, and others--address the need to improve the oral health condition of these children and to achieve national oral health goals. As you know, we have ongoing work for the subcommittee examining state and federal efforts to ensure that children in Medicaid receive needed dental services. We expect to report to the subcommittee on our findings and any recommendations in spring 2009. Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions that you or other members of the Subcommittee may have. For information regarding this testimony, please contact Alicia Puente Cackley at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Katherine Iritani, Assistant Director; Sarah Burton; and Terry Saiki made key contributions to this statement. Medicaid: Extent of Dental Disease in Children Has Not Decreased, and Millions Are Estimated to Have Untreated Tooth Decay. GAO-08-1121. Washington, D.C.: September 23, 2008. Medicaid: Concerns Remain about Sufficiency of Data for Oversight of Children's Dental Services. GAO-07-826T. Washington, D.C.: May 2, 2007. Medicaid Managed Care: Access and Quality Requirements Specific to Low-Income and Other Special Needs Enrollees. GAO-05-44R. Washington, D.C.: December 8, 2004. Medicaid and SCHIP: States Use Varying Approaches to Monitor Children's Access to Care. GAO-03-222. Washington, D.C.: January 14, 2003. Medicaid: Stronger Efforts Needed to Ensure Children's Access to Health Screening Services. GAO-01-749. Washington, D.C.: July 13, 2001. Oral Health: Factors Contributing to Low Use of Dental Services by Low- Income Populations. GAO/HEHS-00-149. Washington, D.C.: September 11, 2000. Oral Health: Dental Disease Is a Chronic Problem Among Low-Income Populations. GAO/HEHS-00-72. Washington, D.C.: April 12, 2000. Medicaid Managed Care: Challenge of Holding Plans Accountable Requires Greater State Effort. GAO/HEHS-97-86. Washington, D.C.: May 16, 1997. 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 recent years, concerns have been raised about the adequacy of dental care for low-income children. Attention to this subject became more acute due to the widely publicized case of Deamonte Driver, a 12-year-old boy who died as a result of an untreated infected tooth that led to a fatal brain infection. Deamonte had health coverage through Medicaid, a joint federal and state program that provides health care coverage, including dental care, for millions of low-income children. Deamonte had extensive dental disease and his family was unable to find a dentist to treat him. GAO was asked to examine the extent to which children in Medicaid experience dental disease, the extent to which they receive dental care, and how these conditions have changed over time. To examine these indicators of oral health, GAO analyzed data, by insurance status, from two nationally representative surveys of the Department of Health and Human Services (HHS): the National Health and Nutrition Examination Survey (NHANES) and the Medical Expenditure Panel Survey (MEPS). This statement summarizes the resulting report being released today, Medicaid: Extent of Dental Disease in Children Has Not Decreased, and Millions Are Estimated to Have Untreated Tooth Decay (GAO-08-1121). In commenting on a draft of the report, HHS acknowledged the challenge of providing dental services to children in Medicaid, and cited the agency's related activities. Dental disease remains a significant problem for children aged 2 through 18 in Medicaid. Nationally representative data from the 1999 through 2004 NHANES surveys--which collected information about oral health through direct examinations--indicate that about one in three children in Medicaid had untreated tooth decay, and one in nine had untreated decay in three or more teeth. Projected to 2005 enrollment levels, GAO estimates that 6.5 million children aged 2 through 18 in Medicaid had untreated tooth decay. Children in Medicaid remain at higher risk of dental disease compared to children with private health insurance; children in Medicaid were almost twice as likely to have untreated tooth decay. Receipt of dental care also remains a concern for children aged 2 through 18 in Medicaid. Nationally representative data from the 2004 through 2005 MEPS survey--which asks participants about the receipt of dental care for household members--indicate that only one in three children in Medicaid ages 2 through 18 had received dental care in the year prior to the survey. Similarly, about one in eight children reportedly never sees a dentist. More than half of children with private health insurance, by contrast, had received dental care in the prior year. Children in Medicaid also fared poorly when compared to national benchmarks, as the percentage of children in Medicaid who received any dental care--37 percent--was far below the Healthy People 2010 target of having 66 percent of low-income children under age 19 receive a preventive dental service. Survey data on Medicaid children's receipt of dental care showed some improvement; for example, use of sealants went up significantly between the 1988 through 1994 and 1999 through 2004 time periods. Rates of dental disease, however, did not decrease, although the data suggest the trends vary somewhat among different age groups. Younger children in Medicaid--those aged 2 through 5--had statistically significant higher rates of dental disease in the more recent time period as compared to earlier surveys. By contrast, data for Medicaid adolescents aged 16 through 18 show declining rates of tooth decay, although the change was not statistically significant.

Within FDA, the Office of Medical Products and Tobacco is responsible for providing leadership for the medical product centers and coordinating their plans, strategies, and programs. Under the office's direction, three FDA centers have primary responsibility for overseeing medical products and developing strategic plans to guide their activities: The Center for Biologics Evaluation and Research (CBER) is responsible for overseeing most biologics, such as blood, vaccines, and human tissues. The Center for Drug Evaluation and Research (CDER) is responsible for overseeing drugs and certain therapeutic biologics. The Center for Devices and Radiological Health (CDRH) is responsible for overseeing devices and for ensuring that radiation- emitting products, such as microwaves and x-ray machines, meet radiation safety standards. Several offices within FDA provide additional oversight and management support to assist the three medical product centers. FDA's Office of Policy, Planning, Legislation, and Analysis supports strategic planning at the agency-wide, program-specific, and center levels across FDA, which included coordinating the development of the SIMP and FDA's agency- wide strategic priorities document. FDA's Office of Human Resources supports recruitment and workforce management activities. Finally, FDA's Office of Regulatory Affairs conducts field activities for all of FDA's medical product centers, such as inspections of domestic and foreign establishments involved in medical products. The centers conduct pre- and post-market oversight of medical products, as well as formulate guidance, perform research, communicate information to industry and the public, and set priorities. Premarket oversight comprises review activities to ensure that medical products are safe and effective for use before they can be marketed in the United States. FDA's premarket oversight typically begins when companies-- known as sponsors--develop a medical product. Before beginning clinical trials (studies involving humans) for a new medical product, sponsors must submit an application so that FDA can preliminarily assess the product for safety. As part of its premarket oversight, FDA may also choose to inspect establishments producing medical products to ensure their manufacturing processes meet quality standards. Postmarket oversight includes review activities to both provide certainty that medical products are safe and effective after they have been marketed, and to enable FDA to take regulatory actions if a safety issue is identified, such as requiring that sponsors communicate new safety information to the public and health care providers or withdraw the product from the market. Examples of postmarket oversight include reviewing reports of adverse events to monitor the safety of marketed medical products and examining advertising and other promotional materials to ensure they are not false or misleading. FDA may require sponsors to provide additional information both before and after a product has been approved. For example, FDA may require medical product manufacturers to create a Risk Evaluation and Mitigation Strategy to ensure that the benefits of a medical product outweigh its risks. A significant portion of FDA's annual appropriation consists of amounts derived from user fees paid by the medical products industry. Beginning in 1992 with prescription drugs, Congress has authorized the collection of user fees from the medical products industry to provide additional resources for certain FDA oversight activities. Each user fee program is subject to reauthorization every 5 years and supports different oversight activities across each of the centers, as illustrated in figure 1. In 2012, FDASIA reauthorized or authorized four user fee programs for medical products. It included the fifth reauthorization of the Prescription Drug User Fee Act of 1992 (PDUFA), which allows FDA to collect user fees from manufacturers of prescription drugs. It also included the third reauthorization of the Medical Device User Fee and Modernization Act (MDUFA), which allows FDA to collect user fees from manufacturers of medical devices. Congress also authorized two new user fee programs in FDASIA: the Biosimilar User Fee Act (BsUFA), and the Generic Drug User Fee Amendments Act (GDUFA). BsUFA authorizes FDA to collect user fees from manufacturers of biosimilars, which FDA may approve based on a sponsor's ability to show that the product is highly similar to an FDA-approved biological product and has no clinically meaningful differences in terms of safety and effectiveness. GDUFA authorizes FDA to collect user fees from manufacturers of generic drugs. Prior to each user fee program reauthorization, FDA negotiates with representatives of each medical products industry to identify goals for how FDA should spend those user fees over the next 5-year authorization period. Once FDA and the industry reach agreement, the Secretary of Health and Human Services submits letters containing these commitments to Congress. The user fee commitments contain performance goals for FDA's review activities, such as reviewing and acting upon a certain number of received medical product applications within certain time frames. User fee commitments may also require FDA to undertake certain actions, such as implementing agreed upon efficiency enhancements by a given date. FDA reports annually to Congress on progress made in achieving performance goals identified in each of the user fee commitments. These reports contain both descriptions of each center's relevant oversight activities over the previous year, and data on its performance toward meeting user fee commitments. We found that the SIMP does not contain key elements of strategic planning and therefore does not present a comprehensive strategy across the medical product centers. Our previous work has shown that strategic planning for activities below the agency-wide level is a leading practice for successful agencies, and can help agencies integrate activities, align goals, and coordinate performance management across different parts of their organization. However, the SIMP does not fully contain several of these leading practices. Of the seven relevant strategic planning elements from GPRA, the SIMP fully contains two elements, partially contains four elements, and does not contain one element. In particular, we found that the SIMP contains a mission statement and describes how FDA incorporated input from Congress; it partially contains a description of its general goals and objectives, the strategies needed to achieve its goals and objectives, how its performance goals related to its general goals and objectives, and program evaluations used to review its goals and objectives; and it does not identify external factors that could significantly affect the achievement of its goals and objectives. Specifically, the SIMP presents high-level information on goals and performance measures for medical product oversight, but lacks detail on how it will be used or implemented. Each of the SIMP's first two sections describes a goal--improving efficiency and developing the workforce, respectively--and lists planned or ongoing initiatives to achieve that goal. For most of these initiatives, rather than describe the necessary steps, planned accomplishments, or time frames for implementation, the SIMP provides a high-level description of what FDA expects to achieve. In addition, the SIMP's summary states that the plan reflects coordination and cooperation among the centers to address their program-specific needs, share best practices, and share common solutions. However, FDA officials told us that they do not use the SIMP to address issues requiring center collaboration, and acknowledged that the plan did not represent the full range of working relationships among the centers. Moreover, the SIMP does not fully link its performance goals to its general goals and objectives. The SIMP instead describes performance measures related to FDA's user fee commitments, even though several of the initiatives included in the plan are unrelated to these commitments. FDA officials explained that they focused the SIMP's performance measures on user fee commitments rather than, for example, tying performance measures to each initiative, because user fee commitments are the main vehicle by which FDA assesses the efficiency of each medical product center's premarket review. Additionally, groups we spoke with that represent the medical products industry did not view the SIMP as an effective strategic planning document for FDA. Of the five industry groups we interviewed, two were unfamiliar with the SIMP and the others did not see how its contents related to strategic planning. For example, representatives from one industry group said that the SIMP was neither integrated nor strategic, because it merely described the different activities of the centers rather than establishing one overarching strategic approach for all of the centers. Additionally, representatives from another industry group said that the SIMP lacked detail on how FDA would use it or implement the initiatives it described. FDA officials said that due to the circumstances around FDASIA's enactment in 2012, they chose to develop the SIMP as a point-in-time document to address legislative requirements rather than as a strategic plan for medical product oversight. For example, agency officials said FDASIA required FDA to submit the SIMP within a year of enactment, during which time FDA was also developing its agency-wide strategic priorities document. Officials said that more time would have better enabled FDA to align the SIMP with agency-wide goals, and helped the agency to structure the plan as a strategic planning document. Officials also told us that leadership gaps in the Office of Medical Products and Tobacco, caused in part by turnover in the Deputy Commissioner position, created challenges when developing the SIMP. Officials said that, given these factors, the agency chose to develop a more limited document. Despite acknowledging that the SIMP was not intended to be an effective strategic planning document, FDA officials said that the SIMP's development process was useful because it facilitated coordination and information sharing between the centers on how to achieve certain user fee goals. Nonetheless, FDA officials acknowledged the growing need for strategic planning across the medical product centers to improve center collaboration and address emerging issues, but said that it may not require a separate strategic plan. Officials said that some issues, such as staffing vacancies and coordination with other agencies, were better addressed at an agency-wide level. However, they indicated that integration and collaboration across the medical product centers are important for other issues that the agency is working to address, such as data sharing, evidence generation, biomarker integration, combination products, consistent terminology, patient engagement, and the medical product review process. FDA officials also said that these types of issues have become more important as the complexity of medical products has increased, and that coordination can help the centers share leading practices to address these issues. For example, officials said that collaboration could help the centers develop more effective clinical trials, improve their decision-making, and improve the quality of evidence and clarity of guidance. For these issues, FDA officials said that they continue to strategically plan across the centers without a written document specifically for medical products by using other planning documents. Although they noted that the agency's resources have been better spent working toward goals in existing plans, rather than putting together a new strategic plan specific to medical product oversight, they indicated that more formal planning in the future may be useful as resources become available. FDA officials said that they did not structure the SIMP as a strategic plan, because they thought it would be duplicative of other FDA strategic plans; however, we found that none of these other plans comprehensively describes FDA's long-term plan for addressing key issues amongst the centers, as summarized below: FDA has an overarching strategic priorities document that includes strategic goals and objectives for medical product activities. This document describes a broad level of activities, but does not specifically discuss strategies across the centers. For example, one FDA goal is partially aimed at improving coordination within FDA, and the agency also describes some activities that may require the centers' collaboration, such as developing comprehensive regulatory approaches for integrating approval and compliance functions. FDA officials said that they use the annual budget process as an opportunity for strategic planning. While FDA's fiscal year 2017 budget justification describes planned activities specific to each center, its planning across the centers is limited to a few specific initiatives, such as developing scientific workshops to advance the development of pediatric therapeutic products. FDA officials identified strategic plans for specific initiatives that involve each center, such as FDA's strategic plan for advancing regulatory science and FDA's strategic plan for information technology. However, we recently reported on FDA's strategic plan for information technology, finding a lack of goals and performance measures for determining whether its implementation is successful in supporting FDA's mission. Each center also has its own strategic plan, but they differ in structure and content. While the center-specific plans include activities, goals, and objectives relevant to each individual center, they do not describe crosscutting issues or include plans for collaboration across the centers to address them. Officials from each center said that they also relied on performance measures in other documents, such as user fee commitments, to plan their activities and measure their performance. The growing importance of areas that cut across medical product centers highlights the importance of FDA's strategic planning for medical product oversight. The absence of a documented long-term plan for medical product oversight may hinder FDA's efforts to address emerging issues that require center collaboration, such as access to quality data and developing requirements for combination products. Also, the absence of a documented strategy is inconsistent with leading practices for strategic planning based on prior GAO work. These practices indicate that formal strategic planning is needed for medical products by identifying crosscutting issues and ensuring that collaborative center goals, measures, and activities are effectively integrated with FDA's overall organizational mission and goals. Documenting a strategic plan for medical products--whether it occurs in a freestanding document or as part of existing documents the centers are already using--would also enable FDA to oversee its activities in a consistent and transparent manner, help the agency communicate its priorities to key stakeholders, and help align its activities to support mission-related outcomes. In FDA's SIMP, the agency compiled 30 efficiency initiatives under three different themes and included 19 different types of workforce development initiatives for each center on training, recruitment, and retention. FDA had fully implemented about a third of the efficiency initiatives and most of the workforce development initiatives prior to the SIMP's issuance in 2013. We found that FDA grouped the SIMP's 30 efficiency initiatives into three themes: (1) business modernization, (2) process improvement, and (3) smarter regulation. (See appendix I for a full description of each efficiency initiative.) Under business modernization, FDA included 3 initiatives on each center's workload measurement activities, 3 initiatives focused on data standards efforts, and 2 initiatives specific to staff location and ability to use electronic functions to complete their work. For the initiatives on the centers' workload measurement activities, the centers each updated their time reporting systems to record user fee activities, which employees are required to do in 2-week increments four times during the fiscal year. Under process improvement, FDA included 11 efficiency initiatives specific to an agency-wide or center-specific need. CBER included initiatives to improve its review mechanisms and move to more electronic processes. CDER included efforts to streamline processes for its formal communication mechanisms with the industry and manufacturing facilities. CDRH included pilot programs for certain device types and manufacturers, and a postmarket program for identifying new device risks. Under smarter regulation, FDA included 11 initiatives--8 initiatives that stem from each user fee program, as well as 3 initiatives for medical devices that respond to other statutory requirements. The majority of the 11 initiatives are focused on the premarket review process of medical products. Specifically, the initiatives are related to improving communication between FDA and the industry, providing additional guidance to industry for how FDA will assess medical products, providing its plans for health information technology, and defining FDA's approach to and requirements for facilities that manufacture drug products. The SIMP notes that these three themes reflect the strategic goals and priorities that the medical product centers are all pursuing to improve efficiency. FDA officials further explained that the three themes helped to connect seemingly unrelated center-specific and user fee program responsibilities and initiatives presented in the SIMP. We found that FDA fully implemented about a third of the 30 efficiency initiatives within the 12 to 18 months prior to the SIMP's issuance in July 2013, and implemented another half of the initiatives since then. As of March 2016, the remaining initiatives had yet to be fully implemented, the majority of which are related to developing data standards for electronic submissions or efforts to move to an electronic review process. For example, CDRH specified that its initiative to establish a unique device identification system started with the highest risk medical devices and will be fully implemented in 2020 once all medical devices have identifiers in electronic health records. (See table 1.) We found that FDA included 19 workforce development initiatives in the SIMP--11 training initiatives, 7 recruitment initiatives, and 1 retention initiative. (See appendix II for a full description of each workforce development initiative.) FDA officials told us that the majority of the workforce development initiatives are specific to each center's activities, reflecting differences in program responsibilities and procedures. Industry officials we spoke with emphasized the importance of recruitment, retention, and training efforts on the agency's ability to meet user fee commitments. (For more information on the size and characteristics of FDA's overall and center-specific workforce, see appendix III.) The 11 training initiatives FDA included in the SIMP describe multiple training courses or programs. As part of these initiatives, FDA included programs for the new reviewer trainings offered by each of the medical product centers and initiatives covering training for each of the user fee programs, which may be taken by staff from multiple centers. The initiatives also included training courses dedicated to specific topics for each medical product center. For example, CBER included training courses covering medical device review and project management, and CDRH included two leadership experience programs for future and current managers. The first CDRH program gives certain staff an opportunity to explore a supervisory career path; the second is to help staff in management positions learn about CDRH's management competencies and satisfy federal supervisory training requirements. We found that the seven recruitment initiatives FDA included in the SIMP are intended to streamline recruitment processes at both the agency and center levels. For example, CDER included initiatives to manage and fill vacancies in executive-level positions and critical occupations, such as chemists and project managers. Each of the centers also included initiatives to improve outreach to potential job candidates, such as through job fairs, alumni networks, and institutional partnerships. For retention, we found that FDA included a single initiative in the SIMP-- CDRH's efforts to address the center's high attrition rate by reducing individual workloads, decreasing staff-to-manager ratios, and providing employees with a better work environment. To reduce staff workloads and decrease staff-to-manager ratios, CDRH increased the number of review and management staff. To provide a better work environment, CDRH developed and improved performance evaluation tools and employee recognition processes. For example, CDRH created a resource guide to educate staff on the center's performance management system. FDA did not include retention initiatives for CBER or CDER in the SIMP; however, officials from both centers told us that each center uses some retention tools and processes. Among the 19 workforce development initiatives included in the SIMP, 15 initiatives were implemented prior to the plan's issuance in July 2013. By March 2016, FDA implemented 2 additional workforce development initiatives, bringing the total to 17 initiatives. Of the remaining 2 initiatives, 1 is still being implemented. CDRH is in the process of reducing staff workloads as part of the center's retention initiative--an activity related to hiring plans that are to be phased in through fiscal year 2017. The final one, CDER's alumni network initiative, was terminated. CDER planned to pilot the initiative in four of its offices beginning in 2013, but it was never piloted or implemented due to a lack of employee activity in alumni associations. (See table 2.) We found that FDA had already established or has plans to establish formal and informal mechanisms to assess the effectiveness of just over half of the 30 efficiency initiatives in the SIMP. For the SIMP's workforce development initiatives, FDA identified mechanisms to assess most of the 19 initiatives, and each center's approach to assess training is different. FDA stated that the agency had assessed or has plans to assess just over half of the 30 efficiency initiatives for effectiveness, although these plans are generally not described in the SIMP. In its plan, FDA identified formal measures of effectiveness for 3 initiatives, each of which is based on a MDUFA or PDUFA commitment, but does not specify any additional measures in the plan itself for the remaining 27 initiatives. (See table 3.) However, we found that FDA has formal or informal measures that do not appear in the SIMP for a majority of these initiatives. For five initiatives, FDA officials identified formal measures of effectiveness that were not described in the SIMP. The officials explained that these initiatives are assessed through periodic user fee program reports or center strategic goals. For example CDER officials told us that the GDUFA initiative on commitments, complete review, and easily correctable deficiencies is assessed against the user fee commitments. For example, FDA committed to review and act on 90 percent of complete, electronic abbreviated new drug applications within 10 months after the date of submission. FDA does not have to meet some of these commitments until 2017, but the agency indicated that it faces challenges meeting them due to a large backlog of applications. CDRH officials told us that they assessed the investigational device exemption decision program using center-specific strategic goals related to reducing the number of review cycles needed before full approval, and reducing the overall median time to full approval. CDRH met each of these goals in fiscal year 2015. For nine initiatives, officials from each center described efforts they took to informally examine effectiveness. For example, CBER uses staff feedback to assess implementation of its electronic review templates, and incorporates revisions as appropriate. For CDRH's initiative to establish a unique device identification system, officials said they track certain metrics, such as numbers of vendors certified to participate in the program and visits to the program's website. FDA officials told us that, for the remaining 13 effectiveness initiatives in the SIMP, they are either exploring effectiveness measures or do not have plans to measure effectiveness. In some cases, officials described ways in which effectiveness could be measured or efforts to develop assessments. For example, CDRH officials told us that they did not currently have, but were exploring, ways to measure the impact of its signal management program initiative through industry responses or actions taken. In other instances, such as with CBER's two initiatives on improving its managed review process tool, officials indicated that they were unclear about the best way to measure effectiveness. Additionally, FDA does not have current plans to measure effectiveness of some initiatives and officials noted that such measurement would be either unnecessary or impractical. For example, FDA is not measuring effectiveness for the PDUFA meeting minutes initiative, because officials said it would be a challenge to survey sponsors and the agency wants to be selective about choosing that option. FDA identified mechanisms to assess the effectiveness of 12 of the 19 workforce development initiatives. Specifically, the agency identified mechanisms to assess 4 of 7 recruitment initiatives, the 1 retention initiative, and 7 of 11 training initiatives. In the SIMP, FDA generally did not describe assessments for specific initiatives, but rather described each user fee program's hiring and training commitments as broad measures of the agency's workforce development efforts. For example, in order to reach the committed GDUFA level of 923 full-time equivalent staff by the end of fiscal year 2015, FDA committed to hire and then train at least 25 percent of staff in fiscal year 2013 and 50 percent in fiscal year 2014. FDA reported that it met this commitment by October 2014, 11 months ahead of schedule. (As previously noted, appendix III provides additional information on the size and characteristics of FDA's overall and center-specific workforce.) FDA officials described the mechanisms in place to assess the effectiveness of 4 of the 7 recruitment initiatives described in the SIMP. For the two that are FDA-wide recruitment initiatives, FDA uses agency- and department-wide tools to measure the overall effectiveness. Specifically, FDA developed the FDA Accelerated Staffing Track 80-day hiring metric in early fiscal year 2015 to measure the time it takes to hire a new employee once the need is identified. However, officials said that data quality and data entry issues limited the accuracy and validity of the data available at the time of our review. In addition, FDA uses HHS personnel information systems to track monthly and quarterly hire and separation data for each medical product center. Officials also described performance metrics that CBER and CDRH track to assess effectiveness for two center-specific recruitment initiatives. For CBER's comprehensive recruitment strategy, the center tracks the number of resumes received and hires from targeted populations. For example, CBER hired four veteran; five minority; and 31 science, technology, engineering, and mathematics candidates during fiscal year 2015. For CDRH's initiative on strategic communication and outreach for recruitment, the center uses monthly reports to track the number of applicants responding to the center's job postings, including data on the number of applicants that apply to and are eligible for each position. For the three recruitment initiatives that do not currently have mechanisms to assess effectiveness, CDER officials described the center's current plans or what it had already done. For one initiative, officials said that the center is developing an automated project management and tracking tool. Officials expect that the tool will be implemented in spring 2016. For another initiative, CDER met its overall hiring objectives, but did not measure the number of selections made as a result of the initiative itself. Finally, CDER's alumni network initiative was never implemented, and thus FDA did not put in a place a mechanism to assess its effectiveness. To assess the effectiveness of the one retention initiative in the SIMP, CDRH officials told us they measure the number of full-time equivalent staff supporting MDUFA activities, changes in staff-to-manager ratios, and survey results. CDRH's total full-time equivalent staff supporting MDUFA increased from 1,133 in fiscal year 2013 to 1,293 in fiscal year 2015. At the same time, CDRH reduced the staff-to-manager ratio in its two offices with medical device review responsibilities. CDRH also analyzes changes in federal Employee Viewpoint Survey responses to assess its efforts to provide a better workplace for its employees. From 2011 to 2014, CDRH observed positive changes for three of six critical indicators it identified for providing recognition and all six critical indicators it identified for performance evaluation. Of the 11 training initiatives, CBER, CDER, and CDRH officials each identified mechanisms to assess the effectiveness of 7 initiatives. Specifically, each center indicated that it uses participant surveys to assess effectiveness. CBER also delivers a test at the conclusion of some, but not all, of the programs included in its training initiative.Furthermore, as described in the SIMP, CDRH conducts an audit process for its Reviewer Certification Program through which new reviewers are evaluated by an experienced reviewer. During the audit process, new reviewers are rated against six criteria, including the appropriate use of guidance and strength of final review decision analyses. The four remaining training initiatives described in the SIMP were related to each user fee program and the centers use different approaches to assess the extent to which all reviewers required to complete training have done so. CBER and CDER track the names of staff who register for training and do not measure the number of medical product reviewers required to complete the trainings. CBER and CDER officials said that FDA was not required to report on training completion rates, and they assume that required staff completed user fee training, because it is made available in different settings, such as CBER's review management updates and CDER's new employee orientation. For example, CDER officials told us that 99 percent of the staff hired under the GDUFA commitment had completed training, as all hired staff take mandatory online training once hired. Training completion rates are not included in GDUFA performance reports. In contrast, CDRH measures user fee training completion rates among its required staff and reports on these rates in MDUFA quarterly performance reports, as required by their user fee commitments. CDRH reported a 99 percent staff completion rate among its review staff required to complete MDUFA training. Center officials did not identify any mechanisms to assess how effective participants were in applying the information learned during these user fee trainings (known as training comprehension). CBER officials said its user fee trainings were delivered and recorded in special training sessions, such as in monthly review management updates, and that these trainings do not have mechanisms to assess comprehension. CDER officials were unable to show that staff who took user fee trainings were given post-completion tests. CDRH officials told us that a post- completion test was not disseminated for the initial MDUFA trainings. However, CDRH has since incorporated the user fee trainings into the center's Reviewer Certification Program, which has multiple mechanisms for assessment. Emerging issues--including increasingly complex medical products such as combination products, the need for integrated information systems, and the increased hiring demands for specific scientific knowledge--go beyond the expertise of a single medical product center and highlight the growing importance of strategic planning across medical products. Advances involving new diagnostic tools, treatments, and cures require collaboration in order to be successful. However, FDA has faced longstanding challenges in carrying out the many responsibilities necessary for the oversight of medical products. While FDA engaged each of the medical product centers in the development of the SIMP, this narrowly focused plan is not used by the agency or centers. Moreover, it highlights gaps in the agency's management across FDA's medical product centers by not fully linking its performance goals to its general goals and objectives, and having limited information on implementation time frames. While FDA has various other strategic planning documents for medical product oversight, these documents also do not set a long- term strategy for the centers, because they are focused on narrower issues or do not have details specific to center-level collaboration. Using leading practices identified as essential for strategic planning can help ensure the agency is prepared to address challenges requiring coordination across the centers in a consistent and transparent manner. Documenting measurable goals, objectives, and a long-term strategy for areas resulting from this planning--whether it is through a freestanding document or as part of existing documents--can help the agency ensure its priorities are communicated among key stakeholders, even in times of leadership turnover. To ensure that FDA can effectively coordinate and integrate its medical product centers' programs and emerging issues, we recommend that the Secretary of Health and Human Services direct the Commissioner of FDA to engage in a strategic planning process to identify challenges that cut across the medical product centers and document how it will achieve measurable goals and objectives in these areas. We provided a draft of this report to HHS. The agency agreed with our recommendation and provided written comments, which are reprinted in appendix IV. In its written comments, HHS described the context surrounding the development of the SIMP and the progress FDA has made regarding its medical product review activities under its four user fee programs. It noted the importance of coordinating and integrating the activities that are common among FDA's medical product centers. In agreeing with our recommendation, HHS indicated that FDA has already started a process to identify key crosscutting themes for the medical products centers, which it will then use to develop an overarching strategic planning framework to guide the work of these centers. We encourage FDA to use leading practices to ensure this framework has measurable goals and objectives. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its date. At that time, we will send copies to the Secretary of Health and Human Services. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. Table 4 shows each efficiency initiative that the Food and Drug Administration (FDA) included in its strategic integrated management plan. FDA described 30 efficiency initiatives in its plan, including those specific to a medical product center or to a user fee program. FDA also grouped the initiatives into three themes: (1) business modernization, (2) process improvement, and (3) smarter regulation. Table 5 shows each workforce development initiative the Food and Drug Administration (FDA) included in its strategic integrated management plan. FDA described 19 workforce development initiatives in its plan specific to recruitment, retention, or training. We analyzed Food and Drug Administration (FDA) data on the agency's workforce population and attrition for fiscal years 2012 to 2015. Our analysis includes detail on the three medical product centers: the Center for Biologics Evaluation and Research (CBER), the Center for Drug Evaluation and Research (CDER), and the Center for Devices and Radiological Health (CDRH). FDA's total workforce grew from 16,716 employees in 2012 to 19,043 employees in 2015--a 14 percent increase. FDA measures year-to-year changes in its total workforce by subtracting the employee losses from the employee gains of permanent and non- permanent staff. Figure 2 shows the number of medical product center employees--permanent and non-permanent--for each fiscal year. Some losses and gains reported by the centers are due to employees that transferred within the agency, such as from one center to another. Tables 6, 7, and 8 show information on transfers within FDA for each medical product center in fiscal years 2012 to 2015. FDA also tracks the percentage of retirement-eligible staff. In fiscal year 2015, 12.4 percent of FDA's overall permanent workforce was retirement- eligible. In the same fiscal year, the retirement eligibility for each medical product center was 15.9 percent for CBER, 10.9 percent for CDER, and 11.8 percent for CDRH. Figure 3 shows the FDA-wide and center-specific attrition rates from fiscal year 2012 to 2015. FDA calculates attrition rates by dividing the number of voluntary personnel losses by the average number of employees for each fiscal year. Voluntary personnel losses include retirements, resignations, and employees who transfer externally to another federal agency or internally to a different center or office within FDA. The following tables show the number of employees, personnel gains, and attrition rates for FDA and each medical product center. The tables also include information on mission-critical occupations, which may vary by center. In addition to the contact named above, William Hadley, Assistant Director; George Bogart; Jennel Lockley; Drew Long; Matt Lowney; Dan Powers; and E. Jane Whipple made key contributions to this report.

FDA--an agency within the Department of Health and Human Services (HHS)--has faced challenges in carrying out its responsibilities to ensure the safety and efficacy of medical products sold in the United States. In 2012, Congress required FDA to develop a SIMP for the three centers overseeing medical products that identifies initiatives for improving efficiency, initiatives for workforce development, and measures for assessing the progress of these initiatives. FDA issued the SIMP in July 2013. GAO was asked to examine FDA's implementation of the SIMP. In this report, GAO (1) evaluates the extent to which the SIMP serves as a strategic planning document, (2) describes the types of plan initiatives, and (3) describes the mechanisms FDA has to evaluate the effectiveness of its plan initiatives. GAO analyzed FDA documents and spoke to FDA officials to assess the SIMP's development and use, along with the implementation status and evaluation mechanisms used for the SIMP's initiatives. GAO also assessed FDA's plan against leading practices for strategic planning. Finally, GAO analyzed FDA workforce data on hiring and attrition for fiscal years 2012 to 2015. The Food and Drug Administration (FDA) developed a strategic integrated management plan (SIMP) for its three centers that oversee medical products (biologics, drugs, and medical devices); however, GAO found that the plan does not incorporate leading practices for strategic planning or document a comprehensive strategy for the centers. FDA officials explained that circumstances at the time of the SIMP's development, including leadership gaps, limited FDA's ability to structure the plan into an effective strategic planning document. While officials said they use a variety of other key documents for strategic planning--such as agency-level and initiative-specific plans--these other plans also do not describe a long-term strategy for addressing key issues that cut across medical product centers. For example, these other FDA documents do not describe the agency's plans for collaboration between the centers that could benefit certain initiatives, improve their decision-making, and improve the quality of evidence and clarity of guidance. FDA officials acknowledged the growing need for strategic planning across the medical product centers to improve center collaboration and address emerging issues. The absence of a comprehensive long-term plan for medical product oversight may hinder FDA's efforts to address emerging issues that require center collaboration, such as access to quality data. Fully documenting such a strategy, either in a separate plan or through existing documents, would help the agency identify measurable goals and objectives for the centers that align with its mission and help communicate its priorities to key stakeholders. In the SIMP, FDA compiled mostly preexisting initiatives to improve the efficiency of each center's activities and develop its workforce. GAO found that for improving efficiency, FDA selected 30 initiatives that it grouped into three different themes--smarter regulation, process improvement, and business modernization. FDA had fully implemented a third of the initiatives prior to the SIMP's issuance in 2013; another half were implemented by March 2016. As of this date, the remaining initiatives had yet to be fully implemented. For workforce development, FDA included 19 recruitment, retention, and training initiatives, which generally reflected differences in center activities. FDA implemented 15 initiatives prior to the SIMP's issuance and 2 additional initiatives since then. Of the remaining initiatives, 1 was terminated and, as of March 2016, FDA was in the process of implementing the other initiative. Although not generally reported in the SIMP, FDA officials identified mechanisms to assess the effectiveness of the majority of the initiatives included in the plan. Of the 30 efficiency initiatives, FDA officials identified 8 that have formal evaluations (such as third-party assessments) and 9 that are assessed informally (such as by gathering feedback). For the remaining 13, officials said they are either exploring effectiveness measures or have no plans to assess them because they consider it to be unnecessary or impractical. FDA identified mechanisms to assess 12 of the 19 workforce development initiatives, including through recruitment performance metrics and surveys of training participants. For 4 initiatives, the centers each use different approaches to assess training. For the remaining 3 initiatives, FDA either is developing a mechanism or described past assessment activities. GAO recommended that the Secretary of Health and Human Services direct FDA to engage in a strategic planning process to identify challenges that cut across the medical product centers, and document how it will achieve measurable goals and objectives in these areas. HHS agreed with the recommendation.

For the past several years, concerns about the cost of operating and maintaining federal recreation sites within the federal land management agencies have led the Congress to provide a significant new source of funds. This additional source of funding--the Recreational Fee Demonstration Program--was authorized in 1996. The fee demonstration program authorized the Bureau of Land Management, Fish and Wildlife Service, National Park Service, and the Forest Service to experiment with new ways to administer existing fee revenues and to establish new recreation entrance and user fees. The current authorization for the program expires December 31, 2005. Previously, all sites collecting entrance and user fees deposited the revenue into a special U.S. Treasury account to be used for certain purposes, including resource protection and maintenance activities, and funds in this account only became available through congressional appropriations. The fee demonstration program currently allows agencies to maintain fee revenues in special U.S. Treasury accounts for use without further appropriation: 80 percent of the fees are maintained in an account for use at the site and the remaining 20 percent are maintained in another account for use on an agency-wide basis. As a result, these revenues have yielded substantial benefits for local recreation sites by funding significant on-the-ground improvements. From the inception of the Recreational Fee Demonstration Program, the four participating agencies have collected over $1 billion in recreation fees from the public. The Department of the Interior and the Department of Agriculture's most recent budget requests indicate that the agencies expect to collect $138 million and $46 million, respectively, from the fee demonstration program in fiscal year 2005. H.R. 3283, as proposed, would provide a permanent source of revenue for federal land management agencies to use to, among other things, help address the backlog in repair and maintenance of federal facilities and infrastructure. One of the principal uses of the revenues generated under the existing Recreational Fee Demonstration Program is for participating agencies to reduce their respective maintenance backlogs. The Department of the Interior owns, builds, purchases, and contracts services for such assets as visitor centers, roads, bridges, dams, and reservoirs, many of which are deteriorating and in need of repair or maintenance. We have identified Interior's land management agencies inability to reduce their maintenance backlogs as a major management challenge. According to the Department of the Interior's latest estimates, the deferred maintenance backlog for its participating agencies ranged from about $5.1 billion to $8.3 billion. Table 1 shows the Department's estimate of deferred maintenance for its agencies participating in the Recreational Fee Demonstration Program. Of the current participating agencies within Interior, the National Park Service has the largest estimated maintenance backlog--ranging from $4 to nearly $7 billion. As we have previously reported, the Park Service's problems with maintaining its facilities have steadily worsened in part because the agency lacks accurate data on the facilities that need to be maintained or on their condition. As a result, the Park Service cannot effectively determine its maintenance needs, the amount of funding needed to address them, or what progress, if any, it has made in closing the maintenance gap. Although the Park Service has used some of the revenues generated from the fee demonstration program to address its high-priority maintenance needs, without accurate and reliable data, it cannot demonstrate the effect of fee demonstration revenues in improving the maintenance of its facilities. The Park Service has acknowledged the problems associated with not having an accurate and reliable estimate of its maintenance needs and promised to develop an asset management process that, when operable, should provide a systematic method for documenting deferred maintenance needs and tracking progress in reducing the amount of deferred maintenance. Furthermore, the new process should enable the agency to develop (1) a reliable inventory of its assets, (2) a process for reporting on the condition of each asset, and (3) a system-wide methodology for estimating its deferred maintenance costs. In 2002, we identified some areas that the agency needed to address in order to improve the performance of the process, including the need to develop cost and schedules for completing the implementation of the process, better coordinating the tracking of the process among Park Service headquarters units to avoid duplication of effort within the agency, and better definition of its approach to determine the condition of its assets and how much the assessments will cost. In our last testimony on this issue before this Subcommittee in September 2003, we stated that the complete implementation of the new process would not occur until fiscal year 2006, but that the agency had completed, or nearly completed, a number of substantial and important steps to improve the process. The two other Interior agencies participating in the program--the Fish and Wildlife Service and the Bureau of Land Management also report deferred maintenance backlogs of about $1 billion and $330,000, respectively. We do not have any information at this time on the effectiveness of the program in reducing these backlogs. The Forest Service also has an estimated $8 billion maintenance backlog most of which is needed to maintain forest roads and bridges. In September 2003, we reported that the Forest Service (like the Park Service) had no effective means for measuring how much of the fee demonstration revenues it had spent on deferred maintenance or the impact that the fee program had had on reducing its deferred maintenance needs. Although the Forest Service has recognized the significance of its deferred maintenance problem, it does not have a systematic method for compiling the information needed to provide a reliable estimate of its deferred maintenance needs. Furthermore, the agency has not developed a process to track deferred maintenance expenditures from fee demonstration revenues. As a result, even if the agency knew how much fee revenue it spent on deferred maintenance, it could not determine the extent to which these revenues had reduced its overall deferred maintenance needs. Forest Service officials provided several reasons why the agency had not developed a process to track deferred maintenance expenditures from the demonstration revenues. First, they said that the agency chose to use its fee demonstration revenue to improve and enhance on-site visitor services rather than to develop and implement a system for tracking deferred maintenance spending. Second, the agency was not required to measure the impact of fee revenues on deferred maintenance. Finally, because the fee demonstration program was temporary, agency officials had concerns about developing a process for tracking deferred maintenance, not knowing if the program would subsequently be made permanent. H.R. 3283 would provide participating agencies with a permanent source of funds to supplement existing appropriations and to better address maintenance backlogs. Furthermore, by making the program permanent, H.R. 3283 could provide participating agencies like the Forest Service with an incentive to develop a system to track their deferred maintenance backlogs. The existing fee demonstration program requires federal land management agencies to maintain at least 80 percent of the fee revenues for use on-site. In a 1998 report, we suggested that, in order to provide greater opportunities to address high priority needs of the agencies, the Congress consider modifying the current requirement to grant agencies greater flexibility in using fee revenues. H.R. 3283 provides the agencies with flexibility to reduce the percentage of revenues spent on-site down to 60 percent. We also reported that the requirement that at least 80 percent of the revenues be maintained for use at the collection site may inadvertently create funding imbalances between sites and that some heavily visited sites may reach a point where they have more revenues than they need for their projects, while other sites would still fall short. In 1999, we testified that some demonstration sites were generating so much revenue as to raise questions about their long-term ability to spend these revenues on high-priority items. In contrast, we warned that sites outside the demonstration program, as well as demonstration sites that did not collect as much in fee revenues, may have high-priority needs that remained unmet. As a result, some of the agencies' highest-priority needs might not be addressed. Our testimony indicated that, at many sites in the demonstration program, the increased fee revenues amounted to 20 percent or more of the sites' annual operating budgets, allowing such sites to address past unmet needs in maintenance, resource protection, and visitor services. While these sites could address their needs within a few years, the 80-percent requirement could, over time, preclude the agencies from redistributing fee revenues to meet more pressing needs at other sites. Our November 2001 report confirmed that such imbalances had begun to occur. Officials from the land management agencies acknowledged that some heavily visited sites with large fee revenues may eventually collect more revenue than they need to address their priorities, while other lower-revenue generating sites may have limited or no fee revenues to meet their needs. To address this imbalance, we suggested that the Congress consider modifying the current requirement that 80 percent of fee revenue be maintained for use by the sites generating the revenues to allow for greater flexibility in using fee revenues. H.R. 3283 would still generally require agencies to maintain at least 80 percent of fee revenues for use on-site. However, if the Secretary of the Interior determined that the revenues collected at a site exceeded the reasonable needs of the unit for which expenditures may be made for that fiscal year, under H.R. 3283 the Secretary could then reduce the percentage of on-site expenditures to 60 percent and transfer the remainder to meet other priority needs across the agency. The need for flexibility in transferring revenue must also be balanced against the necessity of keeping sufficient funds on-site to maintain incentives at fee-collecting units and to maintain the support of the visitors. Such a balance is of particular concern to the Forest Service, which has identified that visitors generally support the program so long as the fees are used on-site and they can see improvements to the site where they pay fees. Accordingly, under the existing fee demonstration program, the Forest Service has committed to retaining 90 to 100 percent of the fees on-site. As such, H.R. 3283 would not likely change the Forest Service's use of collected fees. However, it would provide the Forest Service, as well as the other agencies, with the flexibility to balance the need to provide incentives at fee collecting sites and support of visitors against transferring revenues to other sites. The legislative history of the fee demonstration program places an emphasis on participating agency collaboration to minimize or eliminate confusion for visitors where multiple fees could be charged to visit recreation sites in the same area. Our prior work has pointed to the need for more effective coordination and cooperation among the agencies to better serve visitors by making the payment of fees more convenient and equitable while at the same time, reducing visitor confusion about similar or multiple fees being charged at nearby or adjacent federal recreation sites. For example, sites do not consistently accept agency and interagency passes, resulting in visitor confusion and, in some cases, overlapping or duplicative fees for the same or similar activities. H.R. 3283 would allow for improved service to visitors by coordinating federal agency fee-collection activities. First, the act would standardize the types of fees that the federal land management agencies use. Second, it would create a single national pass that would provide visitors access to recreation sites managed by different agencies. Third, it would allow for the coordination of fees on a regional level for access to multiple nearby sites. In November 2001, we reported that agencies had not pursued opportunities to coordinate their fees better among their own sites, with other agencies, or with other nearby, nonfederal recreational sites. As a result, visitors often had to pay fees that were sometimes overlapping, duplicative, or confusing. Limited fee coordination by the four agencies has permitted confusing fee situations to persist. At some sites, an entrance fee may be charged for one activity whereas a user fee may be charged for essentially the same activity at a nearby site. For example, visitors who entered either Olympic National Park or the Olympic National Forest in Washington state for day hiking are engaged in the same recreational activity--obtaining general access to federal lands--but were charged distinct entrance and user fees. For a 1-day hike in Olympic National Park, users paid a $10 per-vehicle entry fee (good for 1 week), whereas hikers using trailheads in Olympic National Forest were charged a daily user fee of $5 per vehicle for trailhead parking. Also, holders of the interagency Golden Eagle Passport--a $65 nationwide pass that provides access to all federal recreation sites that charge entrance fees--could use the pass to enter Olympic National Park, but had to pay the Forest Service's trailhead parking fee because the fee for the pass covers only entrance fees and not a user fees. However, the two agencies now allow holders of the Golden Eagle Passport to use it for trailhead parking at Olympic National Forest. Similarly, confusing and inconsistent fee situations also occur at similar types of sites within the same agency. For example, visitors to some Park Service national historic sites, such as the San Juan National Historic Site in Puerto Rico, pay a user fee and have access to all amenities at the sites, such as historic buildings. However, other Park Service historic sites, such as the Roosevelt/Vanderbilt Complex in New York State, charge no user fees, but tours of the primary residences require the payment of entrance fees. Visitors in possession of an annual pass that cover entrance fees, such as the National Parks Pass, may be further confused that their annual entrance pass is sufficient for admission to a user fee site, such as the San Juan National Historic Site, but not sufficient to allow them to enter certain buildings on the Roosevelt/Vanderbilt Complex, which charge entrance fees. H.R. 3283 would streamline the recreational fee program by providing a standard fee structure across federal land management agencies using a 3- tiered fee structure: a basic recreation fee, an expanded recreation fee, and a special recreation permit fee. H.R. 3283 establishes several areas where a basic recreation fee may be charged. For example, the basic recreation fee offers access to, among other areas, National Park System units, National Conservation Areas, and National Recreation Areas. Expanded recreation fees are charged either in addition to the basic recreation fee or by itself when the visitor uses additional facilities or services, such as a developed campground or an equipment rental. A special recreation permit is charged when the visitor participates in an activity such as a commercial tour, competitive event, or an outfitting or guiding activity. In November 2001 we reported another example of an interagency issue that needed to be addressed--the inconsistency and confusion surrounding the acceptance and use of the $65 Golden Eagle Passport. The annual pass provides visitors with unlimited access to federal recreation sites that charge an entrance fee. However, many sites do not charge entrance fees to gain access to a site and instead charge a user fee. For example, Yellowstone National Park, Acadia National Park, and the Eisenhower National Historic Site charge entrance fees. But sites like Wind Cave National Park charge user fees for general access. If user fees are charged in lieu of entrance fees, the Golden Eagle Passport is generally not accepted even though, to the visitor with a Golden Eagle Passport, there is no practical difference. Further exacerbating the public's confusion over payment of use or entrance fees was the implementation of the Park Service's single-agency National Parks Pass in April 2000. This $50 pass admits the holder, spouse, children, and parents to all National Park Service sites that charge an entrance fee for a full year. However, the Parks Pass does not admit the cardholder to the Park Service sites that charge a user fee, nor is it accepted for admittance to other sites in the Forest Service and in the Department of the Interior, including the Fish and Wildlife Service sites. H.R. 3283 would eliminate the current national passes and replace them with one federal lands pass--called the "America the Beautiful--the National Parks and Federal Recreation Lands Pass"--for use at any site of a federal land management agency that charges a basic recreation fee. The act also calls for the Secretaries of Agriculture and the Interior to jointly establish the National Parks and Federal Recreation Lands Pass and to jointly issue guidelines on the administration of the pass. In addition, it requires that the Secretaries develop guidelines for establishing or changing fees and that these guidelines, among other things, would require federal land management agencies to coordinate with each other to the extent practicable when establishing or changing fees. H.R. 3283 would also provide local site managers the opportunity to coordinate and develop regional passes to reduce visitor confusion over access to adjacent sites managed by different agencies. When authorizing the demonstration program, the Congress called upon the agencies to coordinate multiple or overlapping fees. We reported in 1999 that the agencies were not taking advantage of this flexibility. For example, the Park Service and the Fish and Wildlife Service manage sites that share a common border on the same island in Maryland and Virginia--Assateague Island National Seashore and Chincoteague National Wildlife Refuge. When the agencies selected the two sites for the demonstration program, they decided to charge separate entrance fees. However, as we reported in 2001, the managers at these sites developed a reciprocal fee arrangement whereby each site accepted the fee paid at the other site to better accommodate the visitors. Resolving situations in which inconsistent and overlapping fees are charged for similar recreation activities would offer visitors a rational and consistent fee program. We stated that further coordination among the agencies participating in the fee demonstration program could reduce the confusion for visitors. We reported that demonstration sites may be reluctant to coordinate on fees partly because the program's incentives are geared towards increasing their revenues. Because joint fee arrangements may potentially reduce revenues to specific sites, there may be a disincentive among these sites to coordinate. Nonetheless, we believe that the increase in service to the public might be worth a small reduction in revenues. Accordingly, we recommended that the Secretaries of Agriculture and the Interior direct the heads of the participating agencies to improve their service to visitors by better coordinating their fee collection activities under the Recreational Fee Demonstration Program. In response, in 2002, the Departments of the Interior and Agriculture formed the Interagency Recreational Fee Leadership Council to facilitate coordination and consistency among the agencies on recreation fee policies. We also recommended that the agencies approach such an analysis systematically, first by identifying other federal recreation areas close to each other and then, for each situation, determining whether a coordinated approach, such as a reciprocal fee arrangement, would better serve the visiting public. The agencies implemented this recommendation to a limited extent as evidenced by the reciprocal fee arrangement between Assateague Island National Seashore and Chincoteague National Wildlife Refuge. H.R. 3283 offers federal agencies the opportunity to develop regional passes to offer access to sites managed by different federal, state and local agencies. As we have reported in the past, for all four agencies to make improvements in interagency communication, coordination, and consistency for the program to become user-friendly, an effective mechanism is needed to ensure that interagency coordination occurs or to resolve interagency issues or disputes when they arise. Essentially, the fee demonstration program raises revenue for the participating sites to use for maintaining and improving the quality of visitor services and protecting the resources at federal recreation sites. The program has been successful in raising a significant amount of revenue. However, the agencies could enhance the quality of visitor services more by providing better overall management of the program. Several of the provisions in H.R. 3283 address many of the quality of service issues we have identified through our prior work and if the provisions are properly implemented these services should improve. While the fee demonstration program provides funds to increase the quality of the visitor experience and enhance the protection of resources by, among other things, addressing a backlog of needs for repair and maintenance, and to manage and protect resources, the program's short and long-term success lies in the flexibility it provides agencies to spend revenues and the removal of any undesirable inequities that occur to ensure that the agencies' highest priority needs are met. However, any changes to the program's requirements should be balanced in such a way that fee-collecting sites would continue to have an incentive to collect fees and visitors who pay them will continue to support the program. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Doreen Feldman, Roy Judy, Jonathan McMurray, Patrick Sigl, Paul Staley, Amy Webbink, and Arvin Wu made key contributions to this statement. The following is a listing of related GAO products on recreation fees, deferred maintenance, and other related issues. Recreation Fees: Information on Forest Service Management of Revenue from the Fee Demonstration Program. GAO-03-1161T. Washington, D.C.: September 17, 2003. Recreation Fees: Information on Forest Service Management of Revenue from the Fee Demonstration Program. GAO-03-470. Washington, D.C.: April 25, 2003. Recreation Fees: Management Improvements Can Help the Demonstration Program Enhance Visitor Services. GAO-02-10. Washington, D.C.: November 26, 2001. Recreational Fee Demonstration Program Survey. GAO-02-88SP. Washington, D.C.: November 1, 2001. National Park Service: Recreational Fee Demonstration Program Spending Priorities. GAO/RCED-00-37R. Washington, D.C.: November 18, 1999. Recreation Fees: Demonstration Has Increased Revenues, but Impact on Park Service Backlog Is Uncertain. GAO/T-RCED-99-101. Washington, D.C.: March 3, 1999. Recreation Fees: Demonstration Program Successful in Raising Revenues but Could Be Improved. GAO/T-RCED-99-77. Washington, D.C.: February 4, 1999. Recreation Fees: Demonstration Fee Program Successful in Raising Revenues but Could Be Improved. GAO/RCED-99-7. Washington, D.C.: November 20, 1998. National Park Service: Efforts Underway to Address Its Maintenance Backlog. GAO-03-1177T. Washington, D.C.: September 27, 2003. National Park Service: Status of Agency Efforts to Address Its Maintenance Backlog. GAO-03-992T. Washington, D.C.: July 8, 2003. National Park Service: Status of Efforts to Develop Better Deferred Maintenance Data. GAO-02-568R. Washington, D.C.: April 12, 2002. National Park Service: Efforts to Identify and Manage the Maintenance Backlog. GAO/RCED-98-143. Washington, D.C.: May 14, 1998. National Park Service: Maintenance Backlog Issues. GAO/T-RCED-98-61. Washington, D.C.: February 4, 1998. Deferred Maintenance Reporting: Challenges to Implementation. GAO/AIMD-98-42. Washington, D.C.: January 30, 1998. Major Management Challenges and Program Risks, Department of the Interior. GAO-03-104. Washington, D.C.: January 2003. Major Management Challenges and Program Risks, Department of the Interior. GAO-01-249. Washington, D.C.: January 2001. Park Service: Managing for Results Could Strengthen Accountability. GAO/RCED-97-125. Washington, D.C.: April 10, 1997. 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In 1996, the Congress authorized an experimental initiative called the Recreational Fee Demonstration Program that provides funds to increase the quality of visitor experience and enhance resource protection. Under the program, the Bureau of Land Management, Fish and Wildlife Service, and National Park Service--all within the Department of the Interior--and the Forest Service--within the U.S. Department of Agriculture--are authorized to establish, charge, collect, and use fees at a number of sites to, among other things, address a backlog of repair and maintenance needs. Also, sites may retain and use the fees they collect. The Congress is now considering, through H.R. 3283, whether to make the program permanent. Central to the debate is how effectively the agencies are using the revenues that they have collected. This testimony focuses on the potential effect of H.R. 3283 on the issues GAO raised previously in its work on the Recreational Fee Demonstration Program. Specifically, it examines the extent to which H.R. 3283 would affect (1) federal agencies' deferred maintenance programs, (2) the management and distribution of the revenue collected, and (3) interagency coordination on fee collection and use. H.R. 3283 would provide agencies with a permanent source of funds to better address their maintenance backlog, and by making the program permanent, the act would provide agencies incentive to develop a system to track their deferred maintenance backlogs. According to the Department of the Interior's latest estimates, the deferred maintenance backlog for the Interior agencies participating in the fee demonstration program ranges from $5.1 billion to $8.3 billion, with the Park Service alone accounting for an estimated $4 to $7 billion. Likewise, the Forest Service, the other participating agency, estimates its total deferred maintenance backlog to be about $8 billion. GAO's prior work on the Park Service's and Forest Service's backlog has demonstrated that neither agency has accurate and reliable information on its deferred maintenance needs and cannot determine how much of the fee demonstration revenues it spends on reducing its deferred maintenance needs. Furthermore, some agency officials have hesitated to divert resources to develop a process for tracking deferred maintenance because the fee demonstration program is temporary. H.R. 3283 would allow agencies to reduce the percentage of fee revenue used on-site down to 60 percent, thus providing the agencies with greater flexibility in how they use the revenues. Currently, the demonstration program requires federal land management agencies to maintain at least 80 percent of the collected fee revenues for use on-site. This requirement has helped some demonstration sites generate revenue in excess of their high-priority needs, but the high-priority needs at other sites, which did not collect as much in fee revenues, remained unmet. GAO has suggested that the Congress consider modifying the current 80-percent on-site spending requirement to provide agencies greater flexibility in using fee revenues. H.R. 3283 would standardize the types of fees federal land management agencies may use and creates a single national pass that provides visitors general access to a variety of recreation sites managed by different agencies and allows for the regional coordination of fees to access multiple nearby sites. GAO's prior reports have demonstrated the need for more effective coordination and cooperation among the agencies to better serve visitors by making the payment of fees more convenient and equitable while reducing visitor confusion about similar or multiple fees being charged at nearby or adjacent federal recreation sites.

DOE has a vast complex of sites across the nation dedicated to the nuclear weapons program. DOE largely ceased production of plutonium and enriched uranium by 1992, but the waste remains at the sites. Most of the tanks in which the waste is stored have already exceeded their design life. For example, many of Hanford's and Savannah River's tanks were built in the 1940s to 1960s and were designed to last 10-40 years. Leaks from some of these tanks were first detected at Hanford in 1956 and at Savannah River in 1959. Given the age and deteriorating condition of some of the tanks, there is concern that some of them will leak additional waste into the soil, where it may migrate to the water table and, in the case of the Hanford Site, to the Columbia River. Responsibility for the high-level waste produced at DOE facilities is governed primarily by federal laws, including the Atomic Energy Act of 1954. These laws established responsibility for the regulatory control of radioactive materials including DOE's high-level waste and assigned the Nuclear Regulatory Commission (NRC) the function of licensing facilities that are expressly authorized for long-term storage of high-level radioactive waste generated by DOE. In addition, the Nuclear Waste Policy Act of 1982 defined high-level radioactive waste. Various other federal laws, including the Resource Conservation and Recovery Act of 1976, guide how DOE must carry out its cleanup program. The high-level waste cleanup program is under the leadership of the Assistant Secretary for Environmental Management. It involves consultation with a variety of stakeholders, including the Environmental Protection Agency, state environmental agencies where DOE sites are located, county and local governmental agencies, citizen groups, advisory groups, and Native American tribes. The waste in the tanks at the Hanford and Savannah River sites and the Idaho National Laboratory near Idaho Falls is a complex mixture of radioactive and hazardous components. DOE's process for preparing it for disposal is designed to separate much of the radioactive material from other waste components. Nearly all the radioactivity in the waste originates from radionuclides with half-lives of about 30 years or less. The relatively short half-lives of most of the radionuclides in the waste means that within 30 years, about 50 percent of the current radioactivity will have decayed away, and within 100 years this figure will rise to more than 90 percent. Figure 1 shows the pattern of decay, using 2002 to 2102 as the 100-year period. Extending the analysis beyond the 100-year period shown in the figure, in 300 years, 99.8 percent of the radioactivity will have decayed, leaving 0.2 percent of the current radioactivity remaining. Despite the relatively rapid decay of most of the current radioactivity, some radionuclides have half-lives in the hundreds of thousands of years and will remain dangerously radioactive for millions of years. Some of these long-lived radionuclides are potentially very mobile in the environment and therefore must remain permanently isolated. If these highly mobile radionuclides leak out or are released into the environment, they can contaminate the soil and water. DOE plans to isolate the radioactive components and prepare the waste for disposal through a multi-step treatment process. DOE expects this process to concentrate at least 90 percent of the radioactivity into a much smaller volume that can be permanently isolated for at least 10,000 years in a geologic repository. The portion of the waste not sent to the geologic repository will have relatively small amounts of radioactivity and long-lived radionuclides. Based on current disposal standards used by the NRC, if the radioactivity of this remaining waste is sufficiently low, it can be disposed of on site near the surface of the ground, using less complex and expensive techniques than those required for the highly radioactive portion. DOE plans to dispose of this waste on site in vaults or canisters, or at other designated disposal facilities. DOE has successfully applied this process in a demonstration project at the West Valley site in New York State. At West Valley, separation of the low-activity portion from the high-level portion of the waste reduced by 90 percent the quantity of waste requiring permanent isolation and disposal at a geologic repository. The high-level portion was stabilized in a glass material (vitrified) and remains stored at the site pending completion of the high-level waste geologic repository and resolution of other issues associated with disposal costs. The remaining low-activity portion was mixed with cement-forming materials, poured into drums where it solidified into grout (a cement-like material), and remains stored on site, awaiting shipment to an off-site disposal facility. DOE's new initiative, implemented in 2002, attempts to address the schedule delays and increasing costs DOE has encountered in its efforts to treat and dispose of high-level waste. This initiative is still evolving. As of April 2003, DOE had identified several strategies to help reduce the time needed to treat and dispose of the waste. Based on these strategies, DOE estimated that it could reduce the waste cleanup schedule by about 20 to 35 years at its high-level waste sites and save about $29 billion compared to the existing program baseline. While some degree of savings is likely if the strategies are successfully implemented, the extent of the savings is still uncertain. Many of DOE's proposals to speed cleanup and reduce environmental risk involve ways to do one or more of the following: Deal with some tank waste as low-level or transuranic waste, rather than as high-level waste. Doing so would eliminate the need to vitrify the waste for off-site disposal in the geologic repository for high-level waste. Complete the waste treatment more quickly by using additional or supplemental technologies. For example, DOE's Hanford Site is considering using up to four supplemental technologies, in addition to vitrification, to process its low-activity waste. DOE believes these technologies are needed to help it meet a schedule milestone date of 2028 agreed to with regulators to complete waste processing. Without these technologies, DOE believes waste treatment would not be completed before 2048. Segregate the waste more fully than initially planned and tailor waste treatment to each of the waste types. By doing so, DOE plans to apply less costly treatment methods to waste with lower concentrations of radioactivity. Close waste storage tanks earlier than expected, thereby avoiding the operating costs involved in maintaining the tanks and monitoring the wastes. Table 1 summarizes the estimated cost savings for each DOE site if accelerated proposals for cleaning up high-level waste are successfully implemented. Our review indicates that DOE's current estimate of $29 billion may not yet be reliable and that the actual amount to be saved if DOE successfully implements the alternative waste treatment and disposal strategies may be substantially different from what DOE is projecting. We have several concerns about the reliability and completeness of the estimate. These concerns include the accuracy of baseline cost estimates from which savings are calculated, whether all appropriate costs are included in the analysis, and whether the savings estimates properly reflect the timing of the savings or uncertainties. DOE's current lifecycle cost baseline is used as the base cost from which potential savings associated with any improvements are measured. However, in recent years, we and others have raised concerns about the reliability of DOE's baseline cost estimates. In a 1999 report, we noted that DOE lacked a standard methodology for sites to use in developing their lifecycle cost baseline, raising a concern about the reliability of data used to develop these cost estimates. DOE's Office of Inspector General also raised a concern in a 1999 review of DOE project estimates, noting that several project cost estimates examined were not supported or complete. DOE acknowledged in its February 2002 review of the cleanup program that baseline cost estimates do not provide a reliable picture of project costs. Some of DOE's savings may be based on incomplete estimates of the costs for the accelerated proposals. According to Office of Management and Budget (OMB) guidance on developing cost estimates, agencies should ensure that all appropriate costs are addressed in the estimate. However, DOE has not always done so. For example, the Idaho National Laboratory's estimated savings of up to $7 billion is based, in large part, on eliminating the need to build a vitrification facility to treat its waste. However, the waste may have to undergo an alternative treatment method before it can be accepted at a geological repository, and the Idaho National Laboratory is considering four different technologies for doing so. Nevertheless, DOE's current savings estimate reflects the potential cost of only one of those technologies. DOE has not yet developed the costs of using any of the other waste treatment approaches. DOE noted that the accelerated lifecycle estimate could likely change depending on which one of the technologies is selected and the associated costs of treating the waste are developed. According to OMB guidance, agencies should ensure that the timing of when the savings will occur is accounted for, that uncertainties are recognized and quantified where possible, and that nonbudgetary impacts, such as a change in the level of risk to workers, are quantified, or at least described. We found problems in all three areas. Regarding the time value of money, applying OMB guidance would mean that estimates of savings in DOE's accelerated plans should reflect a comparison of its baseline cost estimate with the alternative, expressed in a "present value," where the dollars are discounted to a common year to reflect the time value of money. Instead, DOE's savings estimates generally measure savings by comparing dollars in different years. For example, the Savannah River Site estimates a savings of nearly $5.4 billion by reducing by 8 years (from 2027 to 2019) the time required to process its high-level waste. Adjusting the savings estimate to present value in 2003 results in a savings of $2.8 billion in 2003 dollars. Regarding uncertainties, in contrast to OMB guidance, the DOE savings estimates generally do not consider uncertainties. For example, the savings projected in the Idaho National Laboratory's accelerated plan reflect the proposal to no longer build the vitrification facility and an associated reduction in operations costs. However, the savings do not account for uncertainties such as whether alternatives to vitrification will succeed and at what cost. Rather than reflecting uncertainties by providing a range of savings, DOE's savings estimate is a single point estimate of $7 billion. Regarding nonbudgetary impacts, DOE's savings estimates generally do not fully assess the value of potential nonbudgetary impacts, such as a change in the level of risk to workers or potential effects on the environment. OMB guidelines recommend identification and, where possible, quantification of other expected benefits and costs to society when evaluating alternative plans. For example, the Idaho National Laboratory's accelerated plan does not assess potential increases in environmental risk, if any, from disposing of the waste without stabilizing it into a vitrified form. By not assessing these benefits and risks to workers and the environment, DOE leaves unclear how important these risks and trade-offs are to choosing an alternative treatment approach. DOE faces significant legal and technical challenges in achieving the cost and schedule reductions proposed in its new initiative. On the legal side, DOE's proposals depend heavily on the agency's authority to apply a designation other than "high-level waste" to the low-activity portion of the waste stream, so that this low-activity portion does not have to be disposed of more expensively as high-level waste. The portion of DOE's order setting out criteria for making such determinations has been invalidated in a recent court ruling. On the technical side, DOE's proposals rest heavily on the successful application of waste separation methods that are still under development and will not be fully tested before being put in place. DOE's track record in this regard has not been strong; it has had to abandon past projects that were also based on promising--but not fully tested--technologies. Either or both of these challenges could limit the potential savings from DOE's accelerated cleanup initiative. DOE has traditionally managed all of the wastes in its tanks as high-level waste because the waste resulted primarily from the reprocessing of spent nuclear fuel and contains significant amounts of radioactivity. However, by separating the waste into high-level and low-activity portions and managing the low-activity portion as something other than high-level waste, DOE could use less costly and less complicated treatment approaches. DOE has developed guidelines for deciding when waste in the tanks should not be considered high-level waste. In 1999, under Order 435.1, DOE formalized its process for determining which waste is incidental to reprocessing ("incidental waste"), not high level waste, and therefore will not be sent to a geological repository for high-level waste disposal. This process provides a basis for DOE to treat and dispose of some portion of its wastes less expensively as low-level or transuranic wastes. DOE's ability to define some waste as incidental to reprocessing, and to then follow a different set of treatment and disposal requirements for that waste, is central to its overall strategy for addressing its tank waste. For example, DOE planned to use its incidental waste process to manage about 90 percent of its 54 million gallons of tank waste at the Hanford Site as low-level waste, rather than process it through a high-level waste vitrification facility. Using that approach, most of the waste would be eligible for treatment and disposal on site. Such an approach would save billions compared to treating all of the waste as high-level waste and sending it for disposal in a high-level waste geologic repository. A recent court ruling precludes DOE from reclassifying some of its waste as other than high-level waste. In March 2002, the Natural Resources Defense Council and others filed a lawsuit challenging DOE's authority to manage its wastes through its incidental waste process. The plaintiffs alleged that DOE arbitrarily established the incidental waste determination process without proper regard for the law or properly establishing a justification for this process. A primary concern of the plaintiffs was that DOE would use its incidental waste process to permanently leave intensely radioactive waste sediments in the tanks with only minimal treatment. The lawsuit alleged that DOE's incidental waste process improperly allows DOE to reclassify high-level waste as incidental waste that does not need to be treated in the same way as high-level waste. According to the plaintiffs, the Nuclear Waste Policy Act defines all waste originating from a given source--that is, from reprocessing of spent nuclear fuel--as high-level waste and requires that such waste be managed as high-level waste, yet DOE has chosen to differentiate its wastes according to the level of radioactivity and manage them accordingly. In a July 3, 2003 ruling on the lawsuit, the court agreed with the plaintiffs, stating that the portion of DOE's Order 435.1 setting out its incidental waste determination process violates the Nuclear Waste Policy Act and thus is invalid. The court's ruling could seriously hinder DOE's efforts to implement its accelerated treatment and disposal strategies. Under the ruling, DOE's incidental waste determinations cannot be implemented. Since the start of the lawsuit, DOE had not implemented any of its approved incidental waste determinations and had not yet decided whether to defer or proceed with its pending incidental waste determinations--such as those for closing tanks at the Savannah River Site and Idaho National Laboratory. If DOE appeals the court ruling, a lengthy legal process could follow. A lengthy legal process will also likely delay treatment plans for this waste and delay closing tanks on an accelerated schedule. For example, the Idaho National Laboratory planned to begin closing tanks in the spring of 2003, pending approval of an incidental waste determination that would allow DOE to close the tanks by managing tank waste residuals as low- level waste. A DOE official at the Idaho National Laboratory told us that while a delay of several months would not immediately threaten schedule dates, a delay beyond 24 months would seriously affect the site's ability to meet its accelerated 2012 date to close all of the tanks. If the court's ruling invalidating DOE's incidental waste determination process is upheld, DOE may need to find an alternative that would allow it to treat waste with lower concentrations of radioactivity less expensively. Searching for such an alternative could delay progress at all three of DOE's high-level waste sites that rely on incidental waste determinations. If DOE cannot meet its accelerated schedules, then potential savings are in jeopardy. At this point, the department does not appear to have a strategy to avoid the potential effects of challenges to its incidental waste determination authority, either from the current court ruling or future challenges. At the time of our report, DOE officials told us that they believed the department would prevail in the legal challenge. DOE believed it would be premature to explore alternative strategies to overcome potentially significant delays to the program that could result from a protracted legal conflict or from an adverse decision. Such strategies could range from exploring alternative approaches for establishing an incidental waste regulation to asking that the Congress provide legislative authority for DOE to implement an incidental waste policy. Like the ability to determine that some waste is incidental to reprocessing, the ability to separate the waste components is important to meet waste cleanup schedule and cost goals. If the waste is not separated, all of it-- about 94 million gallons--may have to be treated as high-level waste and disposed of in the geological repository. Doing so would require a much larger repository than currently planned, and drive up disposal costs by billions of dollars. Successful separation will substantially reduce the volume of waste needing disposal at the planned repository, as well as the time and cost required to prepare it for disposal, and allow less expensive methods to be used in treating and disposing of the remaining low- activity waste. The waste separation process is complicated, difficult, and unique in scope at each site. The waste differs among sites not only in volume but also in the way it has been generated, managed, and stored over the years. The challenge to successfully separate the waste is significant at the Hanford Site, where DOE intends to build a facility for separating the waste before fully testing the separation processes that will be used. The planned laboratory testing includes a combination of pilot-scale testing of major individual processes and use of operational data for certain of those processes for which DOE officials said they had extensive experience. However, integrated testing will not be performed until full-scale facilities are constructed. DOE plans to fully test the processes for the first time during the operational tests of the newly constructed facilities. This approach does not fully reflect DOE guidance, which calls for ensuring that new or complex technology is mature before integrating it into a project. Specifically, DOE's Project Management Order 413.3 requires DOE to assess the risks associated with technology at various phases of a project's development. For projects with significant technical uncertainties that could affect cost and schedule, corrective action plans to address these uncertainties are required before the projects can proceed. In addition, DOE's supplementary project management guidance suggests that technologies be developed to a reasonable level of maturity before a project progresses to full implementation to reduce risks and avoid cost increases and schedule delays. The guidance suggests that DOE avoid the risk of designing facilities concurrently with technology development. The laboratories working to develop Hanford's waste separation process have identified several technical uncertainties, which they are working to address. These uncertainties or critical technology risks include problems with separating waste solids through an elaborate filtration system, problems associated with mixing the waste during separation processes, and various problems associated with the low-activity waste evaporator. Given these and other uncertainties, Hanford's construction contractor and outside experts have seen Hanford's approach as having high technical risk and have proposed integrated testing during project development. However, DOE and the construction contractor eventually decided not to construct an integrated pilot facility and instead to accept a higher-risk approach. DOE officials said they wanted to avoid increasing project costs and schedule delays, which they believe will result from building a testing facility. Instead, Hanford officials said that they will continue to conduct pilot-scale tests of major separation processes. DOE officials said they believe this testing will provide assurance that the separation processes will function in an integrated manner. After the full- scale treatment facilities are constructed, DOE plans to fully test and demonstrate the separation process during facility startup operations. The consequences of not adhering to sound technology development guidelines can be severe. At the Savannah River Site, for example, DOE invested nearly $500 million over nearly 15 years to develop a waste separation process, called in-tank precipitation, to treat Savannah River's high-level waste. While laboratory tests of this process were viewed as successful, DOE did not adequately test the components until it started full-scale operations. DOE followed this approach, in part, because the technology was commercially available and considered "mature." However, when DOE started full-scale operations, major problems occurred. Benzene, a dangerously flammable byproduct, was produced in large quantities. Operations were stopped after DOE spent about $500 million because experts could not explain how or why benzene was being produced and could not determine how to economically reconfigure the facility to minimize it. Consequences of this technology failure included significant cost increases, schedule delays, a full-scale waste separation process that did not work, and a less-than-optimum waste treatment operation. Savannah River is now developing and implementing a new separation technology at an additional cost of about $1.8 billion and a delay of about 7 years. Subsequent assessments of the problems that developed at Savannah River found that DOE (1) relied on laboratory-scale tests to demonstrate separation processes, (2) believed that technical problems could be resolved later during facility construction and startup, and (3) decided to scale up the technology from lab tests to full-scale without the benefit of using additional testing facilities to confirm that processes would work at a larger scale. Officials at Hanford are following a similar approach. Several experts with whom we talked cautioned that if separation processes at Hanford do not work as planned, facilities will have to be retrofitted, and potential cost increases and schedule delays would be much greater than any associated with integrated process testing in a pilot facility. In addition to the potential cost savings identified in the accelerated site cleanup plans, DOE continues to develop and evaluate other proposals to reduce costs but is still assessing them. Although the potential cost savings have not been fully developed, they could be in the range of several billion dollars, if the proposals are successfully implemented. At the Savannah River and Hanford sites, for example, DOE is identifying ways to increase the amount of waste that can be placed in its high-level waste canisters to reduce treatment and disposal costs. DOE also has a number of initiatives under way to improve overall program management. However, we are concerned that the initiatives may not be adequate. In our examinations of problems that have plagued DOE's project management over the years, three contributing factors often emerged-- making key project decisions without rigorous analysis, incorporating new technology before it has received sufficient testing, and using a "fast-track" approach (concurrent design and construction) on complex projects. Ensuring that these weaknesses are addressed as part of its program management initiatives would further improve the management of the program and increase the chances for success. DOE is continuing to identify other proposals for reducing costs under its accelerated cleanup initiative. Among the proposals that DOE is considering, the ones that appear to offer significant cost savings opportunities would increase the amount of waste placed in each disposal canister. The amount of waste that can be placed into a canister depends on a complex set of factors, including the specific mix of radioactive material combined with other chemicals in the waste, such as chromium and sulfate, that affect the processing and quality of the immobilized product. These factors affect the percentage of waste than can be placed in each canister because they indicate the likelihood that radioactive constituents could move out of the immobilizing glass medium and into the environment. The greater the potential for the waste to become mobile, the lower the allowable percentage of waste and the higher the percentage of glass material that must be used. Savannah River officials believe they can increase the amount of waste loaded in each canister from 28 percent to about 35 percent, and for at least one waste batch, to nearly 50 percent. In June 2003, Savannah River began to implement this new process to increase the amount of waste in each canister. If successful, Savannah River's improved approach could reduce the number of canisters needed by about 1,000 canisters and save about $2.7 billion, based on preliminary estimates. Other efforts to increase waste loading of the canisters are also under way that, if successful, may permit further cost savings of about $1.7 billion. The Hanford Site is also exploring ways to decrease the numbers of waste canisters that will be needed by using waste forms other than the standard borosilicate glass. This effort is in a very early stage of development and cost-savings estimates have not been fully developed. In addition to site-specific proposals for saving time and money, DOE is also undertaking management improvements using teams to study individual issues. Nine teams are currently in place, while other teams to address issues such as improving the environmental review process to better support decision making have not yet been formed. Each team has a disciplined management process to follow, and even after the teams' work is completed, any implementation will take time. These efforts are in the early stages, and therefore it is unclear if they will correct the performance problems DOE and others have identified. We are concerned that these management reforms may not go far enough in addressing performance problems with the high-level waste program. Our concerns stem from our review of initiatives under way in the management teams, our discussions with DOE officials, and our past and current work, as well as work by others inside and outside DOE. We have identified three recurring weaknesses in DOE's management of cleanup projects that we believe need to be addressed as part of DOE's overall review. These weaknesses cut across the various issues that the teams are working on and are often at the center of problems that have been identified. Two of these weaknesses have been raised earlier in this testimony--lack of rigor in the analysis supporting key decisions, and incorporating technology into projects before it is sufficiently mature. The final area of weakness involves using "fast-track" methods to begin construction of complex facilities before sufficient planning and design have taken place. DOE's project management guidance emphasizes the importance of rigorous and current analysis to support decision making during the development of DOE projects. Similarly, OMB guidance states that agencies should validate earlier planning decisions with updated information before finalizing decisions to construct facilities. This validation is particularly important where early cost comparisons are susceptible to uncertainties and change. DOE does not always follow this guidance, yet no DOE management team appears to be addressing this weakness. Proceeding without rigorous review has been a recurring cause of many of the problems we have identified in past DOE projects. For example, the decision at Hanford to construct a vitrification plant to treat Hanford's low-activity waste has not been validated with updated information. Hanford's primary analysis justifying the cost of this approach was prepared in 1999 and was based on technical performance data, disposal assumptions, and cost data developed in the early to mid-1990s--conditions that are no longer applicable. Subsequent analyses have continued to rely on this data. However, since that time conditions have changed, including the performance capabilities of alternative technologies such as grout, the relative cost of different technologies, and the amount of waste DOE intends to process through a vitrification facility. DOE officials disagree with our assessment of their analysis, stating that a comprehensive analysis was conducted in the spring of 2003. However, DOE's high-level waste project team agreed that the DOE officials at Hanford had not performed a current, rigorous analysis of low-activity waste treatment options including the use of grout as an alternative to vitrification, and the team encouraged the Hanford site to update its analysis based on current waste treatment and disposal assumptions. DOE officials at Hanford told us they do not plan to reassess the decision to construct a low-activity vitrification facility because their compliance agreement with the state of Washington calls for vitrification of this waste. They also stated that vitrification is a technology needed for destroying hazardous constituents in a portion of the waste. Our work on Department of Defense acquisitions has documented a set of "best practices" used by industry for integrating new technology into major projects. We reported in July 1999 that the maturity of a technology at the start of a project is an important determinant of success. As technology develops from preconceptual design through preliminary design and testing, the maturity of the technology increases and the risks associated with incorporating that technology into a project decrease. Waiting until technology is well-developed and tested before integrating it into a project will greatly increase the chances of meeting cost, schedule, and technical baselines. On the other hand, integrating technology that is not fully mature into a project greatly increases the risk of cost increases and schedule delays. According to industry experts, correcting problems after a project has begun can cost 10 times as much as resolving technology problems beforehand. DOE's project management guidance issued in October 2000 is consistent with these best practices. The guidance discusses technology development and sets out suggested steps to ensure that new technology is brought to a sufficient level of maturity at each decision point in a project. For example, during the conceptual design phase of a project, "proof of concept" testing should be performed before approval to proceed to the preliminary design phase. Furthermore, the guidance states that attempting to concurrently develop the technology and design the facility for a project poses ill-defined risks to the project. Nevertheless, as we discussed earlier, DOE sites continue to integrate immature technologies into their projects. For example, as discussed earlier, DOE is constructing a facility at the Hanford Site to separate high-level waste components, although integrated testing of the many steps in the separations process has not occurred and will not occur until after the facility is completed. DOE, trying to keep the project on schedule and within budget, has decided the risks associated with this approach are acceptable. However, there are many projects for which this approach created schedule delays and unexpected costs. The continued reliance on this approach in the face of so many past problems is a signal of an area that needs careful attention as DOE proceeds with its management reform efforts. At present, no DOE management team is addressing this issue. Finally, we have concerns about DOE's practice of launching into construction of complex, one-of-a-kind facilities well before their final design is sufficiently developed, again in an effort to save time and money. Both DOE guidance and external reviews stress the importance of adequate upfront planning before beginning project construction. DOE's project management guidance identifies a series of well-defined steps before construction begins and suggests that complex projects with treatment processes that have never before been combined into a facility do not lend themselves to being expedited. However, DOE guidance does not explicitly prohibit a fast-track--or concurrent design and construction--approach to complex, one-of-a-kind projects, and DOE often follows this approach. For example, at the Hanford Site, DOE is concurrently designing and constructing facilities for the largest, most complex environmental cleanup job in the United States. Problems are already surfacing. Only 24 months after the contract was awarded, the project was 10 months behind schedule dates, construction activities have outpaced design work causing inefficient work sequencing, and DOE has withheld performance fee from the design/construction contractor because of these problems. DOE experienced similar problems in concurrent design and construction activities on other waste treatment facilities. Both the spent nuclear fuel project at Hanford and the waste separations facility at the Savannah River Site encountered schedule delays and cost increases in part because the concurrent approach led to mistakes and rework, and required extra time and money to address the problems. In its 2001 follow-up report on DOE project management, the National Research Council noted that inadequate pre-construction planning and definition of project scope led to cost and schedule overruns on DOE's cleanup projects. The Council reported that research studies suggest that inadequate project definition accounts for 50 percent of the cost increases for environmental remediation projects. Again, no DOE team is specifically examining the "fast-track" approach, yet it frequently contributed to past problems and DOE continues to use this approach. DOE's efforts to improve its high-level waste cleanup program and to rein in the uncontrolled growth in project costs and schedules are important and necessary. The accelerated cleanup initiative represents at least the hope of treating and disposing of the waste in a more economical and timely way, although the actual savings are unknown at this time. Furthermore, specific components of this initiative face key legal and technical challenges. Much of the potential for success rested on DOE's ability to dispose of large quantities of waste with relatively low concentrations of radioactivity on site by applying its incidental waste process. Recently, a court ruled that the portion of DOE's order setting out its incidental waste determination process violates the Nuclear Waste Policy Act and is invalid. Thus, DOE is precluded from implementing this element of its accelerated initiative. Success in accelerating cleanup also rests on DOE's ability to obtain successful technical performance from its as-yet unproven waste separation processes. Any technical problems with these processes will likely result in costly delays. At DOE's Hanford Site, we believe the potential for such problems warrants reconsidering the need for more thorough testing of the processes, before completing construction of the full-scale waste separation facility. DOE's accelerated cleanup initiative should mark the beginning, not the end, of DOE's efforts to identify other opportunities to improve the program by accomplishing the work more quickly, more effectively, or at less cost. As DOE continues to pursue other management improvements, it should reassess certain aspects of its current management approach, including the quality of the analysis underlying key decisions, the adequacy of its approach to incorporating new technologies into projects, and the merits of a fast-track approach to designing and building complex nuclear facilities. Although the challenges are great, the opportunities for program improvements are even greater. Therefore, DOE must continue its efforts to clean up its high-level waste while demonstrating tangible, measurable program improvements. In the report being released today, we made several recommendations to help DOE manage or reduce the legal and technical risks faced by the program as well as to strengthen DOE's overall program management. DOE agreed to consider seeking clarification from Congress regarding its authority to define some waste as incidental to reprocessing, if the legal challenge to its authority significantly affected DOE's ability to achieve savings under the accelerated initiative. Regarding our recommendations to conduct integrated pilot-scale testing of the separations facility at Hanford before construction is completed, and to make other management improvements to address the weaknesses I just discussed, DOE's position is that it has already taken appropriate steps to manage the technology risks and strengthen its management practices. We disagree and believe that implementing all of our recommendations would help reduce the risk of costly delays and improve overall management of DOE's entire high- level waste program. - - - - - Thank you, Mr. Chairman and Members of the Subcommittee. That concludes my testimony. I would be pleased to respond to any questions that you may have. For further information on this testimony, please contact Ms. Robin Nazzaro at (202) 512-3841. Individuals making key contributions to this testimony included Carole Blackwell, Robert Crystal, Doreen Feldman, Chris Hatscher, George Hinman, Gary Jones, Nancy Kintner-Meyer, Avani Locke, Mehrzad Nadji, Cynthia Norris, Tom Perry, Stan Stenersen, and Bill Swick. 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 Energy (DOE) oversees the treatment and disposal of 94 million gallons of highly radioactive nuclear waste from the nation's nuclear weapons program, currently at DOE sites in Washington, Idaho, and South Carolina. In 2002, DOE began an initiative to reduce the estimated $105-billion cost and 70-year time frame of this cleanup. GAO was asked to testify on the status of this initiative, the legal and technical challenges DOE faces in implementation, and any further opportunities to reduce costs or improve program management. GAO's testimony is based on a report (GAO-03-593) released at the hearing. DOE's initiative for reducing the costs and time required for cleanup of high-level wastes is still evolving. DOE's main strategy for treating high-level waste continues to include separating and concentrating much of the radioactivity into a smaller volume for disposal in a geologic repository. Under the initiative, DOE sites are evaluating other approaches, such as disposing of more waste on site. DOE's current savings estimate for these approaches is $29 billion, but the estimate may not be reliable or complete. For example, the savings estimate does not adequately reflect uncertainties or take into account the timing of when savings will be realized. DOE faces significant legal and technical challenges to realize these savings. A key legal challenge involves DOE's process for deciding that some waste with relatively low concentrations of radioactivity can be treated and disposed of on-site. A recent court ruling invalidated this process, putting the accelerated schedule and potential savings in jeopardy. A key technical challenge is that DOE's approach relies on laboratory testing to confirm separation of the waste into high-level and low-activity portions. At the Hanford Site in Washington State, DOE plans to build a facility before conducting integrated testing of the waste separation technology--an approach that failed on a prior major project. DOE is exploring proposals, such as increasing the amount of high-level waste in each disposal canister, that if successful could save billions of dollars more than the current $29 billion estimate. However, considerable evaluation remains to be done. DOE also has opportunities to improve program management by fully addressing recurring weaknesses GAO has identified in DOE's management of cleanup projects, including the practice of incorporating technology into projects before it is sufficiently tested.

"Mobility" is an overarching term that describes the ability of employees, enabled by information technology, to perform their work in areas other than an assigned office or workstation. GSA has been reporting since the late 1990s that federal agencies could do more to reduce their space needs and achieve savings by recognizing that many of their employees are able to perform their work either outside the office or in smaller workspaces. GSA has noted that mobility can improve employees' work- life balance, such as by giving employees greater control over their schedule, and can reduce employees' commuting time. GSA has also noted that federal agencies have not yet widely embraced mobility, but trends in the private sector, workforce demographics, and technology suggest that agencies could do so in the future. Organizing the workplace around mobility can reduce the size and number of dedicated individual workspaces and accommodate the same number of employees in less total physical space. For example, when agencies provide the necessary technologies, employees may perform their work in areas other than an assigned office or workstation. It may be possible for agencies to reduce their space needs when this mobility is combined with hoteling, which means that employees give up their individual, permanent space and use shared, nonpermanent workspaces when they are in the office.more of an organization's space to collaborative areas, such as conference rooms, team rooms, and informal meeting rooms. Figure 1 illustrates one possible way an agency could reduce its per-employee footprint by redesigning space to reflect mobility. Officials at the five agencies we reviewed told us they are exploring or taking actions to reduce their space needs and achieve space efficiencies. These actions depend, in part, on a mobile workforce and include increasing telework participation, introducing hoteling, and reducing the size of individual workspaces. However, some agency officials we spoke with pointed out that actions such as increasing telework participation or implementing a hoteling program may not be appropriate in all instances. Some employees, for example, may not want to telework for personal reasons or be unable to telework due to the requirements of their work--these include employees who work with sensitive or classified documents, or who interact with members of the public as part of the jobs. With respect to the agencies we reviewed: USPTO has been taking steps to reduce its space needs as a result of increased workforce mobility for more than a decade. For example, under USPTO's Patent Hoteling Program, more than 4,000 full-time employees--or about 36 percent of its workforce--telework 4 to 5 days per week. These full-time teleworking employees do not have a personal workspace in the office; instead, they use an automated system to reserve a workspace for times when they need to be in the office. According to USPTO officials, most of their employees are patent examiners who perform solitary, independent work, which makes them good candidates for teleworking. USPTO officials told us their Patent Hoteling Program has enabled USPTO to accommodate new hires without having to increase its space needs. Further, we note that there are indications that USPTO has avoided real estate costs as a result of its efforts. For example, in 2012, the Department of Commerce reported, that as a result of USPTO's Patent Hoteling Program, USPTO has avoided almost $17 million in In real estate costs annually since 2006 when the program started.addition, an analysis of the costs and benefits of USPTO's Patent Hoteling Program that USPTO conducted for fiscal year 2012 indicates that USPTO's estimated savings could be larger. However, while we reviewed documentation provided by USPTO regarding its estimated cost savings, we could not verify USPTO's estimates as some key assumptions--such as rental costs per square feet--were not supported. In designing its headquarters renovation, GSA officials told us they made extensive use of open, collaborative work environments; eliminated private offices for most employees, including senior-level employees; established a target ratio of one workstation for every two employees; and implemented a hoteling program for all employees. GSA also eliminated cubicles in favor of a workbench configuration of space, as shown in figure 2. GSA estimates that its renovation, scheduled to be complete before the end of 2013, will allow it to eliminate the need for additional leased space at four locations in the Washington D.C. area, resulting in projected savings of approximately $25 million in annual lease payments, and about a 38 percent reduction in needed office space. However, this estimate does not include the costs of GSA's renovation, which has not been completed. The IRS implemented new space standards in October 2012 that reflect changes in the mobility of its workforce and is applying these new standards as part of its space-planning efforts. Under the IRS's new space standards, employees who work out of the office an average of 80 hours or more per month no longer have a dedicated workstation and must hotel with other employees who are also out of the office an average of 80 hours or more per month. USDA set agency-wide goals for increasing the number of its employees with approved telework agreements as well as its overall telework participation rates for fiscal year 2013. Officials told us they believe that the increased use of telework could allow the department to reduce its real estate needs. In addition, officials of the Forest Service, an agency within USDA, told us that the Forest Service plans to increase telework participation, utilize hoteling, and decrease the size of individual workstations as part of its headquarters renovation. The renovated space, which formerly provided space for 420 employees, is expected to provide workspace for approximately 760 employees. Forest Service officials said the agency estimates saving at least $5 million in annual rent as a result of these efforts. However, this estimate does not include the costs for its headquarters renovation, which has not yet been completed. ATF officials told us they are developing a workstation-sharing policy for those employees who telework 3 or more days per week. According to ATF officials, this policy, which they expect to have in place in October 2013, will help ATF reduce the amount of space it needs to lease in the future. Officials at each of the five agencies we reviewed told us that they expect their efforts will result in space reductions and cost savings over time. However, it is too early to determine the specific cost savings that might be realized for actions agencies like GSA and the Forest Service are taking, given that they are in progress. Since the late 1990s, GSA has issued several reports that provide general guidance to assist with agencies' space-planning efforts in an environment of increased workforce mobility. These reports have highlighted the variety of actions that agencies can take to achieve space efficiencies and help ensure that workspaces adequately support their agencies' missions. GSA's research on how public and private sector organizations use office space shows that office space in general, and federal office space specifically, is often underutilized as employees work elsewhere. For example, in 2006, GSA reported that its surveys of federal workspaces indicate that employees are typically seated at their desks less than one-third of the average work day because they are often working elsewhere--collaborating with team members, working off-site, or in meetings--the rest of the time. In its reports, GSA has provided examples of how various federal agencies have achieved space efficiencies, including reducing their space needs, through reconfiguring the layout of existing workstations and implementing various alternative work arrangements, such as hoteling and increased use of telework. While federal agencies are ultimately responsible for addressing their changing space needs, they can also seek assistance from GSA. An official at the Forest Service's headquarters told us the Forest Service worked with GSA to measure utilization of its leased office space in the Washington D.C. area. According to the official, working with GSA helped provide the Forest Service with information on how its space was being used, and helped the Forest Service determine that it could reduce its office space needs by 25 percent. In late 2011, GSA established a Workplace Program Management Office designed to help agencies explore and implement mobility initiatives. GSA helps agencies explore mobility as part of a broader approach to space planning as well as engaging workplace strategists in developing solutions focused on mission, people, and space opportunities. For example, since 2011 GSA has offered two customized programs known as Client Portfolio Planning and National Engagements for Workplace Services. In part, these programs are designed to help agencies explore mobility and achieve space efficiencies and also determine the type of workplace configuration that best supports the accomplishment of the agency's mission. According to GSA officials, these programs also offer additional benefits, such as increased employee satisfaction. GSA officials stressed that customized programs work better because each agency has a unique mission and culture. GSA officials describe the Client Portfolio Planning program as one that will help an agency find ways to increase energy efficiency and mobility, potentially allowing an agency to reduce its need for office space. GSA collects information about the client agency's space use and needs through various instruments, including employee surveys. GSA subsequently works with the agency to identify potential opportunities and develops recommendations. According to GSA officials, having a client agency actively participate in this process is a key factor to achieving success in implementing GSA recommendations. If an agency chooses to act upon GSA's recommendations, it could take years to realize savings due to factors such as the timing of leases, the cost of reconfiguration, and negotiation with employee organizations. GSA officials told us that they work with three new agencies each year and currently have nine departments or agencies participating in this program. Unlike the Client Portfolio Planning program, GSA's National Engagements for Workplace Services program is designed to help agencies examine their operations and identify new ways of working that leverage technology and furniture solutions. According to GSA, the information obtained by participating in this program can help guide an agency's space-planning efforts and mobility initiatives and provide a business case for making changes. GSA funds initial services, such as performing space utilization studies, evaluating existing workplace conditions, developing alternative work arrangement standards, and implementing pilot programs. The client agency funds subsequent services, such as implementing developed programs and evaluating the results. To date, GSA has completed national engagements with two agencies--the Defense Contract Audit Agency and USPTO--and is in various stages of working with eight other departments or agencies. Of the agencies we reviewed, USPTO has worked with GSA under both programs. According to USPTO officials, as a result of working with GSA, USPTO set a goal of releasing space when leases expire and is exploring opportunities to consolidate additional personnel within its headquarters building. Several factors can affect what strategies or recommendations, if any, GSA's clients may decide to implement as a result of these programs. These include an agency's culture, mission, funding sources, and the flexibility it has within its existing leases. For example, USPTO stated that while it concurs with the goal of releasing space when leases expired, its future staffing projections need to be considered when evaluating any proposals. In addition, USPTO noted that it was in ongoing discussions with its employee organization over changes affecting employee workspaces. Also, not all of GSA's client agencies may complete these programs. For example, GSA officials told us that because one agency did not actively participate during the planning processes of the Client Portfolio Planning program, GSA opted to refocus its efforts on another agency that it perceived was more willing to collaborate in the planning process. GSA officials also noted that because these programs are relatively new, they involve an iterative and ongoing learning process, including the development of tools to help agencies explore the benefits of mobility. For example, GSA is in the process of developing an additional Excel-based tool aimed at helping agencies quantify the benefits and costs of increased telework participation and implementing other alternative work arrangements, such as hoteling. According to GSA officials, this tool will be available to agencies later this year. GSA is also developing tools to help agencies measure the extent to which their office space is being used on a daily basis. For example, GSA is exploring how using mobile devices such as cell phones could provide information electronically on which offices are occupied. According to GSA officials, such tools would allow agencies to collect such information without the need to rely on manually observing the workspace. Our discussions with officials from the five selected agencies and five private sector organizations identified two factors as particularly important to achieving space efficiencies in an environment of increased workforce mobility: acquiring information about how office space is currently used and gaining management and employee support. Leading practices in capital decision-making and OMB guidance have stressed that having accurate data is essential to supporting sound capital planning and decision-making. By measuring how existing space is being used, organizations are better positioned to determine how much space they really need. We have also previously found that people are at the center of any management initiative for serious change, and that leading practices for managing change include ensuring that top leadership is behind transformations and that employees are involved throughout the transformation. Officials from three of the agencies we reviewed told us that organizations must first obtain the data necessary to inform their decision-making about future space needs; such data might include current information on space utilization rates, telework participation, and employee views about alternative work arrangements. For example, GSA officials noted that to obtain this type of information, they count heads (i.e., they manually count the number of offices occupied) and solicit employee opinions on proposed workspace changes. Officials at the other two agencies told us they take similar steps. For example, Forest Service officials told us that when planning to consolidate space in the Washington, D.C., area, they performed head counts twice a day for several weeks to determine the feasibility of implementing hoteling. According to these officials, their data showed that 60 percent of employee workspaces were occupied at any given time. They then used that knowledge to reduce the number of workstations in their renovated space. IRS officials told us that when their agency implemented a new collaborative workspace design at its headquarters, they held focus groups to obtain employee input on various design features. Officials from each of the five private sector organizations we contacted also told us that when working to incorporate elements of mobility into space planning, either for a client or their own organization, data on how employees currently use their space is necessary for informed decision- making. For example, a representative of one organization told us that when working with a client, his organization first acquires data on how that client uses its space by examining costs, office density, and space utilization rates; within his own organization, they perform daily head counts to determine how their office space is being utilized. Similarly, a representative of another organization told us that he advises clients seeking to make physical changes to their workplace that they must first do some research to understand the current level of office utilization. When introducing physical space changes associated with increased workforce mobility--including the loss of dedicated workspace-- organizations may encounter resistance from agency leaders, managers, employees, or employee organizations. Officials from all of the agencies and the private sector organizations we contacted described redesigning space to reflect mobility as a significant change. Several noted that employees have traditionally regarded their workspace as their own personal space and that mobility initiatives can result in reduced personal space for employees. Some pointed out that managers also may be uncomfortable with mobility initiatives for various reasons. For example, managers may be uncomfortable supervising employees who work outside the office, or they may perceive a reduction in office space to mean that they or their programs have become less important to the organization. To implement changes, agencies we reviewed, as well as private sector organizations we contacted, have taken a number of actions to gain support. For example, IRS officials told us they worked with agency leadership as well as their union, when they implemented new space standards that reflect changes in the mobility of their workforce. IRS officials told us that they used budgetary pressures as the primary driver to help both managers and employees understand why they needed to substantially change their view of personal workspace. Similarly, Forest Service officials told us they worked with their employee organization when negotiating the space-sharing arrangements they plan to use in their renovated space. Representatives from the private sector told us their organizations took similar steps. For example, a representative of one organization told us that his organization advises clients to ensure, when downsizing offices, that employees understand the link between reducing real estate costs and budgetary sustainability. A representative from another organization told us that when his organization provides space-planning services for clients, it always ensures that employee organizations are consulted. Officials from the agencies we reviewed, as well as private sector organizations we contacted, told us that management needs to gain organizational support for changes and cannot impose change on managers and employees. In their opinion, organizations that have tried to impose such change are less likely to succeed. We provided a draft of this report to OMB, GSA, IRS, USDA, USPTO, and ATF for review and comment. USPTO provided written comments, which are reprinted in appendix I. In its comments, USPTO stated that a February 2012 audit performed by the Department of Commerce's Inspector General indicated that USPTO has avoided real estate costs as a result of its Patent Hoteling Program. USPTO also stated that this audit indicated that further analysis would point to increased cost avoidance and savings, and that USPTO has since performed an analysis of its Patent Hoteling Program's costs and benefits. As noted in our report, we reviewed USPTO's analysis of the costs and benefits of its Patent Hoteling Program. While USPTO's analysis provided estimates for some of the Patent Hoteling Program's costs and benefits, we found that some key assumptions USPTO made--such as rental costs per square feet--were not supported. Accordingly, we could not verify USPTO's estimates. USPTO also provided technical comments, which we incorporated where appropriate. GSA, IRS, and USDA provided technical comments that we incorporated where appropriate. ATF and OMB did not have comments on the report. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Director of OMB; the Administrator of GSA; the Secretary of Agriculture; the Acting IRS Commissioner; the Acting Under Secretary of Commerce for Intellectual Property and Acting Director of the USPTO; and the Director of ATF. Additional copies will be sent to interested congressional committees. We will also make copies available to others upon request, and the report is available at no charge on the GAO website at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-5731 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. David J. Wise, at (202) 512-5731 or [email protected]. In addition to the contact named above, Keith B. Cunningham (Assistant Director), Russell C. Burnett, Colin J. Fallon, Robert K. Heilman, Wesley A. Johnson, Terence C. Lam, John P. Robson, James R. Russell, Crystal Wesco, and Nancy Zearfoss made key contributions to this report.

New technologies and the adoption of alternative work arrangements have increasingly enabled employees to perform some aspects of their work outside of the traditional office environment. As requested, GAO examined how aspects of mobility have affected agencies' space needs. This report identifies (1) actions selected agencies have taken as a result of increased workforce mobility to reduce their space needs; (2) the assistance GSA provides federal agencies that are exploring reducing their space needs, at least partly in response to increased workforce mobility; and (3) factors selected agencies and private sector organizations viewed as important to achieving space efficiencies in an environment of increased workforce mobility. GAO focused its review on five agencies: GSA, the Department of Agriculture, the Internal Revenue Service, the Department of Commerce's USPTO, and the Department of Justice's Bureau of Alcohol, Tobacco, Firearms and Explosives. Altogether, these five agencies reported holding or leasing more than 400-million square feet of office space in fiscal year 2011. GAO reviewed agency-specific guidance and other documents related to space planning and conducted interviews with key officials from the selected agencies. GAO also interviewed representatives from five private sector organizations to obtain their perspectives on how the private sector plans for its future space needs. The five selected agencies GAO reviewed are either exploring or taking actions such as increasing "telework" participation and implementing a "hoteling" program--which means that employees give up their individual, permanent space and use shared, nonpermanent workspaces when they are in the office-- to reduce their space needs. For example, as part of its headquarters renovation, the General Services Administration (GSA) is making use of open, collaborative work environments and implementing a hoteling program for all employees. In addition, the Department of Agriculture set agency-wide goals for increasing the number of its employees with approved telework agreements as well as its overall telework participation rates for fiscal year 2013. The U.S. Patent and Trademark Office (USPTO) has taken steps to reduce its space needs as a result of increased workforce mobility for more than a decade, and there are indications that USPTO has avoided real estate costs as a result of its efforts. However, GAO was unable to obtain sufficient information to determine the accuracy and validity of USPTO's estimated cost savings. Beyond USPTO, the agencies GAO reviewed have not yet realized space reductions or cost savings because their efforts are too new. In addition, officials at the selected agencies pointed out that increasing telework participation or implementing a hoteling program may not be appropriate in all instances, such as for employees who work with sensitive or classified documents or who interact with members of the public. GSA offers general guidance as well as customized programs to help guide agencies' space-planning efforts in an environment of increased workforce mobility. In this guidance, GSA has shown that agencies can achieve space efficiencies by reconfiguring the layout of existing workstations and implementing various alternative work arrangements. While agencies may take steps on their own to address their changing space needs, GSA has offered two customized programs since 2011 to assist agencies. These programs are designed to help agencies explore mobility and achieve space efficiencies; however, GSA's client agencies determine whether to act on GSA's recommendations, and it may take years to realize savings due to factors such as the timing of leases and the cost of reconfiguration. GAO's discussions with officials from the selected agencies and private sector organizations identified two factors--acquiring information about the current utilization of office space, and gaining the support of management and employees--that were frequently viewed as important for an organization to achieve space efficiencies in an environment of increased workforce mobility. By measuring how existing space is being used, organizations are better positioned to determine their future space needs. Similarly, by taking steps to obtain the support of leadership and employees, organizations can help facilitate the acceptance of mobility initiatives. Officials described the loss of dedicated workspace resulting from increased mobility as a significant change in the workplace and indicated that organizations that try to impose such changes are less likely to succeed than those that build organizational support. GAO makes no recommendations in this report. USPTO commented on the estimated cost savings of its hoteling programs, as discussed in this report.

NASA established DSN over 40 years ago with the intention of coordinating all deep space communications through a single ground system to improve efficiency and minimize duplication. Today, DSN consists of communications antennas at three major sites around the world--Goldstone, Calif.; Madrid, Spain; and Canberra, Australia. These sites are specifically positioned to offer complete coverage to deep space mission craft regardless of their positions around the Earth. DSN officials informed us that while contractor personnel operate all three sites, NASA owns the physical assets and is responsible for funding all operations at the sites. Each site has a 70-meter antenna, which can provide communications with the most distant spacecraft, and several smaller antennas that can facilitate communications with closer spacecraft or can be arrayed to communicate with more distant missions. NASA's Jet Propulsion Laboratory is responsible for management of DSN and also serves as the distribution point for data collected from deep space. DSN supports an average of 35 to 40 deep space missions each year. According to program officials, as a mission is being developed, a representative from the DSN program works with the mission team to establish the amount of coverage the mission will need from DSN assets during its lifetime. This coverage includes the amount of time per day for routine communications and also critical coverage of major mission events. In most cases, missions must negotiate with the DSN program because they desire more coverage than DSN can provide. Once the amount of coverage time is established and major mission events are scheduled, DSN commits to that coverage in a Service Agreement with the mission. Within the agreement, DSN commits to providing coverage for 95 percent of the time agreed to with its mission customers, while the remaining 5 percent allows for unexpected disruptions during that coverage. This 95 percent commitment almost guarantees that all critical mission events will be covered without disruption. Once this is put into place, missions are generally free to trade time amongst themselves if priorities change or a particular mission gets kicked off the network due to an unexpected anomaly in the system. The missions that DSN supports are not charged for their usage of the system, unless they require a unique technology that DSN must add to its system in order to provide coverage. This is a relatively rare phenomenon, however. DSN is primarily funded through its managing entity, the Science Mission Directorate, and receives resources consistent with its performance the previous year and its previous year's budget. DSN works in conjunction with NASA's other space communications assets to provide coverage to missions at all distances from the Earth. The Ground Network provides communications capabilities to spacecraft in low-Earth orbit. Additionally, the Space Network, including the Tracking and Data Relay Satellite System, is an Earth-based satellite relay system that also facilitates missions in low-Earth orbit. In order for a spacecraft to receive support from all of these communications assets, NASA must ensure they are coordinated and can provide the capabilities for which they are intended. Throughout its history, NASA has had different management structures trying to achieve this coordination. According to NASA officials, from the Apollo missions in the 1960s through 1995, space communications was managed through an agency wide communications entity with budgetary authority to provide appropriate investments in system capabilities. In 1995, this management and budget authority was devolved to a central contract managed out of the Johnson Space Center in an effort to cut costs and streamline maintenance to the assets. The savings from this realignment were never realized for the agency and the communications assets were severely underfunded as a result of how they were managed under this arrangement. Subsequently, management and budget authority for these assets were brought back to NASA headquarters in 2001 and aligned with the mission directorate responsible for the customers each asset served. NASA then created the Space Communication Coordination and Integration Board to oversee the technical integration of these assets into a seamless space communications architecture. This is how space communications assets, including the DSN program, are managed currently at NASA. The NASA Authorization Act of 2005 contains a requirement that the NASA Administrator submit a plan for updating NASA's space communications architecture for low-Earth orbital operations and deep space exploration so that it is capable of meeting NASA's needs over the next 20 years. This plan is due to be submitted to the House Committee on Science and the Senate Committee on Commerce, Science and Transportation no later than February 17, 2007. In addition, the Conference Report accompanying the Science, State, Justice, Commerce and Related Agencies Appropriations Law, 2006 requires that NASA include a 10-year funding profile for DSN in its fiscal year 2007 budget request. DSN is currently able to meet most requirements of its existing workload. However, according to program officials, DSN's current operational ability is no predictor of future success, and they have significant concerns about the ability of the system to continue to meet customer requirements into the future. These concerns are based on the system's aging infrastructure and projected additional workload on top of servicing existing missions. DSN suffers from an aged, fragile infrastructure. Significant parts of that infrastructure--including many antennas--were first built in the 1950s and 1960s and are showing their age. DSN program officials stated that the Goldstone complex is down, on average, 16 hours per week for maintenance and repairs due to problems associated with its age. While Goldstone contains some of the oldest equipment in the system and the poor condition of much of its equipment characterizes the underlying fragility of the network, operational disruptions occur across the entire network. For instance, the 70-meter dishes are widely regarded by program officials and mission customers as increasingly fragile, which calls into question expectation of their continued reliability. In fact, mission customers shared similar concerns that DSN's infrastructure is not in the appropriate condition that it should be to support their missions. With increasing use of these assets, they fear service will only deteriorate and more disruptions will occur during service to their missions. Program officials and mission customers provided some examples, as follows, of disruptions that have occurred during service as a result of infrastructure deterioration: During a critical event for the Deep Impact Mission on July 4, 2005, corrosion of the sub reflector on the 70-meter dish at DSN's Madrid site caused an unexpected disruption in service. In response, program managers had to shift coverage to alternative antennas. While they were able to provide adequate coverage of the event for the Deep Impact Mission, the shift to back-up antennas forced other users off at that time, which meant they lost coverage. In October 2005, a significant power disruption caused by corrosion to a major power line resulted in multiple antennas at the Goldstone complex going offline, resulting in several hours of downtime and a subsequent loss of scientific data. In November 2005, failure of a prime network server resulted in several hours of unexpected downtime, which in turn caused considerable loss of data to four research projects. During this anomaly, the Stardust, Mars Reconnaissance Orbiter, Mars Odyssey and Mars Global Surveyor missions lost a total of 241 minutes of coverage to their missions. Program officials also expressed concern about the possibility of massive antenna failure due to metal fatigue. Ultimately, such a failure would result from a partial or total collapse of an antenna structure. Although no DSN antenna has yet collapsed from fatigue, an antenna in West Virginia similar in design and age to those already used by the DSN program collapsed unexpectedly in 1988. DSN program managers are in the process of finding an engineering firm to conduct a survey of the program's antenna assets to assess their structural reliability. Beyond that action, program officials rely mostly on their experience and visual observations to assess the condition of these assets. Deferred maintenance also poses a significant challenge to the sustainability of DSN assets. Since 2002, the program has consistently deferred approximately $30 million in maintenance projects each year. These projects are commonly associated with infrastructure that is not directly related to system performance and have been given lower priority when more pressing needs limit the system's ability to provide coverage for its customers. For example, several roadway, water and electrical projects at the Goldstone facility have consistently been deferred due to the need to address system maintenance needs considered to have become more pressing. Although the program does seek to prioritize its most pressing projects and direct resources to them once its budget is allotted, operating aging facilities and systems inevitably results in the need for new repairs rising unexpectedly, which forces program managers to constantly have to juggle priorities to address them. DSN also faces increasing competition between new and old users for coverage time on the system. There is a growing demand for a level of service that DSN is not likely to be able to provide to its customers. DSN promises 95 percent availability to its mission customers for routine mission coverage. According to program officials, the remaining 5 percent is reserved for unexpected failures and downtimes during mission coverage. They said DSN can maintain its 95 percent commitment to its mission customers within its current mission set. However, as that mission set increases, officials become less confident in their ability to continue to achieve that level of service. New missions are continuing to increase as they have in the past--by some 350 percent over the last 20 years. By the year 2020, DSN is projected to be required to support twice the number of missions it does currently. DSN officials thus find themselves faced with the need to balance this new demand with an equally compelling demand from existing "legacy" missions that have remained operational beyond their original lifetimes but are still returning science data and need to be maintained. Such legacy missions include the following: The Voyager missions--two similar spacecraft launched in 1977 to conduct close-up studies of Jupiter and Saturn, Saturn's rings, and the larger moons of the two planets--are still supported by DSN today even though their primary missions were completed in 1989. Each mission receives approximately 12 hours of coverage each day using one of the network's 70-meter dishes. The Mars Rover missions, although scheduled to end their prime missions in mid-2004, have gone well beyond their forecasted lifetimes. Program officials pointed out that even though they did not have a role in the decision to extend the missions, the program continues to allocate funds to support their operations through present day. It is up to the DSN program to determine how best to provide service to its many mission customers, but this task is becoming increasingly complex. The effort to balance conflicting program priorities is a continuing struggle for DSN program managers. So far, DSN has been able to avoid stressing the capacity of the system because a select number of missions it was scheduled to support were either canceled or failed before requiring significant support. However, according to program officials, if the number of missions the system is scheduled to support begins to increase, the amount of service the system can provide will be limited. Further, officials expect that any commitments to provide support for manned missions under the coming Vision for Space Exploration, in addition to what it currently must support, will prevent them from being able to provide necessary coverage to new mission customers or maintain the service guarantee of 95 percent availability to any customer. In addition, the DSN program is planning to begin decommissioning its 26 meter antennas in 2006 due to costs of maintenance associated with their age. Officials told us that they believe the program's remaining 34- and 70-meter antennas will be unable to sustain the anticipated workload in the very near future, and one projection is that the system will reach capacity in 2013. If this occurs, the opportunity to continue adding new mission customers will be limited and the potential for lost deep space science is significant. DSN's future utility is also in question because NASA currently does not have a mechanism in place to match funding for space communications assets with program requirements, such as infrastructure and technology development needs, from an agency wide perspective. At the end of 2003, NASA created the Space Communication Coordination and Integration Board with the intent of reviewing requirements for integration of space communications assets into a seamless architecture, but according to agency officials, the Board does not review individual program requirements or have any authority over the allocation of resources to the space communications programs. Instead, funding for space communications capabilities is controlled by the individual communications programs and their associated mission directorates, who may not consider agency wide goals when making investments. This disconnect between requirements and resources has caused program level requirements to be given low priority by the agency, which in turn has forced programs to make tradeoffs to maintain functionality and has offered the potential for programs to make investments that may undercut agency wide goals for space communications. In light of this problem, NASA has recently established a task group to identify ways to better address how to match agency requirements with program resources. At the end of 2003, NASA created the Space Communication Coordination and Integration Board to establish technical requirements for the integration of NASA's space communications assets into a seamless communications architecture for the future. According to NASA officials, the Board is technical in nature and not intended to manage space communications, but rather focus on integrating the architecture. Further, officials said that no other agency-level entity reviews requirements for individual communications programs or establishes broader mission requirements for space communications. As a result, they informed us that program requirements, such as infrastructure and technology development needs, have consistently been given low priority by the agency. They said that the DSN program is forced to make tradeoffs to maintain functionality, but it is not able to fully address its requirements and has concerns about its ability to continue supporting the operations for which it is entrusted. Currently, identification of appropriate investment resources (in line with decisions made about the architecture) is performed by the mission directorate with responsibility over the program and the program's customers. There is no overarching entity for space communications management at NASA to consider the specific investment needs of the programs and direct funding accordingly. And while all programs are supposed to consider the broader needs of the agency and other programs in their investment decisions, officials informed us that there is no formal oversight mechanism to ensure that investment decisions made at the program level are in line with those broader requirements. As a result of this mismatch between agency level requirements and investment decisions for the programs that support those requirements, NASA has limited ability to prevent competing programs from making investments that, while supporting individual program requirements, undercut broader agency goals. For example, several agency officials noted both the Deep Space Network and the Ground Network programs recently were on a path to develop separate array technologies to support overlapping requirements for the same lunar missions, which would have undercut agency efforts to create a seamless, integrated architecture for space communications and would have represented unnecessary duplication of effort and added costs. But officials said these pilot efforts were terminated after much of the planning for them had taken place. However, the termination was a result of budget constraints and lack of clearly defined requirements, as opposed to a decision by an authority with an agency wide investment perspective. In addition, another potential DSN customer--the Solar Dynamic Observatory--recognized that DSN could not provide it with the service it needed, so it invested in its own communications antennas to provide the coverage it needed. Such duplication undermines the original intent of DSN to be an efficient, single network for NASA's deep space communications on Earth. During the course of our review, NASA established a task group to address how best to manage the agency's space communications programs so program resources are invested in a way that supports agency wide goals. The task group has yet to make any recommendations to address these issues. Currently, the task group must consider two primary competing viewpoints within the agency. One viewpoint holds that the current structure of space communications, in which mission directorates and programs control resources, is ideal because it allows communications support to be controlled by the same entity that establishes and funds the programs that use the system. For example, DSN is funded by the Science Mission Directorate, which also supports the vast majority of missions that the DSN serves. Some agency officials believe that this approach provides better customer service, since resource trade-offs can be made by those closest to both the customers and the service provider. However, under this current structure, maintenance requirements for DSN have consistently been deemed a low priority. Alternatively, others in the agency point to the success of a more centralized space communications structure, as was in place before 1995. Under this structure, resource decisions can be made in light of an overall agency perspective on which communications program can best fulfill agency wide communications goals. However, one official suggested that under this structure, maintenance requirements for DSN could become an even lower priority as the requirements of other programs are considered. In the former case, a program like DSN must compete for funding against individual missions. In the latter case, a program like DSN will compete for funding against other space communications assets. By establishing DSN as the primary communications system for supporting deep space missions, NASA will be reliant on the system for mission successes--both now and in the distant future. By virtue of this reliance, NASA has a responsibility to ensure that the system is operationally sound and meets user needs. The system faces challenges that call into question how well it will continue to be able to adequately support deep space missions. The potential for more significant system failure and major disruption to the deep space exploration program, both manned and unmanned, looms large if nothing is done to address the condition of DSN. As NASA continues to depend on the program for meeting its deep space communications requirements, the program and the agency will have to determine what those requirements are and how they can best meet those requirements with a viable system for the future. Establishing these requirements in terms more comprehensive than just being able to provide coverage for 95 percent of committed time will provide for a better understanding of what is needed by the program. Furthermore, quantification and characterization of such requirements in more comprehensive terms will be critical to the development of a plan as required under the 2005 NASA Authorization Act. As NASA prepares to take on extensive exploration initiatives under the President's Vision for Space Exploration, the agency needs to position itself to make investment decisions from an agency-wide perspective. Currently, because NASA does not consider program level requirements when planning agency wide commitments for space communications, many of these program requirements, such as infrastructure needs, are not being addressed, which means they will worsen and inhibit the agency's ability to support future space exploration initiatives. Also, since space communications programs have the ability to direct resources to investments, investments made may not support agency wide requirements conducive to a broader and possibly more efficient space communications capability for the agency. As NASA begins to commit more resources to deep space exploration in the future, the agency must ensure that it properly addresses the communications needs of all of its missions and makes investments from that viewpoint. NASA has the opportunity to address this issue through a newly created task group charged with analyzing how this can best be achieved. To better position the Deep Space Network to meet existing workload challenges and prepare the network for future deep space communications responsibilities, we recommend that the NASA Administrator direct DSN to (1) identify total program requirements for deep space communications capabilities for the near and long term, in terms better defined than the single coverage commitment of 95 percent, (2) determine the extent to which the program's current capabilities can support those identified requirements and (3) develop a plan to address any gap between those capabilities and requirements and identify the estimated costs of any enhancements needed. As NASA's task group on space communications considers how program requirements can be better integrated into overall agency goals for space communications capabilities, we recommend that the NASA Administrator direct the group to consider the following in carrying out its task: (1) identify what priority program-level requirements have in agency-level decisions affecting space communications, (2) determine how program- level requirements for space communications programs can be identified and communicated to agency-level decision makers, and (3) establish how the agency can identify program-level investments needed to address program requirements that support agency wide goals for space communications and how to coordinate those investments to avoid duplication and additional costs. While considering these recommendations and the task at hand, the group should also consider the importance of having shared knowledge and communication about these issues openly with all entities involved. NASA concurred with our recommendations. In commenting on the draft of our report, NASA pointed out that it already had a plan in place that addresses our first set of recommendations, namely the need for the agency to identify all DSN requirements for the near and long-term, how it will meet those requirements, and identify costs associated with meeting those requirements. While we recognize that NASA has a DSN Roadmap, the agency still lacks a detailed strategy for addressing DSN needs for the future that includes all program requirements, i.e. deferred maintenance, in addition to the already projected mission needs. Furthermore, the DSN Roadmap does not include estimation of costs and does not address the impact of unmet needs on its ability to meet mission requirements. NASA also commented that the DSN has not been responsible for the loss of missions. Our report does not state that missions were lost because of the DSN. However, NASA officials provided GAO evidence that mission science had been lost as a result of disruptions in the operation of DSN, and that point is characterized in the report. As agreed with your offices, unless you announce its contents earlier, we will not distribute this report further until 30 days from its date. At that time, we will send copies to the NASA Administrator and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are acknowledged in appendix III. To identify the challenges facing NASA's Deep Space Network program in meeting its current and planned space communications workload, we performed the following: We obtained and analyzed NASA documents and briefing slides related to the operation and capabilities of the Deep Space Network, including budget submissions and funding breakouts, workforce projections, missions lists, fiscal year 2004 and fiscal year 2005 Program Operating Plans, the DSN Strategic Roadmap, mission agreements, the memorandums of agreement with the host countries of the foreign DSN sites, a 2004 NASA-wide facilities condition assessment, deferred maintenance information and work breakdown system data, risk assessments for various aspects of the network, return on investment analyses for various technology upgrades and system performance and reliability data, including records of downtimes. We reviewed the NASA Vision for Exploration roadmaps and the National Research Council reports on those roadmaps, the Vision for Exploration Architecture report, and NASA Strategic Plan for 2005 and Beyond for information about the role of DSN in the Vision. We also reviewed previous GAO reports on infrastructure investment, technology development and deferred maintenance. We interviewed NASA mission officials to receive their feedback on the performance of DSN, including performance shortfalls, in meeting their needs and collected information related to those specific missions. We also discussed the nature of challenges experienced by the program through interviews with NASA and Jet Propulsion Laboratory officials and DSN contractor personnel and received written and oral responses from all. To determine the extent NASA is integrating DSN into its space communications plans for the future, we performed the following: We collected and analyzed information related to space communications architecture management at NASA, including the NASA 4.0 Communication and Navigation Capability Roadmap, space communication architecture plans, descriptions of the various space communications assets intended to play a role in the future architecture, Memorandum of Agreement for the Management of NASA's Space Communications Networks, and a description of the history of space communications management at NASA. We held discussions with NASA space communications officials about future space communications architecture requirements, what assets the architecture will include, and how its development is being managed by the Space Communication Coordination and Integration Board (SCCIB) and Space Communications Architecture Working Group (SCAWG). We reviewed the charter of the SCAWG. We also discussed the budget development and execution process for DSN at the Science Mission Directorate (SMD) level, and how that impacts integration of the DSN into the overall agency space communications architecture. We met with NASA's Space Communications Organization Study Group, which was established during the course of our review, to discuss its task of identifying options for the management of space communications for the future of NASA space exploration. We also reviewed the Terms of Reference (TOR) for this group to better understand its goals and time frames. To accomplish our work, we visited and interviewed officials responsible for DSN operations at NASA Headquarters, Washington, D.C.; the Jet Propulsion Laboratory in Pasadena, Calif.; and ITT Industries contractor officials at their offices in Monrovia, Calif., and at the DSN site complex in Goldstone, Calif. At NASA Headquarters, we met with officials from the Science Mission Directorate, including lead representatives from the Deep Space Network program, the Exploration Missions Directorate and the Space Operations Mission Directorate, including the Space Communications Architecture Working Group. We also met with DSN mission officials from the Mars Rovers, Deep Impact, Cassini-Huygens, and Stardust programs. We conducted our review from May 2005 to April 2006 in accordance with generally accepted government auditing standards. In addition to the individual named above, Brendan Culley, James Morrison, Sylvia Schatz, Robert Swierczek, Trevor Thomson, Hai Tran and Thomas Twambly made key contributions to this report.

The President's Vision for Space Exploration calls for human and robotic missions to the Moon, Mars, and beyond. In response, over the next two decades, NASA may spend $100 billion on new technologies and facilities that will require reliable ground communications to achieve those missions. Presently, that communications capability is provided by NASA's Deep Space Network--a system of antennas located at three sites around the world. However, the Network faces challenges that may hinder its provision of current and future mission support. This report discusses (1) the significant operational challenges faced by the Deep Space Network and (2) the extent to which NASA is integrating the Network into its future communications plans. While NASA's Deep Space Network can meet most requirements of its current workload, it may not be able to meet near-term and future demand. The system--suffering from an aging, fragile infrastructure with some crucial components over 40 years old--has lost science data during routine operations and critical events. In addition, new customers find they must compete for this limited capacity, not just with each other, but also with legacy missions extended past their lifetimes, such as NASA's Voyager, that nonetheless return valuable science. Program officials doubt they can provide adequate coverage to an increasing set of new mission customers, especially if they increase dramatically under the President's Vision. The Deep Space Network's future utility is also in question because NASA does not currently match funding for space communications capabilities with agency wide space communications requirements. While NASA created an agency level entity to review the technical requirements for integrating assets like the network into an agency wide space communications architecture for the future, that entity does not address program level requirements nor influence investment decisions. Control over such requirements and funding remains with the mission directorates and programs themselves. This disconnect allows programs to invest in capabilities that may undercut agency wide goals for space communications. After this review was initiated, NASA began to study how to better manage this gap between agency-level requirements and program-level funding, but no recommendations for action have yet been proposed.

We found that BSEE leadership has started several initiatives to improve its safety and environmental oversight capabilities, but its limited efforts to obtain and incorporate input from within the bureau have hindered its progress. Since 2012, BSEE has sought to augment its annual inspection program with a risk-based inspection program, but limited efforts to obtain and incorporate input from experienced regional personnel have hindered BSEE's ability to develop and implement the risk-based program. In 2012, BSEE began an initiative to develop an approach for conducting inspections of offshore facilities based on the level of risks they posed. However, to date, BSEE has not successfully implemented this supplemental risk-based inspection capability. BSEE leadership led the development of the risk-based program; however, according to officials, leadership developed the program with little input from regional personnel. Officials in the Gulf of Mexico region with knowledge and experience conducting previous risk-based inspection efforts told us that they were not apprised of key program products (e.g., a risk model developed by Argonne National Laboratory) until the products were well under development and that they were given little opportunity to provide comment on them. As a result, BSEE first identified deficiencies with its risk-based program during pilot testing in 2015, rather than working closely with experienced regional personnel earlier in the process to obtain their input to identify potential deficiencies and remediate them during program development. In turn, BSEE leadership's limited efforts to obtain and incorporate input from regional staff and management during development of the program led to poor pilot results. In response, BSEE has changed the focus of the program and reduced expectations for its initial approach to risk-based inspections. In 2016, BSEE conducted an environmental stewardship initiative comprised of two simultaneous environmental risk reduction efforts, but we found that these efforts were overlapping, fragmented, and uncoordinated, which reduced the effectiveness of the initiative and hindered the implementation of identified improvements. These efforts were led and coordinated by BSEE leadership in the Environmental Compliance Division at headquarters, which BSEE created in 2015 to establish national strategic goals and procedures for the bureau's environmental compliance activities. However, the efforts were overlapping because BSEE leadership tasked both with the same five objectives. The two efforts were also fragmented because BSEE leadership did not effectively coordinate their execution, which hindered information sharing between them that could have enhanced their value. Moreover, because the efforts were uncoordinated, they resulted in the inefficient use of resources. In our report being released today, we recommended that the Secretary of the Interior direct the Assistant Secretary for Land and Minerals Management, who oversees BSEE, to establish a mechanism for BSEE management to obtain and incorporate input from bureau personnel and any external parties, such as Argonne National Laboratory, that can affect the bureau's ability to achieve its objectives. In its written response to our report, Interior neither agreed nor disagreed with our recommendation. Interior stated that the recommendation reflects an ongoing BSEE commitment and that BSEE and Interior agree with the concept laid out therein. However, Interior's comments do not discuss any specific actions taken or under way to do so. Without higher-level oversight within Interior establishing a mechanism for BSEE management to obtain and incorporate input from personnel within the bureau and any external parties that can affect the bureau's ability to achieve its objectives, BSEE's risk-based inspection program and Environmental Stewardship efforts are likely to experience continued implementation and efficacy problems. We found that since 2013, BSEE has begun four strategic initiatives to improve its internal management--two to improve its decision-making capabilities and two to enhance communication and transparency--but their successful implementation has been hindered by limited leadership commitment and not addressing factors contributing to trust concerns. In 2013, BSEE began an initiative to develop an Enterprise Risk Management (ERM) framework but has not fully implemented it as a management tool. BSEE has made some progress over the past 3 years in implementing an ERM framework but has not completed the actions necessary to fully implement it. In conjunction with a contracted ERM support consultant, BSEE developed an iterative ERM cycle that includes six steps. In 2014, BSEE identified and prioritized 12 strategic risks that cover the lifecycle of BSEE operations. BSEE planned to verify the prioritization of its top several strategic risk treatments by July 2016 but did not do so. BSEE officials told us that the bureau halted ERM implementation while it acquired automated ERM software. The officials said BSEE planned to finalize a plan for its prioritized risk treatments by August 2016 but did not do so because of the temporary halt to ERM implementation. Likewise, they said BSEE intended to promulgate a monitoring plan by October 2016 but did not do so because of the aforementioned temporary halt to ERM implementation. However, in November 2016, BSEE determined that it would reinitiate ERM implementation simultaneous to the implementation of software. In 2014, BSEE began an initiative to develop performance measures for its programs but has not implemented any measures. BSEE's October 2012 Strategic Plan-Fiscal Years 2012-2015 stated that the bureau must develop performance measures to assess the results of its programmatic efforts as well as its ability to reduce the risks of environmental damage and accidents. BSEE's initiative to develop performance measures has been comprised of three sequential efforts, in 2014, 2015, and 2016. For the first two efforts, the bureau contracted with a consultant. BSEE terminated the first effort, and although the consultant delivered a report identifying 12 performance measures during the second effort, BSEE officials said they were not implementing them due to a variety of factors, including data availability limitations. For its third effort to develop performance measures in 2016, BSEE headquarters officials told us that this initiative, which is being conducted internally by BSEE personnel, represents the beginning of a multi-year effort to implement a performance management system. BSEE initially planned to finalize its internally developed list of performance measures in February 2016 but did not meet this deadline. In December 2016, BSEE completed a report that discusses 17 performance measures and the bureau's plans for future iterations of their development. We have previously reported on BSEE's struggles to effectively implement internal management initiatives. Specifically, in February 2016, we found that since its inception in 2011, BSEE had made limited progress in enhancing the bureau's investigative, environmental compliance, and enforcement capabilities. Likewise, with regard to its ongoing strategic initiatives to improve its decision-making capabilities, more than 3 years have passed since BSEE initiated the development of its ERM framework, more than 2 years have passed since the bureau prioritized the strategic risks it faces, and more than 4 years have passed since it identified the development and implementation of performance measures as an organizational need. In that time, BSEE initiated several efforts to develop and implement such measures, and although BSEE has developed measures, it has yet to fully implement any. One of our five criteria for assessing whether an area can be removed from our high-risk list is leadership commitment--that is, demonstrated strong commitment and top leadership support. An example of leadership commitment is continuing oversight and accountability, which BSEE leadership has not demonstrated for implementing internal management initiatives, as evidenced by its limited progress in implementing key strategic initiatives as well as its inability to address long-standing oversight deficiencies. In our report being released today, we recommended that the Secretary of the Interior direct the Assistant Secretary for Land and Minerals Management, who oversees BSEE, to address leadership commitment deficiencies within BSEE, including by implementing internal management initiatives and ongoing strategic initiatives (e.g., ERM and performance measure initiatives) in a timely manner. Interior neither agreed nor disagreed with our recommendation. Interior stated that the recommendation reflects an ongoing BSEE commitment and that BSEE and Interior agree with the concept laid out therein. However, Interior's comments did not discuss specific actions taken or planned to meet the intent of our recommendation. Without higher-level oversight within Interior addressing BSEE's leadership commitment deficiencies-- including by implementing internal management initiatives and ongoing strategic initiatives--in a timely manner, the bureau is unlikely to succeed in implementing such initiatives. In February 2016, BSEE announced an initiative to assess internal communications and develop an employee engagement strategy. BSEE employee engagement initiative documentation identifies the need to enhance communication vertically and horizontally across the bureau. BSEE leadership's safety and environmental stewardship initiatives have had limited success, largely due to poor communication and coordination between headquarters and the regions. BSEE officials from across the bureau told us that the poor communication between headquarters and the regions led to a deficit of trust vertically throughout the bureau. They also told us that because BSEE headquarters was newly established as part of the reorganization of MMS in 2010 following the Deepwater Horizon incident, not many existing relationships between headquarters and regional personnel existed. The data collection plan for this employee engagement initiative focused on conducting outreach across the bureau to identify the means by which BSEE personnel prefer to receive information--for example, town hall meetings, BSEE's website, or e-mail. BSEE conducted this outreach but as of November 2016 had not developed an employee engagement strategy--although its original target completion date was April 2016-- and it is unclear when it will do so. In September 2016, BSEE decided to conduct a second round of outreach across the organization by spring 2017 to review feedback from the initial outreach, discuss next steps, and provide guidance on existing communications resources. To address trust concerns that exist between headquarters and the field, we recommended in our report being released today that the Secretary of the Interior direct the BSEE Director to expand the scope of its employee engagement strategy to incorporate the need to communicate quality information throughout the bureau consistent with federal standards for internal control. Interior neither agreed nor disagreed with our recommendation. Interior asserted that, since receiving our draft report for review, BSEE has completed the assessment and analysis of employee feedback and developed an engagement plan, but Interior did not provide documentary evidence of this plan or what it entails. Without providing evidence of BSEE's activities, we could not confirm that any action had been taken and continue to believe that BSEE should expand the scope of its employee engagement strategy. In addition, the bureau's Integrity and Professional Responsibility Advisor (IPRA) is responsible for promptly and credibly responding to allegations or evidence of misconduct and unethical behavior by BSEE employees and coordinating its activities with other entities, such as Interior's Office of Inspector General (OIG). Senior BSEE officials from across the bureau stated that the IPRA function is critical to bolstering trust within the bureau because personnel need to have a functioning mechanism to which they can report potential misconduct by other employees. To increase transparency and consistency in how IPRA cases are handled following the completion of an investigation report, BSEE conducted a pilot initiative in 2016 to assess the types of allegations of misconduct being reported to the IPRA as well as the frequency with which the IPRA referred such allegations to other entities. In August 2016, BSEE determined that the majority of incoming allegations were being directed to the appropriate office for action. However, BSEE's pilot initiative did not address unclear and conflicting guidance that could undermine organizational trust in how the IPRA addresses allegations of misconduct. Specifically, we found that the Interior Department Manual and IPRA guidance do not specify criteria for the severity thresholds for allegations that are to be referred to the OIG. As a result, the boundaries of IPRA responsibility are unclear. Additionally, BSEE's pilot initiative did not address IPRA guidance that conflicts with the reporting chain established by the Interior Department Manual and BSEE's organization chart. Some BSEE regional officials told us that the uncertainty about how the IPRA reports allegations to the OIG as well as its reporting structure led them to question the independence of IPRA activities, and they expressed concern that the IPRA could be used to retaliate against employees, which has undermined organizational trust in its activities. Under the federal standards of internal control, management should design control activities to achieve objectives and respond to risks, such as by clearly documenting internal controls. While BSEE has documented its policies, they are not clear. In our report being released today, we recommended that the Secretary of the Interior direct the BSEE Director to assess and amend IPRA guidance to clarify (1) severity threshold criteria for referring allegations of misconduct to the OIG and (2) its reporting chain. Interior neither agreed nor disagreed with our recommendation but stated that contrary to our draft report, the Interior Department Manual includes severity threshold criteria for referring allegations of misconduct to the OIG. We believe that the language in the Interior Department Manual does not provide the specificity needed to adequately define the boundaries of IPRA responsibility. Additionally, Interior stated that the IPRA reports to the BSEE Director, consistent with the reporting chain established in the bureau's organizational chart and the Interior Department Manual. However, the BSEE Director told us that, in practice, the IPRA often reports to the BSEE Deputy Director rather than the Director. Moreover, our work found that the decision-making process of the IPRA Board--whereby the Board determines how to respond to an investigation without consulting the Director--does not align with the IPRA's prescribed reporting chain. Without assessing and amending its IPRA guidance to clarify (1) the severity threshold criteria for referring allegations and (2) the IPRA reporting chain, BSEE risks further eroding organizational trust in the IPRA to carry out its mission to promptly and credibly respond to allegations or evidence of misconduct by BSEE employees. Chairman Farenthold, Ranking Member Plaskett, 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 Frank Rusco, Director, Natural Resources and Environment, at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Richard Burkard, Cindy Gilbert, Matthew D. Tabbert, Kiki Theodoropoulos, and Daniel R. Will. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony summarizes the information contained in GAO's March 2017 report, entitled Oil and Gas Management: Stronger Leadership Commitment Needed at Interior to Improve Offshore Oversight and Internal Management ( GAO-17-293 ). The Department of the Interior's (Interior) Bureau of Safety and Environmental Enforcement (BSEE) leadership has started several key strategic initiatives to improve its offshore safety and environmental oversight, but its limited efforts to obtain and incorporate input from within the bureau have hindered its progress. For example, to supplement its mandatory annual regulatory compliance inspections, in 2012, BSEE leadership began developing a risk-based inspection initiative to identify high-risk production facilities and assess their safety systems and management controls. During pilot testing in 2016, several deficiencies--including the usefulness of its facility risk-assessment model and unclear inspection protocols--caused BSEE to halt the pilot. According to bureau officials, during the development of the initiative, BSEE headquarters did not effectively obtain and incorporate input from regional personnel with long-standing experience in previous risk-based inspection efforts, who could have identified deficiencies earlier in the process. GAO previously found that when implementing large-scale management initiatives a key practice is involving employees to obtain their ideas by incorporating their feedback into new policies and procedures. Instead, BSEE leadership appears to have excluded the input of regional personnel by, for example, not incorporating input beyond the risk-assessment tool when selecting the first pilot facility, even though it was prescribed to do so in the bureau's inspection planning methodology. This undercut the pilot effort, raising questions about whether the bureau's leadership has the commitment necessary to successfully implement its risk-based program. Without higher level leadership within Interior establishing a mechanism for BSEE to obtain and incorporate input from personnel within the bureau, BSEE's risk-based inspection initiative could face continued delays. Similarly, since 2013, BSEE leadership has started several key strategic initiatives to improve its internal management, but none have been successfully implemented, in part, because of limited leadership commitment. For example, BSEE's leadership identified the importance of developing performance measures in its 2012-2015 strategic plan. BSEE began one of three attempts to develop performance measures in July 2014 by hiring a contractor to develop measures, but the bureau terminated this contract in January 2015 after determining a need to complete its internal reorganization before developing such measures. A second effort to develop performance measures started in December 2015, using the same consultant, and yielded 12 performance measures in March 2016, but BSEE did not implement them, in part, because data did not exist to use the measures. By the time BSEE received this consultant's report, it had already begun a third effort to internally develop performance measures; as of November 2016 had identified 17 draft performance measures, but BSEE leadership missed repeated deadlines to review them. BSEE officials told GAO that after leadership approval, the bureau plans to pilot these measures and develop others. BSEE leadership has not demonstrated continuing oversight and accountability for implementing internal management initiatives, as evidenced by its limited progress implementing key strategic initiatives. Without higher-level oversight within Interior addressing leadership commitment deficiencies within BSEE, the bureau is unlikely to succeed in implementing internal management initiatives.

To help ensure the safety of the more than one million people who travel on thousands of flights throughout the United States each day, FAA inspects and certifies the aviation community's compliance with FAA regulations. To better focus its limited inspection resources, FAA needs quick access to meaningful information about airlines, aircraft, pilots, and more. However, FAA currently does not have this capability. To address this limitation, FAA is acquiring the Safety Performance Analysis System (SPAS), an automated decision support system to aid FAA in targeting its inspection and certification resources on those areas that pose the greatest aviation safety risks. The Federal Aviation Act of 1958, as amended, requires FAA to promote the highest degree of aviation safety and establishes the safety of air passengers as a joint responsibility of airlines, aircraft manufacturers, and FAA. The airlines are responsible for operating their aircraft safely, aircraft manufacturers are responsible for designing and building aircraft that meet FAA regulations, and FAA is responsible for, among other things, (1) certifying that an airline is ready to operate and (2) conducting periodic inspections to ensure continued compliance with safety regulations. FAA is also responsible for certifying that aircraft produced in the United States or imported by domestic companies and individuals meet minimum safety standards before the aircraft can be operated. To carry out its inspection responsibilities, FAA employs 2,300 inspectors located in 91 Flight Standards District Offices (FSDO), International Field Offices, and Certification Management Offices throughout the United States. These inspectors oversee more than 17,900 commercial aircraft, 4,800 repair stations, 401,060 aircraft mechanics, 642 pilot training schools, 193 maintenance schools, 665,000 active pilots, and 184,400 active general aviation aircraft. FAA inspectors perform four principal functions: (1) airline operation certification, (2) routine surveillance (a process of periodic inspections of airlines and aviation-related activities), (3) accident and incident investigations, and (4) safety promotion. FAA divides its surveillance or inspection activities into three categories--operations, maintenance, and avionics. Operations inspections focus on such items as pilot performance, flight crew training, and in-flight record keeping. Maintenance inspections examine the airline's overall maintenance program, including personnel training and established policies and procedures. Avionics inspections focus on the condition of electronic components of the aircraft. To carry out its aircraft certification responsibilities, FAA has about 825 engineers and others to oversee the certification of new aircraft and the continued airworthiness of the existing fleet. To assist its engineers, FAA also delegates certification activities, as necessary, to designated, FAA-approved employees of manufacturers. The FAA engineers, in turn, oversee the activities of these designees. The size of FAA's inspection and certification workforce, while allowing it to perform its "must do" work, has prevented it from completing other important aviation oversight activities that it designates as "should do." To assist FAA in maximizing the efficiency and effectiveness of its limited workforce, we have long encouraged it to better focus its inspection activities on those entities and areas that pose the greatest risk to aviation safety. In 1987, we recommended that FAA, in addition to having minimum standards for the type and frequency of airline inspections, target airlines displaying risk precursors (that is, characteristics that may indicate safety deficiencies). Again in 1988, we reported that by monitoring risk precursors, FAA could target for intensive inspection those airlines most likely to experience safety compliance problems, thereby improving the quality of information available on the airlines' compliance with regulations. Similarly, we reported in 1991 that FAA needed a mechanism to make more effective use of its limited resources. We further reported that a system that systematically and uniformly determined risks could provide FAA with information vital to enhancing its inspection program. Finally, we recommended, in 1993, that FAA develop criteria for targeting inspections on high-risk conditions. FAA's response to our findings on its inspection program was to develop an automated decision support system for FAA managers, safety inspectors, and certification engineers in headquarters and field offices. This system, begun in February 1991 and designated as SPAS, is planned to be a user-friendly tool for (1) quick analysis of safety-related data,(2) generation of standard and ad hoc indicators (that is, precursors) of safety performance, and (3) identification of safety-related risk areas for investigation, either through analysis of the underlying data used to generate the risk precursor or through on-site inspection of the risk item. FAA decided in early 1991 to develop an aviation safety performance analysis system to aid it in managing its inspection program. In May 1993, FAA completed development and installation of the initial SPAS prototype at 12 field offices, FAA headquarters, and the Air Force's Air Mobility Command. By the end of 1995, FAA plans to have developed the first operational SPAS release, which is to offer additional functions and performance capabilities above those of the prototype, such as the ability to look at the source data behind the indicators. This first operational release is to be installed at up to 30 locations. Development of the final operational SPAS release is scheduled to be completed in late 1997. This version is to be deployed to as many as 140 locations. To date, FAA has spent $6.3 million on the initial and enhanced prototypes. FAA estimates that SPAS will cost a total of $32 million to develop and install. SPAS is to have a powerful graphical user interface that displays performance indicators in such a way that users can easily spot areas for further inquiry. FAA plans four categories of indicators or risk precursors: (1) air operator, (2) air agency (for example, flight and mechanic schools, aircraft repair stations, and so forth), (3) aircraft, and (4) air personnel. In developing the indicators, FAA is focusing first on air operators and air agencies. To date, 25 indicators have been developed and are being generated by the SPAS prototype--19 for air operators and 6 for air agencies. FAA has established a SPAS program office, within the Office of Flight Standards, to manage SPAS. The program office is supported by the FAA Technical Center in Atlantic City, New Jersey. The Technical Center, in turn, has contracted with the Department of Transportation's Volpe National Transportation System Center (VNTSC) for technical and analytical support, such as developing and evaluating the SPAS prototypes and defining the safety indicators. VNTSC has contracted with UNISYS Corporation to provide SPAS hardware and develop applications software in accordance with defined user requirements. Overall SPAS program guidance and direction is provided by the SPAS Steering Committee, which is chaired by the SPAS program manager and includes representatives from four FAA regions, the FAA Office of Integrated Safety Analysis, and the Department of Defense. The Steering Committee's responsibilities include defining systems requirements, approving SPAS indicators, and monitoring system development and implementation. The SPAS program office is also supported by air operator, air agency, aircraft, and work program planning expert panels. These panels are responsible for defining and proposing indicators, identifying data sources for generating these indicators, and reengineering the inspection functions in light of SPAS capabilities. We reviewed SPAS because of our long-standing interest in helping FAA to improve its inspection and certification programs. Our objectives were to determine (1) whether FAA is effectively managing the SPAS acquisition, including its communication network, and (2) the extent to which SPAS will rely on Aviation Safety Analysis System (ASAS) databases and whether FAA is effectively addressing known data quality problems with these databases. To accomplish our first objective, we interviewed SPAS program management about guidance governing the acquisition, and we reviewed this guidance to ensure that it provided a reasonably structured and disciplined basis for acquiring SPAS. Our review included analyzing the guidance relative to Office of Management and Budget (OMB) Circular A-109 and our 1994 report addressing how leading organizations manage information technology investments. We then interviewed program and contractor officials and reviewed system development documentation and plans to determine whether actual SPAS development processes and practices were consistent with the guidance and whether these processes and practices were exposing the program to unnecessary risks. In particular, we focused on system requirements analysis and definition, verification and validation, cost estimating, system architecture alternatives analysis, and communications planning. We also interviewed SPAS users at four field locations that are currently operating the SPAS prototype to determine their involvement in defining SPAS requirements and their reaction to and satisfaction with the prototype. These four sites were the Flight Standards Division of the Western Pacific Region; the Van Nuys, California, FSDO; the San Jose, California, FSDO; and the Bedford, Massachusetts, FSDO. We also witnessed the operation of the prototype at these locations, and operated the prototype at the contractor's facility in Cambridge, Massachusetts. In addition, we reviewed available SPAS program management and system development documentation, such as the SPAS Functional Description Document, SPAS working group minutes, the SPAS verification and validation contract proposal, SPAS cost estimate and budget requests, and SPAS alternative architectures analysis. In addition, to ascertain acquisition plans and whether these plans would satisfy SPAS needs, we interviewed program and contractor officials, as well as FAA officials responsible for acquiring FAA-wide and Office of Flight Standards communication networks. In doing so, we discussed SPAS communications requirements and steps underway to satisfy them. To accomplish our second objective, we interviewed SPAS program officials and Office of Flight Standards information resource management officials and reviewed SPAS documentation to determine what FAA and non-FAA databases will be used to generate SPAS indicators. We then discussed with these officials the accuracy, completeness, and consistency of the data residing on these databases and what plans and initiatives are underway to address any data quality shortfalls and what assurances they had that any quality problems would be addressed in time for SPAS deployment. We also reviewed published GAO and FAA reports and studies on the quality of the data in these databases, and interviewed Office of Flight Standards officials as to the status of actions to address any recommendations made. We conducted our audit work primarily at FAA headquarters in Washington, D.C.; and VNTSC and UNISYS Corporation in Cambridge, Massachusetts. We also communicated frequently with the FAA Technical Center in Pomona, New Jersey. Throughout our review, we discussed our preliminary results with the Director of the Office of Flight Standards. In addition, the Department of Transportation and FAA provided oral comments on a draft of this report. Their comments and our evaluation of these comments are contained in chapters 2 and 3 of this report. Additional comments provided on the contents of the draft report have been incorporated as appropriate throughout the report. We conducted our work between November 1993 and November 1994, in accordance with generally accepted government auditing standards. Overall, FAA has handled key aspects of SPAS development reasonably well. In particular, its analysis and definition of SPAS requirements provided for user involvement and effectively used prototyping techniques. Moreover, recent changes to the FAA standards governing the acquisition of SPAS provide important structure and discipline that, if adhered to, should reduce SPAS development and deployment risks. Also, FAA's decision to employ an independent verification and validation agent should further mitigate system development and acquisition risks. Last, FAA's decision to not acquire duplicative data communication networks to support SPAS and other systems should save precious resources. However, opportunities exist to improve the SPAS cost estimates, and thus FAA management's ability to make sound system investment decisions. One of the most difficult and challenging aspects of any systems development effort is accurately and completely identifying and documenting requirements of system users. To do so successfully requires a commitment on the part of management and system developers to involve users continuously throughout the system development process. That is, the agency must recognize that user requirements cannot be accurately defined at the beginning of the development process. Instead, effective requirements definition demands a more iterative process in which requirements are continuously analyzed, validated, and refined through constant interaction with users. FAA's approach to analyzing and defining SPAS requirements has involved a series of steps to maximize user involvement and provide users with early "looks" at the system for evaluation and reaction, thereby better ensuring that the system will meet their needs. These steps first began in May 1991 when the SPAS Steering Committee distributed a questionnaire to 1,000 aviation safety inspectors to solicit their views on what type of automated tool would best serve their needs. The questionnaire contained a variety of questions, such as: How could an automated system help with your work? and What features would you like to see? On the basis of the 375 survey responses received and experience with the Air Force's airline safety analysis system, FAA and VNTSC generated an initial set of SPAS requirements. Next, FAA began validating and refining the requirements. First, FAA, in collaboration with VNTSC, held a series of group discussions and one-on-one visits with aircraft safety inspectors throughout the country. According to SPAS documentation, these discussions and visits allowed SPAS developers to see first-hand what the inspectors do on a daily basis and to listen to their ideas, thus giving the developers a keener understanding of the inspectors' needs and helping them to refine SPAS requirements accordingly. In October 1991 and December 1993, two expert panels consisting of dozens of experienced aviation safety inspectors and members of the SPAS management team were established to determine whether users' needs were adequately being captured. These panels were charged with developing and recommending SPAS safety indicators and revalidating SPAS functional requirements. To further validate SPAS requirements, FAA's next step was to implement the SPAS Steering Committee's recommendation to build a prototype system for users. System prototyping is an effective method of defining and refining user requirements. By quickly providing users with a system model (that is, something less than the full complement of envisioned system features and functions) with which to interact and react, prototyping allows needed adjustments to be made before making large investments in developing the final system. In our 1994 report on how leading organizations improved mission performance through strategic information management and technology, we noted that these organizations make effective use of rapid prototyping to minimize system risks and maximize benefits. The SPAS prototype evaluation focused on the effectiveness and ease of use of the user interface, the adequacy of source systems' data quality, and the impact of SPAS on inspectors' daily activities. In late 1993, at the conclusion of the SPAS prototyping phase, FAA was scheduled to discontinue prototype support. However, FAA elected to continue the prototype to help in ongoing requirements refinement, early user familiarization with SPAS, and testing of new SPAS concepts. In March 1993, FAA issued Order 1810.1F, which established its policy for initiating and managing acquisition programs like SPAS. Prior to 1810.1F, the SPAS program office was following VNTSC's Information Systems Development guidelines for development and acquisition programs. The program office has elected to supplement the VNTSC guidelines with Order 1810.1F. Our 1994 report on how leading organizations improve mission performance through strategic information management and technology emphasized the importance of using a disciplined process to develop and acquire information systems--one that uses explicit decision criteria, assesses benefits and costs, and involves senior program and information managers in key system decisions. We reviewed FAA Order 1810.1F and believe it is a reasonably disciplined and organized system acquisition and development process, which if followed, could benefit programs by reducing the potential for cost growth, schedule delays, and performance deficiencies. In particular, 1810.1F imposed valuable rigor and structure on the SPAS acquisition process by applying the principles embodied in OMB Circular A-109 on major systems establishing clear lines of responsibility, authority, and accountability; requiring user and sponsoring office participation throughout the acquisition process, including at key decision points; directing that mission needs be established at the beginning of the acquisition process and then revalidated at critical decision points throughout the remainder of the process; mandating that alternative technological approaches be analyzed prior to selecting a final development strategy; and tailoring the acquisition requirements to the size, complexity, and nature of each specific program. FAA Order 1810.1F specifies five phases and four related key decision points. Each phase produces the documentation needed to make decisions at the next decision point. SPAS is currently in phase I of the 1810.1F acquisition process, with the second decision point scheduled for September 1996. Documents required for this decision point, such as the program master plan and a cost-benefit analysis, are currently being prepared and thus were unavailable for review. Verification and validation involves analyzing and testing a system throughout its development to ensure that it meets specified requirements. The purpose of verification and validation is to better ensure the final system's performance, integrity, reliability, and quality. Verification and validation activities are advocated by industry software standards and federal guidelines for software management, especially for systems that involve the safety and preservation of human life. When verification and validation activities are performed by an organization separate and distinct from the system developers, the additional benefit of independence accrues. This is referred to as independent verification and validation (IV&V). During the course of our review, FAA began using an IV&V agent as a risk mitigating technique. In June 1994, it contracted with Sandia National Laboratories to examine issues relating to (1) system architecture, such as scalability, vulnerability, and robustness, (2) network and server capacity, and (3) system operation. Sandia has also subcontracted with the University of Nevada at Las Vegas for evaluation of the indicators' appropriateness. FAA has long recognized that its communications infrastructure could not satisfy the functional (for example, video conferencing) and performance (for example, response time) requirements of SPAS and other applications. To address this shortfall, FAA is acquiring a corporate wide area network (WAN), called the Administrative Data Transfer Network (ADTN) 2000. This network is intended to satisfy not only current FAA requirements for non air traffic control and administrative communications, but also to accommodate growth in communication demands through capacity expansion and technology infusion. On September 19, 1994, FAA's Telecommunications Division awarded a 5-year contract for ADTN 2000 services. Current plans call for the network to be operational by Spring of 1995. In addition to the agency WAN, FAA's Office of Regulation and Certification, which includes the SPAS user community, was planning its own, independent WAN, called the Aviation Information Exchange Network (AIX). According to officials in this office, AIX was pursued because ADTN 2000 was already 18 months late and they believed that further delays would occur. In June 1994, we raised questions about duplicative WANs and the lack of coordination between these two acquiring organizations. As a result of our inquiries, and to FAA's credit, the two organizations began meeting. Consequently, the Office of Regulation and Certification later agreed to first evaluate whether ADTN 2000 could meet its communication needs before deciding if it would acquire its own, separate network. Our 1994 review of how leading public and private organizations use information technology to improve mission performance showed that these organizations rely heavily on performance measures to, among other things, make informed system life-cycle choices, allocate resources, track progress, and learn from mistakes. One area that these organizations' standard measurement practices focused on was resource consumption, which requires that reliable estimates of resource needs be developed and used. The estimated cost of a system's software is one of the more critical of these resource estimates. To develop reliable software cost estimates, industry practice is to employ one or more structured cost estimating techniques or methods, augmented by the judgement of software experts. While the estimates derived using these methods are not precise, they are more credible than relying solely on the subjective opinions of experts that are unsupported by any objective, verifiable analysis. FAA's current cost estimate for developing and installing SPAS is $32 million. According to SPAS program officials, the software component of this estimate was derived 3 years ago based on the subjective judgment of the technical program manager and two contractor officials. No systematic software cost estimating tool or technique, such as COCOMO (Constructive Cost Model), REVIC (Revised Intermediate COCOMO), or SLIM (Software Life Cycle Intermediate Model), was used. Further, the program has no documented analysis to support the software cost estimate, and it has not attempted to update it. Program officials told us that they relied on the judgment of contractor and program experts in estimating SPAS software costs because they have been unable to identify a reliable cost estimating tool or model appropriate for systems like SPAS, which employs a client-server based architecture. Because of the manner in which the SPAS cost estimate was derived, the reliability of the estimate is uncertain; thus, any decisions made regarding SPAS that rely on this estimate may prove to be ill-advised. For example, to comply with FAA Order 1810.1F, the program office asked FAA's Office of Operations Research to conduct a SPAS cost-benefit analysis. The program office plans to provide its SPAS cost estimate to serve as the basis for this analysis. Because the cost estimate is not credible, any cost-benefit analysis that relies on it will also not be credible. FAA's Office of Operations Research recognizes the limitations in software cost estimates that are not based, at least in part, on formal cost estimating techniques. According to a representative for the contractor performing the SPAS cost-benefit analysis for this office, the SPAS cost estimate provided by the program office will be validated using structured estimating techniques before it is used in the cost-benefit analysis. Key aspects of FAA's management of the SPAS acquisition are reasonably sound. The steps the program office has taken to involve users in defining requirements and evolving the prototypes are appropriate. In addition, the new FAA system acquisition requirements can bring added rigor and discipline to the SPAS development process. Further, the program office's decision to employ an outside party to verify and validate development activities should prove beneficial. Last, FAA's steps to avoid unnecessarily duplicative WANs for SPAS and other systems are judicious and may save scarce acquisition and operation and maintenance money. However, we believe that opportunities exist to strengthen the program office's cost estimating techniques and thus its ability to measure performance and make informed investment decisions. We recommend that the FAA Administrator direct the Associate Administrator for Regulation and Certification to ensure that SPAS software costs are estimated using systematic and rigorous estimating techniques and methods. In commenting on a draft of this report, FAA officials disagreed with our recommendation, although they agreed that the SPAS cost estimate needs to be updated. The officials stated that FAA's approach to estimating SPAS software costs (that is, relying solely on the judgments of experts) is consistent with agency guidance. However, they added that this guidance does not specifically address software cost estimating. They also stated that the cost estimating models mentioned in our report are more appropriate for mainframe systems rather than client-server based systems, such as SPAS. Instead, the officials said that they have recently identified a software cost estimating tool that they believe is applicable to SPAS and that they are now evaluating and may acquire and use. We are encouraged by these statements. Our intent was to neither advocate a particular tool nor to ignore the value of expert judgment in deriving software cost estimates. Rather, our aim was to convince FAA to follow accepted industry cost estimating practices of augmenting expert judgment with the kind of objective, verifiable analysis that structured estimating techniques and methods offer. To produce its indicators, SPAS will use data from a myriad of existing FAA databases. Because these data have been and continue to be incomplete, inconsistent, and inaccurate, the utility of SPAS is threatened. FAA initiatives underway to improve source data quality are insufficient to ensure that SPAS will receive the data it needs in 1997 to be effective. As currently envisioned, SPAS could eventually rely on over 25 databases within FAA, other government agencies, and the aviation industry. The largest single source of data will be FAA's Aviation Safety Analysis Subsystem (ASAS). ASAS is an umbrella term used to describe a collection of 34 largely independent FAA databases. Generally, the nature of these databases falls into one of five categories--repository of data on various components of the aviation industry, repository of data on FAA personnel, tools for managing inspector/investigator workload, reference sources for FAA regulations, and an oversight tool for FAA senior management. The current SPAS prototype relies almost exclusively on two ASAS databases--the Program Tracking and Reporting Subsystem (PTRS) and the Vital Information Subsystem (VIS)--in generating its current complement of indicators. PTRS contains data on planned inspections of airlines and aircraft, as well as the results of these inspections. The data are entered by inspectors or support personnel and are used to inform FAA management of inspection activities. VIS contains key data on airlines, pilot and mechanic schools, repair stations, and FAA designees (that is, people and organizations that FAA empowers to act as surrogates for it in discharging specific FAA responsibilities). These data are entered by inspectors or support personnel and are used to track aviation activity. As the number of indicators expands, FAA plans to use data from other ASAS databases. (See appendix I for description of each of the potential SPAS source data systems.) The quality of SPAS' outputs, and thus its utility in supporting FAA decisionmakers, depends on the quality of its inputs. FAA fully recognizes this. In fact, the Office of Flight Standards Five Year Information Strategy states that information and its quality are at the heart of SPAS' success. Similarly, an Office of Flight Standards expert panel on data quality stated that SPAS needs a sound foundation from which to analyze, and this foundation must be in the form of reliable databases that are correct, complete, and consistent. Also, a Flight Standards Working Group stated that for advanced tools like SPAS, the data on which they operate must be correct, consistent, complete, and up-to-date, or the results will be meaningless--or even misleading. Despite the criticality of reliable source data to SPAS' success, the poor quality of the data on the FAA databases that SPAS will use remains a serious problem today. In our 1988 report on the feasibility of assessing safety levels of individual airlines, we concluded that none of the potential source databases could provide a satisfactory basis for developing safety indicators because the data were unreliable, incomplete, and inconsistent. At that time, one major airline described FAA's data on aircraft accidents, incidents, and serious malfunctions as, for the most part, worthless. In 1989 and 1991, we reported on inaccurate and incomplete inspections data in PTRS. In its response to the 1991 report, FAA agreed that PTRS was inaccurate and incomplete. In fact, an FAA-sponsored study that year concluded that PTRS cannot be used for problem diagnosis and trend analysis with any degree of reliability until data quality issues were resolved. Similarly, a 1992 Flight Standards expert panel, established to identify ways to improve the quality of PTRS data, reported that PTRS did not contain reliable, consistent data. The panel made recommendations for improvement. While FAA has recognized its data quality problems for years and has taken some steps to address them, the problems still persist. According to 1993 SPAS documentation, many FAA databases continue to have data quality and consistency problems, critical data elements are still missing or contain erroneous data, and supporting documentation is either out-of-date or missing. A 1993 Flight Standards working group on data quality improvement also reported that the data quality problem of FAA safety-related databases remains as much an issue today as it was more than 5 years ago. Also, a 1994 Department of Transportation Inspector General report states that the database containing data on inflight "service difficulties" is neither complete nor current. For example, the report states that omissions in different data fields for each "service difficulty" occurrence in the database as of January 1993 ranged from 46 to 98 percent. In November 1994, SPAS program officials affirmed these reports by stating that the quality of data residing on the SPAS feeder databases remains a major risk item for the system. Despite FAA's recognition of both SPAS' need for quality source data and its lack of such data, FAA has not developed a coordinated strategy for rectifying the situation. We reviewed the 1992 Five Year Flight Standards Information Strategy, and found one broad goal in this area--to "ensure quality data for decisionmaking." We further found that "development of measurement tools to assess and improve data quality of SPAS feeder systems" and "begin data needs analysis of existing processes" were the extent of planned actions to accomplish the goal. We did not find a comprehensive strategy that (1) clearly defines measurable, interim, and long-term goals for improving data quality, (2) specifies the full extent of the problem being addressed, (3) is supported by a series of specific steps designed to meet the stated goals according to a specified schedule, and (4) designates the organizations responsible for executing the strategy and provides the associated authority and resources for doing so. Officials with the SPAS program office, the Flight Standards Training and Automation Committee, and the Office of Flight Standards' Information Resources Management function acknowledged that no strategy exists. Further, officials with the former two organizations stated that FAA has not yet determined what level of data quality is needed from each of the source databases. In other words, FAA has not agreed on a definition of its long-term data quality goals. Instead, these officials pointed to a few independent data improvement measures, some of which are being performed by the SPAS program office even though it is not responsible for these source databases. These measures include implementation of select recommendations made by an Office of Flight Standards working group and VNTSC on PTRS and VIS data quality improvement, development of an automated tool for measuring the quality of data residing on PTRS and VIS (the tool may eventually be applied to all SPAS source databases), and revision of the PTRS and VIS users manuals. While we do not question the merits of these initiatives, they neither individually nor collectively represent the type of coordinated and comprehensive effort that can ensure that SPAS will receive the data it needs when the system is deployed in 1997. In commenting on a draft of this report, the Director of the Office of Flight Standards agreed that such a strategy is needed. The axiom "garbage in, garbage out" applies to SPAS. This system will not be effective if the quality of its source data is not improved. Moreover, it could potentially misdirect FAA resources away from the higher risk aviation activities. While FAA has some initiatives underway to improve some of these data, the initiatives are isolated, incomplete, and provide little assurance that SPAS will receive the quality data it needs to be useful. Unless FAA acts quickly on this matter, SPAS will not be able to perform as intended when it is deployed in 1997. FAA must expeditiously develop a comprehensive and coordinated strategy for defining and attaining defined data quality improvement goals within specified time frames for all SPAS source databases. We recommend that the FAA Administrator direct the Associate Administrator for Regulation and Certification to require the Office of Flight Standards to develop and implement a comprehensive and coordinated strategy, specifying how the quality of all data residing on SPAS source data systems will be brought up to the minimum level needed for SPAS to meet operational requirements. At a minimum, this strategy must include (1) clear and measurable data quality objectives for each SPAS source data system that recognize the sensitivity of SPAS' various analyses to the respective source data inputs, (2) accurate assessments of the current quality of the data on each SPAS source data system, (3) clear statements of organizational responsibility and authority for improving the source systems' data quality, (4) both interim and long-term milestones for attaining stated quality objectives that tie closely to SPAS development schedules, and (5) estimates of resource requirements to meet stated objectives and agency commitments to providing these resources. In commenting on a draft of this report, FAA officials agreed with our recommendation to develop and implement a comprehensive and coordinated strategy for improving the quality of the data residing on SPAS source databases. However, they do not believe that the data quality problem is as severe as our report describes it to be. They stated that the quality of the data has measurably improved over the last several years. To support their position, they cited various steps taken to strengthen the completeness, correctness, currency, and consistency of the databases. For example, they said that data entry edit checks have been introduced and that inspectors are now more conscious of the consistency of the data they enter. However, they could not provide any data, analysis, or otherwise verifiable evidence supporting their claims. While we acknowledge that the steps cited should produce some quality gains, without evidence of actual improvements we believe that the quality of the data on which SPAS will rely remains a significant problem. As stated in our report, FAA and Department of Transportation analyses as recent as 1993 and 1994 continue to report severe aviation safety related data limitations.

Pursuant to a congressional request, GAO reviewed the Federal Aviation Administration's (FAA) Safety Performance Analysis System (SPAS), focusing on: (1) whether FAA is effectively managing the SPAS acquisition; (2) the extent to which SPAS will rely on Aviation Safety Analysis System (ASAS) databases; and (3) whether FAA is effectively addressing known data quality problems with the ASAS databases. GAO found that: (1) FAA has generally implemented good development and acquisition procedures for SPAS; (2) FAA has maximized user involvement and system prototyping in developing and evaluating SPAS; (3) FAA has reduced SPAS development risks by using an independent verification and validation agent; (4) FAA is exploring the potential of its proposed corporate-wide area network to accommodate SPAS in order to avoid the acquisition of duplicate communication networks; (5) FAA cost estimates for SPAS software may not be reliable, since they are subjective; (6) FAA lacks a strategy for improving SPAS data sources, particularly ASAS, which jeopardizes the system's utility; (7) ASAS databases contain incomplete, inaccurate, and inconsistent data on airline inspections; (8) FAA has not yet defined its long-term data quality goals; and (9) if FAA fails to improve ASAS data, it could improperly target its limited inspection and certification resources on less important problems.

JPDO has continued to make progress in facilitating the collaboration that is central to its mission and in furthering its key planning documents. However, JPDO faces a number of challenges involving its organizational structure, institutionalization of its efforts, research and development activities, and stakeholder participation. Vision 100 includes requirements for JPDO to coordinate and consult with its partner agencies, private sector experts, and the public. JPDO's approach has been to establish an organizational structure that involves federal and nonfederal stakeholders throughout the organization. This structure includes a federal interagency senior policy committee, a board of directors, and an institute to facilitate the participation of nonfederal stakeholders. JPDO's structure also includes eight integrated product teams (IPT), which is where the federal and nonfederal experts come together to plan for and coordinate the development of technologies for NextGen. The eight IPTs are linked to eight key strategies that JPDO developed early on for guiding its NextGen planning work (see table 1). JPDO's senior policy committee is headed by the Secretary of Transportation (as required in Vision 100) and includes senior-level officials from JPDO's partner agencies. The Next Generation Air Transportation System Institute (the Institute) was created by an agreement between the National Center for Advanced Technologies and FAA to incorporate the expertise and views of stakeholders from private industry, state and local governments, and academia. The Institute Management Council (IMC), composed of top officials and representatives from the aviation community, oversees the policy, recommendations, and products of the Institute and provides a means for advancing consensus positions on critical NextGen issues. The IPTs are headed by representatives of JPDO's partner agencies and include more than 200 nonfederal stakeholders from over 100 organizations, whose participation was arranged through the Institute. Figure 1 illustrates JPDO's position within FAA and the JPDO structures that bring together federal and nonfederal stakeholders, including the Institute and the IPTs. To meet Vision 100's requirement that JPDO coordinate and consult with the public, the Institute held its first public meeting in March 2006 and plans to hold another public meeting in May 2007. Deprtment of Trporttion (chir) Hrmoniztion (FAA) Infrastrctre (FAA) Situationl Awreness (DOD) (DOC) Mgement (FAA) In November 2006, we reported that JPDO's organizational structure incorporated some of the practices that we have found to be effective for federal interagency collaborations--an important point given how critical such collaboration is to the success of JPDO's mission. For example, the JPDO partner agencies have worked together to develop key strategies for NextGen and JPDO has leveraged its partner agency resources by staffing various levels of its organization with partner agency employees. Also, our work has shown that involving stakeholders can, among other things, increase their support for a collaborative effort, and the Institute provides a method for involving nonfederal stakeholders in planning NextGen. Recently, JPDO officials told us they have proposed to FAA management and the IMC executive board a change in the IPT structure and operation to improve the efficiency of the organization. JPDO has proposed converting each IPT into a "work group" with the same participants as the current IPT, but with each work group led by a joint government and industry steering committee. The steering committee would oversee the creation of small, ad hoc subgroups that would be tasked with short-term projects exploring specific issues and delivering discrete work products. Under this arrangement, work group members would be free of obligations to the group when not engaged in a specific project. According to JPDO officials, if these changes are approved, the work groups would be more efficient and output- or product-focused than the current IPTs. JPDO officials also noted that they are proposing to create a ninth work group to address avionics issues. We believe that these changes could help address concerns that we have heard from some stakeholders about the productivity of some IPTs and the pace of the planning effort at JPDO. Nonetheless, the effectiveness of these changes will have to be evaluated over time. Also, JPDO's director has pointed out the need for the office to begin transitioning from planning NextGen to facilitating the implementation of NextGen. We believe that these changes are potentially useful in supporting such a transition. However, it will be important to monitor these changes to ensure that the participation of stakeholders is neither decreased nor adversely affected. Maintaining communications within and among work groups could increase in importance if, as work group members focus on specific projects, they become less involved in the overall collaborative planning effort. Finally, while the organizational structure of JPDO and the Institute have been in place and largely unchanged for several years now, both of these entities have suffered from a lack of stable leadership. As JPDO begins its fourth year in operation, it is on its third director and operated during most of 2006 under the stewardship of an acting director. The Institute pointed out in its recent annual report that JPDO's leadership turnover had made it a challenge for JPDO to move out more aggressively on many goals and objectives, as the office waited on a full-time director. The Institute also stated that JPDO's leadership turnover had limited the ability of the IMC executive committee to forge a stronger relationship with JPDO leadership and work jointly on strategic issues and challenges. However, the Institute has also had issues with turnover and is currently functioning under an acting director due to the recent departure of its second director, who had been in the position less than two years. The leadership turnovers at both JPDO and the Institute raise concerns about the stability of JPDO and about the impact of these turnovers on the progress of the NextGen initiative. JPDO's authorizing legislation requires the office to create a multi-agency research and development plan for the transition to NextGen. To comply, JPDO is developing several key documents that together form the foundation of NextGen planning. These documents include a NextGen Concept of Operations, a NextGen Enterprise Architecture, and an Integrated Work Plan. The Concept of Operations is the most fundamental of JPDO's key planning documents, as the other key documents flow from it. Although an earlier version was delayed so that stakeholder comments could be addressed, Version 1.2 of the Concept of Operations is currently posted on JPDO's Website for review and comment by the aviation community. This 226-page document provides written descriptions of how the NextGen system is envisioned to operate in 2025 and beyond, including highlighting key research and policy issues that will need to be addressed. For example, some key policy issues are associated with automating the air traffic control system, including the need for a backup plan in case automation fails, the responsibilities and liabilities of different stakeholders during an automation failure, and the level of monitoring needed by pilots when automation is ensuring safe separation between aircraft. Over the next few months, JPDO plans to address the public comments it receives and issue a revised version of the Concept of Operations. In addition to the Concept of Operations, JPDO is working on an Enterprise Architecture for NextGen--that is, a technical description of the NextGen system, akin to blueprints for a building. The Enterprise Architecture is meant to provide a common tool for planning and understanding the complex, interrelated systems that will make up NextGen. According to JPDO officials, the Enterprise Architecture will provide the means for coordinating among the partner agencies and private sector manufacturers, aligning relevant research and development activities, and integrating equipment. JPDO plans to issue an early version of its Enterprise Architecture next month, although it was originally scheduled for release in September 2006. Finally, JPDO is developing an Integrated Work Plan that will describe the capabilities needed to transition to NextGen from the current system and provide the research, policy and regulation, and schedules necessary to achieve NextGen by 2025. The Integrated Work Plan is akin to a project plan and will be critical for fiscal year 2009 partner agency budget and program planning. According to a JPDO official, the office intends to issue its initial draft of the Integrated Work Plan in July 2007. We have discussed JPDO's planning documents with JPDO officials and examined both an earlier version of JPDO's Concept of Operations and the current version that is out for public comment. Based on our analysis, JPDO is focusing on the right types of key documents for the foundation of NextGen planning. As for the Concept of Operations, the current version is much improved from the prior version, with additional details added. Nonetheless, we believe that it still does not include key elements such as scenarios illustrating NextGen operations, a summary of NextGen's operational impact on users and other stakeholders, and an analysis of the benefits, alternatives, and trade-offs that were considered for NextGen. In addition, it lacks an overall description that ties together the eight key areas that the document covers. As noted, JPDO does plan to release another version of the Concept of Operations later this year. In fact, JPDO plans further versions of all of its key planning documents. We see the development of all three of JPDO's key documents as part of an iterative and evolutionary process. Thus, it is unlikely that any of these documents will ever be truly "finalized," but rather will continue to evolve throughout the implementation of NextGen to reflect, for example, the development of new technologies or problems uncovered during research and development of planned technologies. Finally, while each of the three key documents has a specific purpose, the scope and technical sophistication of these documents makes it difficult for some stakeholders to understand the basics of the NextGen planning effort. To address this issue, JPDO is currently drafting what the office refers to as a "blueprint" for NextGen, meant to be a short, high-level, non- technical presentation of NextGen goals and capabilities. We believe that such a document could help some stakeholders develop a better understanding of NextGen and the planning effort to date. In our November 2006 report, we noted that JPDO is fundamentally a planning and coordinating body that lacks authority over the key human and technological resources of its partner agencies. Consequently, institutionalizing the collaborative process with its partner agencies will be critical to JPDO's ability to facilitate the implementation of NextGen. As we reported in November, JPDO has not established some practices significant to institutionalizing its collaborative process. For example, one method for establishing collaboration at a fundamental level would be for JPDO to have formal, long-term agreements among its partner agencies on their roles and responsibilities in creating NextGen. Currently, there is no mechanism that assures the partner agencies' commitment continuing over the 20-year timeframe of NextGen or their accountability to JPDO. According to JPDO officials, they are working to establish a memorandum of understanding (MOU), signed by the Secretary or other high-ranking official from each partner agency, which will broadly define the partner agencies' roles and responsibilities. JPDO first informed us of the development of this MOU in August 2005; in November 2006 we recommended that JPDO finalize the MOU and present it to the senior policy committee for its consideration and action. However, as of March 28, 2007, the MOU remained unsigned by some of the partner agencies. Another key method for institutionalizing the collaborative effort is incorporating NextGen goals and activities into the partner agencies' key planning documents. For example, we noted in November 2006 that NASA and FAA had incorporated NextGen goals into their strategic plans. These types of efforts will be critical to JPDO's ability to leverage its partner agency resources for continued JPDO planning efforts. Even more importantly, these efforts will be critical to helping ensure that partner agencies--given competing missions and resource demands--dedicate the resources necessary to support the implementation of NextGen research efforts or system acquisitions. Recognizing that JPDO does not have authority over partner agency resources, FAA and JPDO have initiated several efforts to institutionalize NextGen. For example, JPDO is working with FAA to refocus one of FAA's key planning documents on the implementation of NextGen--an effort that also appears to be improving the collaboration and coordination between JPDO and FAA's Air Traffic Organization (ATO), which has primary responsibility for modernization of the air traffic control system. FAA has expanded and revamped its Operational Evolution Plan (OEP)-- renamed the Operational Evolution Partnership--to become FAA's implementation plan for NextGen. The OEP is being expanded to apply to all of FAA and is intended to become a comprehensive description of how the agency will implement NextGen, including the required technologies, procedures, and resources. (Figure 3 shows the OEP framework.) An ATO official told us that the new OEP is to be consistent with JPDO's key planning documents and its budget guidance to the partner agencies. According to FAA, the new OEP will allow it to demonstrate appropriate budget control and linkage to NextGen plans and will force FAA's research and development to be relevant to NextGen's requirements. According to FAA documents, the agency plans to publish a new OEP in June 2007. In addition, to further align FAA's efforts with JPDO's plans for NextGen, FAA is creating a NextGen Review Board to oversee the OEP. This Review Board will be co-chaired by JPDO's Director and ATO's Vice President of Operations Planning Services. Initiatives, such as concept demonstrations or research, proposed for inclusion in the OEP will now need to go through the Review Board for approval. Initiatives are to be assessed for their relation to NextGen requirements, concept maturity, and risk. An ATO official told us that the new OEP process should also help identify some smaller programs that might be inconsistent with NextGen and which could be discontinued. Additionally, as a further step towards integrating ATO and JPDO, the administration's reauthorization proposal calls for the JPDO director to be a voting member of FAA's Joint Resources Council and ATO's Executive Council. While progress is being made in incorporating NextGen initiatives into FAA's strategic and planning documents, more remains to be done with FAA and the other JPDO partner agencies. For example, one critical activity that remains in this area will be synchronizing the NextGen enterprise architecture, once JPDO releases and further refines it, with the partner agencies' enterprise architectures. Doing so should help align agencies' current work with NextGen while simultaneously identifying gaps between agency plans and NextGen plans. Also, while FAA is making significant progress toward creating an implementation plan for NextGen, the other partner agencies are less far along or have not begun such efforts. JPDO's lack of authority over partner agency resources will be minimized as a challenge if the partner agencies commit to NextGen goals and initiatives at a structural level. By further incorporation of NextGen efforts into strategic planning documents, the partner agencies will better institutionalize their commitments to JPDO and the NextGen initiative. Finally, another important method for institutionalizing the collaborative effort will be for JPDO to establish mechanisms for leveraging partner agency resources. JPDO has made progress in this area, although further work remains. As we noted in our November report, JPDO is working with OMB to develop a process that would allow OMB to identify NextGen-related projects across the partner agencies and consider NextGen as a unified, cross-agency program. We recently met with OMB officials who said that they felt there has been significant progress with JPDO over the last year. JPDO is now working on an OMB Exhibit 300 form for NextGen. This will allow JPDO to present OMB a joint business case for the NextGen-related efforts within the partner agencies and will be used as input to funding decisions for NextGen research and acquisitions across the agencies. This Exhibit 300 will be due to OMB in September 2007 to inform decisions about the partner agencies' 2009 budget submissions. Ultimately, the success of JPDO will have to be measured in the efforts of its partner agencies to implement policies and procedures and acquire systems that support NextGen. To date, JPDO can point to its success in collaborating with FAA to fund and speed its rollout of two systems considered cornerstone technologies for NextGen: Automatic Dependent Surveillance-Broadcast (ADS-B) and System Wide Information Management (SWIM). ADS-B is a new air traffic surveillance system that will replace many existing radars with less costly ground-based transceivers. SWIM will provide an initial network centric capability to all the users of the air transportation system. This means that the FAA and the Departments of Homeland Security and Defense will eventually share a common, real-time, secure picture of aviation operations across the airspace system. Identifying such NextGen programs across the partner agencies and establishing implementation plans for them in JPDO's Integrated Work Plan will be critical going forward to creating performance metrics for JPDO. Although we recommended in our November report that JPDO develop written procedures that formalize agreements with OMB regarding the leveraging of partner agency resources, this is still a work in progress. For example, OMB officials said they had not reviewed JPDO's 2008 partner agency budget guidance prior to its release to the partner agencies, which highlights the need for JPDO to further develop its procedures for working with OMB. Going forward, it will be important for Congress and other stakeholders to evaluate the success of the 2009 budgets in supporting NextGen initiatives, especially as 2009 is expected to be a critical year in the transition from planning NextGen to implementing NextGen. In our November report, we noted that JPDO had not yet developed a comprehensive estimate of the costs of NextGen. Since then, in its recently released 2006 Progress Report, JPDO reported some estimated costs for NextGen, including specifics on some early NextGen programs. JPDO believes the total federal cost for NextGen infrastructure through 2025 will range between $15 billion and $22 billion. JPDO also reported that a preliminary estimate of the corresponding cost to system users, who will have to equip with the advanced avionics that are necessary to realize the full benefits of some NextGen technologies, produced a range of $14 billion to $20 billion. JPDO noted that this range for avionics costs reflects uncertainty about equipage costs for individual aircraft, the number of very light jets that will operate in high-performance airspace, and the amount of out-of-service time required for installation. FAA, in its capital investment plan for fiscal years 2008-2012, includes estimated expenditures for 11 line items that are considered NextGen capital programs. The total 5-year estimated expenditures for these programs is $4.3 billion. In fiscal year 2008, only 6 of the line items are funded for a total of roughly $174 million; funding for the remaining 5 programs would begin with the fiscal year 2009 budget. According to FAA, in addition to capital spending for NextGen, the agency will spend an estimated $300 million on NextGen-related research and development from fiscal years 2008 through 2012. The administration's budget for fiscal year 2008 for FAA includes a total of $17.8 million to support the activities of JPDO. While FAA and JPDO have begun to release estimates for FAA's NextGen investment portfolio, questions remain over which entities will fund and conduct some of the necessary research, development, and demonstration projects that will be key to achieving certain NextGen capabilities. In the past, a significant portion of aeronautics research and development, including intermediate technology development, has been performed by NASA. However, NASA's aeronautics research budget and proposed funding shows a 30-percent decline, in constant 2005 dollars, from fiscal year 2005 to fiscal year 2011. To its credit, NASA plans to focus its research on the needs of NextGen. However, NASA is also moving toward a focus on fundamental research and away from developmental work and demonstration projects, which could negatively impact NextGen if these efforts are not assumed by others. According to its 2006 Progress Report, JPDO is building a research and development plan that will document NextGen's research needs and the organizations that will perform the work. For example, JPDO's investment simulation capability relies heavily on NASA's NAS-wide modeling platform, the Airspace Concepts Evaluation System (ACES). This investment simulation capability permits JPDO to, among other things, evaluate alternative research ideas and assess the performance of competing vendors. According to a JPDO official, this capability, which is critical to NextGen research, is eroding as JPDO's investment simulation requirements are expanding. As part of its fundamental research mission, NASA intends to upgrade to ACES-X (a more sophisticated representation of the national airspace system), but not for another two years. Until then, JPDO investment modeling capability will be constrained unless the office or another partner agency can assume the modeling work. While one option would be to contract with private sector vendors to do this type of modeling on a per simulation basis, this solution could be expensive for the government. Moreover, JPDO might not be able to continue facilitating participation by both small and large companies, thus giving both an equal opportunity to demonstrate their ideas, because small companies would have to pay for access to this proprietary modeling capability. This is an issue that needs to be addressed in the short-term. JPDO faces the challenge of determining the nature and scope of the research and technology development necessary to begin the transition to NextGen, as well as identifying the entities that can conduct that research and development. According to officials at FAA and JPDO, they are currently studying these issues and trying to assess how much research and development FAA can assume. An FAA official recently testified that the agency proposes to increase its research and development funding by $280 million over the next 5 years. However, a draft report by an advisory committee to FAA stated that FAA would need at least $100 million annually in increased funding to assume NASA's research and development work, and establishing the necessary infrastructure within FAA could delay the implementation of NextGen by 5 years. More work remains to completely assess the research and development needs of NextGen and the ability of FAA and the other JPDO partner agencies to budget for and conduct the necessary initiatives. This information is critical as the timely completion of research and testing of proposed NextGen systems is necessary to keeping the NextGen initiative on schedule. Addressing questions about how human factors issues will affect the move to some key NextGen capabilities is another challenge for JPDO. For example, the NextGen Concept of Operations envisions an increased reliance on automation, which raises questions about the role of the air traffic controllers in such an automated environment. Similarly, the Concept of Operations envisions that pilots will take on a greater share of the responsibility for maintaining safe separation and other tasks currently performed by controllers. This raises human factors questions about whether pilots can safely perform these additional duties. Although JPDO has begun to model how shifts in air traffic controllers' workloads would affect their performance, it has not yet begun to model the effect of how this shift in workload to pilots would affect pilot performance. According to a JPDO official, modeling the effect of changes in pilot workload has not yet begun because JPDO has not yet identified a suitable model for incorporation into its suite of modeling tools. According to a JPDO official, the evolving roles of pilots and controllers is the NextGen initiative's most important human factors issue, but will be difficult to research because data on pilot behavior are not readily available for use in creating models. In addition to the study of changing roles, JPDO has not yet studied the training implications of various systems or solutions proposed for NextGen. For example, JPDO officials said they will need to study the extent to which new air traffic controllers will have to be trained to operate both the old and the new equipment as the Concept of Operations and enterprise architecture mature. Some stakeholders, such as current air traffic controllers and technicians, will play critical roles in NextGen, and their involvement in planning for and deploying the new technology will be important to the success of NextGen. In November 2006, we reported that active air traffic controllers were not involved in the NextGen planning effort and recommended that JPDO determine whether any key stakeholders and expertise were not represented on its IPTs, divisions, or elsewhere within the office. Since then, the head of the controllers' union has taken a seat on the Institute Management Council. However, no active controllers are yet participating at the IPT planning level. Also, aviation technicians do not participate in NextGen efforts. Input from current air traffic controllers who have recent experience controlling aircraft and current technicians who will maintain NextGen equipment is important when considering human factors and safety issues. Our work on past air traffic control modernization projects has shown that a lack of stakeholder or expert involvement early and throughout a project can lead to costly increases and delays. In addition, we found that some private sector stakeholders have expressed concerns that participation in the Institute might either preclude bidding on future NextGen acquisitions or pose organizational conflicts of interest. FAA's acquisition process, generally, precludes bids from organizations that have participated in, materially influenced, or had prior knowledge of the requirements for an acquisition. The Institute was aware of this concern and attempted to address it through an amendment to its governing document that strengthened the language protecting participants from organizational conflicts of interest for participation in the NextGen initiative. However, while the amendment language currently operates to protect stakeholders, the language has never been tested or challenged. Thus, it is unclear at this time whether any stakeholder participation is being chilled by conflict of interest concerns. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions from you or other Members of the Subcommittee. For further information on this testimony, please contact Dr. Gerald L. Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this statement include Kevin Egan, Colin Fallon, Rick Jorgenson, Faye Morrison, and Richard Scott. 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 skies over America are becoming more crowded every day. The consensus of opinion is that the current system cannot be expanded to meet projected growth. In 2003, recognizing the need for system transformation, Congress authorized the creation of the Joint Planning and Development Office (JPDO), housed within the Federal Aviation Administration (FAA), to lead a collaborative effort of federal and nonfederal aviation stakeholders to conceptualize and plan the Next Generation Air Transportation System (NextGen)--a fundamental redesign and modernization of the national airspace system. JPDO operates in conjunction with its partner agencies, which include FAA; the Departments of Transportation, Commerce, Defense, and Homeland Security; the National Aeronautics and Space Administration (NASA); and the White House Office of Science and Technology Policy. GAO's testimony focuses on the progress that JPDO has made in planning the NextGen initiative and some key issues and challenges that JPDO continues to face. This statement is based on GAO's November 2006 report to this subcommittee as well as ongoing work. In our November 2006 report, we recommended that JPDO take actions to institutionalize its collaboration and determine if it had the involvement of all key stakeholders. JPDO said it would consider our recommendations. JPDO has made progress in several areas in its planning of the NextGen initiative, but continues to face a number of challenges. JPDO's organizational structure incorporates some of the practices that we have found to be effective for federal interagency collaborations, and includes an institute that facilitates the participation of nonfederal stakeholders. JPDO has faced some organizational challenges, however. Leadership turnover at JPDO and the Institute have raised concerns about the stability of JPDO and the impact of the turnovers on its progress. Additionally, we and JPDO officials have heard concerns from stakeholders about the productivity of some integrated product teams and the pace of the planning effort. In response, JPDO officials are currently proposing several changes to JPDO's organizational structure aimed at improving the organization's effectiveness. JPDO has also made progress toward releasing several key planning documents, including a Concept of Operations, an Enterprise Architecture, and an Integrated Work Plan, although in some cases on a revised and extended timeline. JPDO is focusing on the right types of key documents for the foundation of NextGen planning, although the current draft Concept of Operations still lacks important details. In our November 2006 report, we noted that JPDO is fundamentally a planning and coordinating body that lacks authority over the key human and technological resources of its partner agencies. Consequently, institutionalizing the collaborative process with its partner agencies will be critical to JPDO's ability to facilitate the implementation of NextGen. JPDO has identified several tasks including aligning the enterprise architectures of its partner agencies, working with OMB to establish a cross-agency mechanism for NextGen funding decisions, and working with FAA to revamp a key planning document to focus on the NextGen effort. JPDO has made progress in developing cost estimates for NextGen, recently reporting that it estimates the total federal cost for NextGen infrastructure through 2025 will range between $15 billion and $22 billion. Questions remain, however, over which entities will fund and conduct some of the necessary research, development, and demonstration projects that in the past were often conducted by NASA, and which will be key to achieving certain NextGen capabilities. For example, JPDO's investment simulation capability, which relies heavily on a NASA modeling platform, may be constrained unless the JPDO or another partner agency can assume the modeling work. JPDO also faces a challenge in addressing questions concerning how human factors issues, such as the changing roles of air traffic controllers in a more automated NextGen environment, will be researched and addressed. Finally, JPDO has a continuing challenge in ensuring the involvement of all key stakeholders, including controllers and technicians. Similarly, issues have arisen over whether conflict of interest issues could chill the participation of industry stakeholders.

Treasury has continued to focus on CPP, but a variety of other programs have been created or are in progress, as shown in table 1. As of March 5, 2009, Treasury had disbursed almost 80 percent of the $250 billion it had allocated for CPP to purchase almost $197 billion in preferred shares of 467 qualified financial institutions (table 1). Treasury also has begun to receive dividend payments relating to capital purchases under CPP and other programs. According to Treasury, as of February 17, 2009, it had received about $2.4 billion. Initially, Treasury approved $125 billion in capital purchases for nine of the largest public financial institutions that federal banking regulators and Treasury considered to be systemically significant to the operation of the financial system. At the time, these nine institutions held about 55 percent of U.S. banking assets. Subsequent purchases were made in qualified institutions of various sizes (in terms of total assets) and types. As we noted in our January report, most of the institutions that received CPP capital were publicly held institutions, although a limited number of privately held institutions and community development financial institutions (CDFI) also received funds. Treasury has taken a number of important steps toward better reporting on and monitoring of CPP. These steps are in keeping with our prior recommendations that Treasury bolster its ability to determine whether institutions are using CPP proceeds in ways that are consistent with the act's purposes and establish mechanisms to monitor compliance with program requirements. However, Treasury needs to take further steps in this area. Treasury has done an initial survey of the largest institutions to monitor their lending and other activities and announced plans to analyze quarterly monitoring data (call reports) for all reporting institutions. In addition, Treasury is developing a more limited monthly survey of lending by smaller institutions participating in the program. These efforts are important steps toward ensuring that all participating institutions are held accountable for their use of the funds and are consistent with our past recommendation that Treasury seek similar information from existing CPP participants.. We will continue to monitor Treasury's oversight efforts as well as the consistency of the approval process in future work. Treasury has also continued to take steps to increase its planned oversight of compliance with terms of the CPP agreements including limitations on executive compensation, dividends, and stock repurchases. Among these steps, Treasury has named an Interim Chief Compliance Officer. However, Treasury has not finalized its plans for detecting noncompliance with CPP requirements or for taking enforcement actions. Without a more structured mechanism in place to ensure compliance with all CPP requirements, and as more institutions continue to participate in the program, ensuring compliance with these aspects of the program will become increasingly important and challenging. In its recently announced Financial Stability Plan, Treasury called for banks receiving future government funds to be held responsible for appropriate use of those funds through (1) stronger restrictions on dividend payment and executive compensation, and (2) enhanced reporting to the public, including reporting on lending activity. In addition, Treasury is in the process of drafting new regulations to implement the executive compensation requirements in the American Recovery and Reinvestment Act of 2009 (the Recovery Act). We will also continue to monitor the system that Treasury develops to ensure compliance with the agreements and the implementation of additional oversight and accountability efforts under its new plan. Treasury has also continued to make some progress in improving the transparency of TARP and a few weeks ago announced its plans for the remaining TARP funds. In our December 2008 report, we first raised questions about the effectiveness of Treasury's communication strategy for TARP with Congress, the financial markets, and the public. These questions were further heightened in the COP's January report, which raised similar questions about Treasury's strategy for TARP. In response to our recommendation about its communication strategy, Treasury noted numerous publicly available reports, testimonies, and speeches. However, even after reviewing these items collectively, we found that Treasury's strategic vision for TARP remained unclear. For example, Treasury initially outlined a strategy to purchase whole loans and mortgage-backed securities from financial institutions, but changed direction to make capital investments in qualifying financial institutions as the global community opted to move in this direction. However, once Treasury determined that capital infusions were preferable to purchasing whole mortgages and mortgage-backed securities, it did not clearly articulate how the various programs--such as CPP, the Systemically Significant Failing Institutions (SSFI) program, and the Targeted Investment Program (TIP)--would work collectively to help stabilize financial markets. For instance, Treasury has used similar approaches--capital infusions--to stabilize healthy institutions under CPP as well as SSFI and TIP, albeit with more stringent requirements. Moreover, with the exception of institutions selected for TIP being viewed as able to raise private capital, both SSFI and TIP share similar selection criteria. Further, the same institution may be eligible for multiple programs. At least two institutions (Citigroup and Bank of America) currently participate in more than one program, adding to the confusion about Treasury's strategy and vision for implementing TARP. Other actions also have raised additional questions about Treasury's strategy. For example, Treasury announced the first institution under TIP weeks before the program was established. Similarly, the Asset Guarantee Program was established after Treasury announced that it would guarantee assets under such a program, but many of the details of the program have yet to be worked out. Since our January report, Treasury has taken three key actions related to our recommendation about the need for a clearly articulated vision for the program. On February 10, Treasury announced the Financial Stability Plan, which outlined a set of measures to address the financial crisis and restore confidence in U.S. financial and housing markets. The plan appears to be an approach designed to resolve the credit crisis by restarting the flow of credit to consumers and businesses, strengthening financial institutions, and providing aid to homeowners and small businesses. On February 25, Treasury announced the standardized terms and conditions for eligible financial institutions participating in the Capital Assistance Program (CAP). Under CAP, an eligible institution that is found by its federal banking regulator to need additional capital to continue lending and absorb losses in a severe economic downturn will be eligible to participate in CAP. Such institutions will be eligible to receive a capital investment from Treasury, with regulatory approval, in the form of preferred securities that are convertible into common equity to help absorb losses and serve as a bridge to receiving private capital. A key element of Treasury's Financial Stability Plan, CAP is designed to ensure that, in severe economic conditions, the largest U.S. bank holding companies have sufficient capital to support lending to creditworthy homeowners and businesses. As part of this effort, the federal banking regulators--the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision--announced that they will begin conducting a one-time forward-looking capital assessment (or stress test) of the balance sheets of the 19 largest bank holding companies with assets exceeding $100 billion. These institutions are required to participate in the coordinated supervisory capital assessment and may obtain additional capital from CAP if necessary. Regulators noted that the capital assessment process for all eligible institutions is expected to be completed by April 30, 2009. On March 4, 2009, Treasury unveiled its Making Home Affordable program, which is based in part on the use of TARP funds. Among other things, the plan is designed to do the following: It will use $75 billion ($50 billion from TARP funds) to modify the loans of up to 3-4 million homeowners to avoid potential foreclosure. The goal of modifying the mortgages of these homeowners is to reduce the amount owed per month to sustainable levels (a mortgage debt-to-income ratio of 31 percent). Treasury will share the cost of restructuring the mortgages with the other stakeholders (e.g., financial institutions holding whole loans or investors if loans have been securitized). Treasury announced a series of financial incentives for the loan servicers, mortgage holders/investors, and borrowers that are intended to "pay for success," encourage borrowers to continue paying on time under the modified loan, and encourage servicers and mortgage holders/investors to modify at-risk loans before the borrower falls behind on a payment. It includes an initiative to help up to 4-5 million homeowners to refinance loans owned or guaranteed by Freddie Mac and Fannie Mae at current market rates. According to Treasury, these homeowners would not otherwise be able to refinance their loans at the conforming loan rates because the declining value of their homes has left them with little or no equity. Refinancing at current mortgage rates could help homeowners save thousands of dollars on their annual mortgage payments. It increases Treasury's funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability. The $200 billion funding commitment is based on authority granted to Treasury under the Housing and Economic Recovery Act of 2008. We will continue to monitor the development and implementation of Treasury's plan, including how its actions address the challenges we have previously identified. Treasury also established the Auto Industry Financing Program (AIFP) in December 2008 to prevent a disruption of the domestic automotive industry that would pose systemic risk to the nation's economy. Under this program, Treasury has lent $13.4 billion to GM and $4 billion to Chrysler to allow the automakers to continue operating while working out details of their plans to become solvent, such as achieving concessions with stakeholders. The loans were designed to allow the automakers to operate through the first quarter of 2009 with recognition that after that point GM and Chrysler would need additional funds or have to take other steps, such as an orderly bankruptcy. As required by the terms of their loan agreements, GM and Chrysler submitted restructuring plans to Treasury in February that describe the actions the automakers will take to become financially solvent. Because of the continued sluggish economy and lower than expected revenues, GM and Chrysler are requesting an additional $16.6 billion and $5 billion in federal financial assistance, respectively. Treasury is currently assessing the automakers' restructuring plans and determining what the government's role will be in future assistance. By March 31, 2009, GM and Chrysler must report to the Secretary of the Treasury on their progress in implementing these restructuring plans. The Secretary will then determine whether the companies have made sufficient progress in implementing the restructuring plans; if they have not, the loans are automatically accelerated and become due 30 days later. As part of our oversight responsibilities for TARP, we are monitoring Treasury's implementation of AIFP, including the auto manufacturers' use of federal funds and development of the required restructuring plans. Treasury has made progress in establishing its management infrastructure for TARP, including in hiring, overseeing contracts, and establishing internal controls. However, hiring for OFS is still ongoing, Treasury is working to improve its oversight of contractors, and its development of a system of internal control is still evolving. In the hiring area--one that we highlighted in our first report--Treasury took steps to help maintain continuity of leadership within OFS during and after the transition to the new administration. Specifically, Treasury ensured that interim chief positions would be filled to ensure a smooth transition and used direct-hire authority and various other appointments to bring a number of career staff on board quickly. OFS has increased its overall staff since our December 2008 report from 48 to 90 employees as of January 26, which includes an increase of permanent staff from 5 to 38. Treasury officials recently told us that the number of permanent staff had increased to 60. While progress has been made since our last report, the number of temporary and contract staff who will be needed to serve long- term organizational needs remains unknown. Because TARP has added many new programs since it was first established in October and program activities are changing under the new administration, we recognize that Treasury may find it difficult to determine OFS's long-term organizational needs at this time. However, such considerations will be vital to retaining institutional knowledge in the organization. Treasury's use of existing contract flexibilities has enabled it to enter into agreements and award contracts quickly in support of TARP. However, Treasury's use of time-and-materials contracts, although authorized when flexibility is needed, can increase the risk that government dollars will be wasted unless adequate mechanisms are in place to oversee contractor performance. In this regard, Treasury has improved its oversight of contractors, including those using time-and- materials pricing. In addition, while Treasury has taken the important step of recently issuing an interim regulation outlining the process for reviewing and addressing conflicts of interest among new contractors and financial agents, it is still reviewing existing contracts or agreements to ensure conformity with the new regulation. We believe this step is a necessary component of a comprehensive and complete system to ensure that all conflicts are fully identified and appropriately addressed. OFS has adopted a framework for developing and implementing its system of internal control for TARP activities. OFS plans to use this framework to develop specific policies, drive communications on expectations, and measure compliance with internal control standards and policies. However, it has yet to develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk- assessment process. In each of these areas, we made additional recommendations. Specifically, we recommended that Treasury continue to expeditiously hire personnel needed to carry out and oversee TARP. For contracting oversight, we recommended that Treasury expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed-price arrangements whenever possible as program requirements are better defined over time. We also recommended that Treasury review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts of interest regulation and that it take continued steps to manage and monitor conflicts of interest and enforce mitigation plans. Finally, we recommended that Treasury, in addition to developing a comprehensive system of internal controls, develop and implement a well- defined and disciplined risk-assessment process, because such a process is essential to monitoring the status of TARP programs and identifying any risks that announced programs will not be adequately funded. We will continue to monitor OFS's hiring and contracting practices and implementation of the internal control framework, which is vital to TARP's effectiveness. It is still too early in TARP's implementation to see measurable results in many areas given that program actions have only recently occurred and there are time lags in the reporting of data. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effects of other economic forces. Some indicators suggest that the cost of credit has declined in interbank, mortgage, and corporate debt markets since the December report. However, while perceptions of risk (as measured by premiums over Treasury securities) have declined in interbank markets, they have changed very little in corporate bond and mortgage markets. Finally, as noted in December, these indicators may be suggestive of TARP's ongoing impact, but no single indicator or set of indicators can provide a definitive determination of its effects because of the range of actions that have been and are being taken to address the current crisis. These include coordinated efforts by U.S. regulators--namely, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Federal Housing Finance Agency--as well as actions by financial institutions to mitigate foreclosures. For example, a large drop in mortgage rates occurred shortly after the Federal Reserve announced it would purchase up to $500 billion in mortgage-backed securities, highlighting the fact that policies outside of TARP may have important effects on credit markets. We will continue to refine and monitor the indicators. Additionally, we plan to use the Treasury survey data in our efforts to evaluate changes in lending activity resulting from CPP. We recognize that the data has certain limitations primarily that it is self-reported and difficult to benchmark because it is unique. Nonetheless, we think it will prove valuable in future analyses. You also asked that I discuss the impact of TARP and related activities on the national debt and borrowing. Congress has assigned to the Treasury Department the responsibility to borrow the funds necessary to finance the gap between cash in and cash out subject to a statutory limit. Since the onset of the current recession in December 2007, the gap between revenues and outlays has grown. Because the Treasury must borrow the funds disbursed, TARP and other actions taken to stabilize the financial markets increase the need to borrow so adding to the federal debt. Also, federal borrowing needs typically increase during an economic downturn--largely because tax revenues decline while expenditures increase for programs to assist those affected by the downturn. In addition, the American Recovery and Reinvestment Act enacted on February 17, 2009 contains both decreases in revenues and increases in spending. Further, all of this takes place in the context of the longer-term fiscal outlook, which will present Treasury with continued financing challenges even after the return of financial stability and economic growth. Treasury's primary debt management goal is to finance the government's borrowing needs at the lowest cost over time. Issuing debt through regularly scheduled auctions lowers borrowing costs because investors and dealers value liquidity and certainty of supply. Treasury issues marketable securities that range in maturity from one month to 30 years and sells them at auction on a pre-announced schedule. The mix of securities that Treasury has outstanding changes regularly as new debt is issued. The mix of securities is important because it can have a significant influence on the federal government's interest payments. Longer-term securities typically carry higher interest rates--or cost to the government--primarily due to concerns about future inflation. However, these longer-term securities offer the government the certainty of knowing what the Treasury's payments will be over a longer period. At the end of February 2009, Treasury's outstanding marketable securities stood at just under $6 trillion--an increase of $1.476 trillion since December 31, 2007. As shown in figure 1, a large portion of this debt increase was in the form of short-term cash management bills (CM bills). Between October 1, 2008 and February 28, 2009 Treasury issued $1.035 trillion in CM bills, of which $510 billion were outstanding at the end of February. Interest rates have decreased dramatically since the start of the financial crisis, particularly for short-term debt. Figure 2 below illustrates the size of that drop. The impact of this drop can be seen in lower borrowing costs--indeed, the budget shows net interest declining in fiscal year 2009. Although these relatively low interest rates have reduced Treasury's borrowing costs, the increasing amount of short-term debt that needs to be rolled over does present challenges. As shown in figure 3, approximately $2.5 trillion--or 41 percent of total outstanding marketable securities will mature in 2009-- and will have to be refinanced. As Treasury borrows to meet its current needs, Treasury must also plan for rolling over large amounts of debt in the short term. Treasury has said that it "recognizes the need to monitor short-term issuance versus longer dated issuance." Market experts generally believe that Treasury needs to increase the average maturity of its debt portfolio in part to lock in relatively low long-term rates and to ensure adequate borrowing capacity in the coming years. To support Congress' oversight of the use of TARP funds we have work underway looking at how Treasury has financed borrowing associated with the recent financial crisis and at additional ideas for debt management that might make sense going forward. Total borrowing will increase by trillions of dollars this year, not solely due to TARP and other activities aimed at stabilizing the financial system. Debt also grows in response to the economic slowdown as revenues fall and spending for some programs grows. Further, both the tax and spending provisions of the Recovery Act will also increase debt. All of this contributes to the borrowing challenge faced by the Treasury. As this Committee well knows, debt is also held in governmental accounts--such as the Social Security Trust Fund. This debt is included in the total debt subject to limit. The debt limit was increased by the Emergency Economic Stabilization Act of 2008 and the Recovery Act, but with only $1.2 trillion remaining under the limit, it will have to be raised again. The combination of slower growth and greater debt lead to increases in publicly-held debt as a share of our economy--The President's budget projects debt reaching 65 percent of gross domestic product in 2010 and remaining at that level for the rest of the decade. Today Congress, the executive branch and the American people are understandably focused on restoring financial stability and economic growth. At some point, however, the nation's leaders will need to apply the same level of intensity to the serious long-term fiscal challenges facing the federal government. Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to discuss this critically important issue and would be happy to answer any questions that you may have. Thank you. For further information on this testimony, please contact Thomas J. McCool on (202) 512-2642 or [email protected]. 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 our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury) has the authority to purchase and insure up to $700 billion in troubled assets held by financial institutions through its Office of Financial Stability (OFS). As Congress may know, Treasury was granted this authority in response to the financial crisis that has threatened the stability of the U.S. banking system and the solvency of numerous financial institutions. The Emergency Economic Stabilization Act (the act) that authorized TARP on October 3, 2008, requires GAO to report at least every 60 days on findings resulting from our oversight of the actions taken under the program. We are also responsible for auditing OFS's annual financial statements and for producing special reports on any issues that emerge from our oversight. To carry out these oversight responsibilities, we have assembled interdisciplinary teams with a wide range of technical skills, including financial market and public policy analysts, accountants, lawyers, and economists who represent combined resources from across GAO. In addition, we are building on our in-house technical expertise with targeted new hires and experts. The act also created additional oversight entities--the Congressional Oversight Panel (COP) and the Special Inspector General for TARP (SIGTARP)--that also have reporting responsibilities. We are coordinating our work with COP and SIGTARP and are meeting with officials from both entities to share information and coordinate our oversight efforts. These meetings help to ensure that we are collaborating as appropriate and not duplicating efforts. This testimony is based primarily on our January 30, 2009 report, the second under the act's mandate, which covers the actions taken as part of TARP through January 23, 2009, and follows up on the nine recommendations we made in our December 2, 2008 report.3 This statement also provides additional information on some recent program developments, including Treasury's new financial stability plan and, as you requested, provides some insights on our ongoing work on the implications of actions related to the financial crisis on federal debt management. Our oversight work under the act is ongoing, and our next report is due to be issued by March 31, 2009, as required. Specifically, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP; (2) the status of OFS's hiring efforts, use of contractors, and development of a system of internal control; (3) implications of TARP and other events on federal debt management, and (4) preliminary indicators of TARP's performance. To do this work, we reviewed documents related to TARP, including contracts, agreements, guidance, and rules. We also met with OFS, contractors, federal agencies, and officials from all eight of the first large institutions to receive disbursements. We plan to continue to monitor the issues highlighted in our prior reports, as well as future and ongoing capital purchases, other more recent transactions undertaken as part of TARP (for example, guarantees on assets of Citigroup and Bank of America), and the status of other aspects of TARP.

USPS's financial condition continued to decline over the past fiscal year and its financial outlook is poor for fiscal year 2011 and the foreseeable future. Key USPS results for fiscal year 2010 included a $1.0 billion decline in total revenue to $67.1 billion, and a $3.7 billion increase in total expenses to $75.6 billion, resulting in a record loss of about $8.5 billion, a $1.8 billion increase in outstanding debt (which left $1.2 billion of available borrowing authority), a total of $12 billion in outstanding debt due to the Treasury, and a $1.2 billion cash balance at the end of the fiscal year. USPS has recently released its budget for fiscal year 2011, projecting a $6.4 billion loss (see fig. 1)--one of the largest in USPS history-- including the impact of a $5.5 billion payment due in 2011 to prefund retiree health benefits; a $3 billion increase in outstanding debt due to the Department of the Treasury (Treasury), thereby reaching its $15 billion statutory limit; and a $2.7 billion cash shortfall at the end of the fiscal year. USPS's revenue drop in fiscal year 2010 was driven by continuing declines in total mail volume. In fiscal year 2010, mail volume decreased about 6 billion pieces from the previous fiscal year to 171 billion pieces. This volume was about 20 percent below the peak of 213 billion pieces delivered during fiscal year 2006. Most of the volume declines were in profitable First-Class Mail--which were particularly significant because the average piece of First-Class Mail generated about three times the profitability of the average piece of Standard Mail. USPS currently projects mail volume to increase by about 2 billion pieces in fiscal year 2011. In this fiscal year, First-Class Mail is expected to decrease by 3 billion pieces, but Standard Mail is expected to increase by 5 billion pieces. With these volume changes and expected small rate increases, USPS projects revenues to increase $0.6 billion in fiscal year 2011. Meanwhile, USPS's expenses increased by $3.7 billion in fiscal year 2010 compared to fiscal year 2009 for several reasons. First, in fiscal year 2010, USPS made its statutorily required payment of $5.5 billion to prefund health benefits for its retirees, in contrast to fiscal year 2009 when Congress deferred all but $1.4 billion of USPS's scheduled payment of $5.4 billion. Second, USPS's workers' compensation costs in fiscal year 2010 were $3.6 billion, up $1.3 billion from the previous fiscal year, primarily from the non-cash effect of changes in the discount rates used to estimate the liability. Third, results of USPS cost savings efforts in fiscal year 2010 were insufficient to offset rising costs in other areas. According to USPS, it achieved a total of close to $13 billion in cost savings from fiscal years 2006 through 2010 (see fig. 2), primarily by reducing 280 million work hours and its workforce by 131,000 employees. Most savings resulted from attrition, reductions in overtime, and changes in postal operations. USPS reported saving $3 billion in fiscal year 2010, primarily because of a reduction of 75 million work hours--half the savings achieved in fiscal year 2009. Looking forward, USPS projects cost savings of $2 billion in fiscal year 2011, primarily from continued attrition and associated savings. As its core product--First-Class Mail--continues to decline, USPS must modernize and restructure to become more efficient, control costs, keep rates affordable, and meet changing customer needs. To do so, USPS will need to become much leaner and more flexible. Key challenges include the following: Mail volume and changing use of the mail: USPS projects mail volume to continue declining to about 150 billion pieces by fiscal year 2020--about 30 percent below its 2006 peak. Most of the declines are projected to be in profitable First-Class Mail. Use of the mail is changing as communications and payments continue to shift to electronic alternatives--a shift that is being facilitated by rapid adoption of broadband. These trends expose weaknesses in USPS's business model, which has relied on volume growth to help cover costs. Postal revenues: USPS expects revenue to stagnate in the next decade as continued declines in mail volume are offset by rate increases. Rate increases are generally limited by the inflationary price cap on market- dominant products that generate close to 90 percent of USPS revenue. Compensation and benefit costs: Compensation and benefits, including retiree health benefits and workers' compensation, totaled about $60 billion in fiscal year 2010, or close to 80 percent of USPS costs. USPS pays a higher share of employee health and life insurance premiums than other federal agencies. Difficulties achieving network realignment: Realigning USPS's mail processing and retail facilities will be crucial for it to achieve sustainable cost reductions and productivity improvements, but limited progress has been made in rightsizing these networks to eliminate costly excess capacity. Although USPS is working to consolidate some mail processing operations, it has closed few large mail processing facilities since 2005. Similarly, its network of post offices and postal retail facilities has remained largely static despite expanded use of retail alternatives and population shifts. Capital investment: Continuing losses from operations have constrained funds for USPS capital investment. USPS's purchases of capital property and equipment and building improvements have declined in recent years, from $1.8 billion in fiscal year 2009 to $1.4 billion in fiscal year 2010. The deferral of maintenance could impede modernization and efficiency gains from optimizing mail processing, retail, and delivery networks. Further, USPS has delayed buying new delivery vehicles for lack of capital resources. We have an ongoing review of USPS's delivery fleet of about 185,000 vehicles, including about 140,000 long-life vehicles purchased in the late 1980s and early 1990s that are nearing the end of their 24-year expected operating time frame. USPS has estimated replacing its delivery fleet will cost about $5 billion. Lack of borrowing capacity: USPS expects to increase its outstanding debt to Treasury during fiscal year 2011 by $3 billion, thereby reaching its total statutory debt limit of $15 billion. Even with this debt increase, USPS projects a cash shortfall at the end of this fiscal year. Its cash outlook is uncertain, as indicated by recent experience. USPS reported in August 2010 that it "would likely experience a cash shortfall if legislation similar to that passed in September 2009 is not passed." USPS ended fiscal year 2010 with cash of about $1.2 billion and remaining annual borrowing authority of an additional $1.2 billion, or slightly more than the funds needed for one biweekly payroll. USPS projects it will have insufficient cash at the end of fiscal year 2011 to meet all of its obligations. Large unfunded financial obligations and liabilities: USPS's unfunded obligations and liabilities were roughly $100 billion at the end of fiscal year 2010. Looking forward, USPS will continue to be challenged by these financial obligations and liabilities, together with expected large financial losses and long-term declines in First-Class Mail volume. Proposed postal legislation, including S. 3831, provides a starting point for considering key issues where congressional decisions are needed to help USPS undertake needed reforms. This bill is based on legislative proposals USPS made this past spring. Resolving large USPS funding requirements for pension and retiree health benefits is important. It is equally important to USPS's future to address constraints and legal restrictions, such as those related to closing facilities, so that USPS can take more aggressive action to reduce costs. Urgent action is needed as some changes, such as rightsizing networks, will take time to implement and produce results. In addition, including incentives and oversight mechanisms would make an important contribution to assuring an appropriate balance between providing USPS with more flexibility and assuring sufficient transparency, oversight, and accountability. Congressional decisions may involve difficult trade-offs related to USPS's role as a federal entity expected to provide universal mail delivery and ready access to postal retail service while being self-financing through businesslike operations. Future USPS actions and other stakeholder actions are expected to be informed and guided based on congressional decisions related to public policy questions, such as: Benefits: What changes, if any, should be made to USPS pension and retiree health benefit obligations and payment schedules? What would be the impact on the federal budget? Delivery: Should the long-standing requirement for Saturday delivery be dropped so USPS can implement its proposal to reduce delivery frequency to 5 days a week? What would be the specific effects on operations, costs, workforce mix, employees, service, competition, the value of mail, mail volume, and revenue? How would shifting to 5-day delivery affect customers including business mailers and the public? Post office closings: Should USPS have greater flexibility to rightsize its retail networks and workforce, which may involve closing post offices and moving retail services to alternative commercial locations that are often open more days and longer hours than postal facilities? Or should USPS retain its retail facilities and provide new nonpostal products and services? Nonpostal products: Should USPS be allowed to offer new nonpostal products and services that compete with private-sector firms? If so, how should fair competition be assured? Would it need additional capital for such initiatives? If so, how would they be financed? Processes for change: What role should Congress, the PRC, USPS, employees, and customers, including business mailers and the public, have in decisions on postal policy issues? What incentives and oversight mechanisms are needed as part of congressional actions to assure an appropriate balance between providing USPS with more flexibility and assuring sufficient transparency, oversight, and accountability? We have discussed several options that Congress and USPS could consider in a report we issued last April, and are currently conducting a congressionally requested review of USPS's 5-day delivery proposal. In this testimony, we will highlight some options related to three areas that are also addressed by S. 3831--compensation and benefits, rightsizing networks and workforce, and expanding nonpostal activities. S. 3831 addresses key retiree health and pension benefit issues. Specifically, it requires OPM to recalculate USPS's CSRS pension obligation in a way expected to make the federal government responsible for a greater share of USPS's CSRS pension obligation. The bill also authorizes the USPS Board of Governors to transfer any part of a resulting pension surplus to the Postal Service Retiree Health Benefits Fund. The sponsor of S. 3831 has estimated that these legislative changes could result in an increase in the government's pension obligations of approximately $50 billion. Such an increase could impact the federal budget deficit and require funding over time. USPS has said it cannot afford its required prefunding payments to the retiree health benefit fund on the basis of its significant volume and revenue declines, large losses, debt nearing its limit, and limited cost- cutting opportunities under its current authority. We have reported that Congress should consider providing financial relief to USPS, including modifying its retiree health benefit cost structure in a fiscally responsible manner. Several legislative proposals have been made to defer costs by revising statutory requirements, including extending and revising prefunding payments to the Retiree Health Benefits Fund, with smaller payment amounts in the short term followed by larger amounts later. Deferring some prefunding of these benefits would serve as short-term fiscal relief. However, deferrals also increase the risk that USPS will not be able to make future benefit payments as its core business declines. Therefore, it is important that USPS fund its retiree health benefit obligations--including prefunding these obligations--to the maximum extent that its finances permit. In addition to considering what is affordable and a fair balance of payments between current and future ratepayers, Congress would also have to address the impact of these proposals on the federal budget. Further, the Congressional Budget Office has raised concerns about how aggressive USPS's cost-cutting measures would be if prefunding payments for retiree health care were reduced. Congress could revisit other aspects of the postal compensation and benefits framework. USPS is required to maintain compensation and benefits comparable to the private sector, a requirement that has been a source of disagreement between USPS and its unions in collective bargaining and binding arbitration. If USPS and its unions go to arbitration, there is no statutory requirement for arbitrators to consider USPS's financial condition. We continue to favor such an arbitration requirement. The law also requires USPS's fringe benefits to be at least as favorable as those in effect when the Postal Reorganization Act of 1970 was enacted. Career employees participate in federal pension and benefit programs, and USPS covers a higher proportion of its employees' health care and life insurance premiums than most other federal agencies. USPS is also required by law to participate in the federal workers' compensation program, and some benefits paid exceed those provided in the private sector. Furthermore, USPS employees in this program can choose not to retire when they become eligible to retire, and they often decide to remain on the more generous workers' compensation rolls. Congressional action is needed to speed USPS's progress in rightsizing its networks and workforce, and S. 3831 seeks to address these issues. Such progress is limited by both stakeholder resistance and statutory requirements. USPS has costly excess capacity and inadequate flexibility to quickly reduce costs in its processing and retail networks. USPS has faced formidable resistance to facility closures and consolidations because of concerns about possible effects on service, employees, and communities, particularly in small towns or rural areas. We have suggested that Congress consider establishing a panel similar to the military Base Realignment and Closure Commissions to facilitate action and progress. Such panels have successfully informed prior difficult restructuring decisions. The panel could consider options for USPS's networks including the following: Mail processing: Decisions to maintain or close facilities are best made in the context of a comprehensive, integrated approach for optimizing the processing network. Issues include how to inform Congress and the public, address resistance, and ensure employees will be treated fairly. Related issues include whether to relax current delivery standards to enable additional facility closures and associated savings. Retail: USPS has retained most of its retail facilities in recent years despite the growing use of less costly alternatives to traditional post offices, such as self-service kiosks and stamp sales in grocery stores, drug stores, and over the Internet. USPS has called for statutory changes to facilitate modernizing its retail services. USPS has asked Congress to change the law so it can diversify into nonpostal areas to find new opportunities for revenue growth, and S. 3831 would authorize such action. This could involve USPS entering into new business areas or earning revenues from partners selling nonpostal products at USPS facilities. About 10 years ago, we reported that USPS incurred losses on early electronic commerce and other nonpostal initiatives, and its management of its electronic commerce initiatives was fragmented, with inconsistent implementation and incomplete financial information. Congress then restricted USPS from engaging in new nonpostal activities in the Postal Accountability and Enhancement Act of 2006. Allowing USPS to expand into new nonpostal activities would raise issues about the areas in which it should be allowed to compete with the private sector, how to assure fair competition, how to mitigate risks associated with entering new lines of business, and how to finance such efforts. Related issues could include whether USPS's mission and role as a government entity with a monopoly should be changed, what transparency and accountability would apply, whether USPS would be subject to the same regulatory entities and regulations as its competitors, and whether losses would be borne by postal ratepayers or taxpayers. A senior USPS official told us that USPS is studying various possibilities for introducing new products and services. A continued issue is whether USPS would make money if it was allowed to compete in new nonpostal areas. USPS has reported that if it could enter such areas, such as banking or sales of consumer goods, its opportunities would be limited by its high cost structure and the relatively light customer traffic of post offices compared with commercial retailers. (There are 600 weekly counter customers at the average post office, compared to 20,000 at the average major supermarket, according to USPS.) USPS has said that the possibility of building a sizable presence in logistics, banking, integrated marketing, and document management was currently not viable because of its net losses, high wage and benefit costs, and limited access to cash to support necessary investment. USPS concluded that building a sizable business in any of these areas would require "time, resources, new capabilities (often with the support of acquisitions or partnerships) and profound alterations to the postal business model." In summary, the need for postal reform continues as business and consumer use of the mail continues to evolve. Congress and USPS urgently need to reach agreement on a package of actions to restore USPS's financial viability and enable it to begin making necessary changes. Mr. Chairman, that concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have. For further information about this statement, please contact Phillip Herr at (202) 512-2834 or [email protected]. Individuals who made key contributions to this statement include Joseph Applebaum, Chief Actuary; Susan Ragland, Director, Financial Management and Assurance; Amy Abramowitz; Teresa Anderson; Joshua Bartzen; Kenneth John; Hannah Laufe; SaraAnn Moessbauer; Robert Owens; Crystal Wesco; and Jarrod West. 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. Postal Service's (USPS) financial condition and outlook deteriorated sharply during fiscal years 2007 through 2009. USPS actions to cut costs and increase revenues were insufficient to offset declines in mail volume and revenues. Mail volume declined from 213 billion pieces in fiscal year 2006, to 171 billion pieces in fiscal year 2010--or about 20 percent. Volume declines resulted from the recession and changes in the use of mail as transactions and messages continued to shift to electronic alternatives. In this environment, USPS initiatives to increase revenues had limited results. USPS expects mail volume to decline further to about 150 billion pieces by 2020. This trend exposes weaknesses in USPS's business model, which has relied on growth in mail volume to help cover costs. GAO and others have reported on options for improving USPS's financial condition, including GAO's April 2010 report on USPS's business model (GAO-10-455). Recently, legislation has been introduced that addresses USPS's finances and the need for flexibility to help modernize operations. This testimony discusses (1) updated information on USPS's financial condition and outlook, (2) the need to modernize and restructure USPS, and (3) key issues that need to be addressed by postal legislation. It is based primarily on GAO's past and ongoing work. In comments on our statement, USPS generally agreed with its accuracy and provided technical comments that were incorporated as appropriate. USPS's financial condition continued to decline in fiscal year 2010 and its financial outlook is poor for fiscal year 2011 and the foreseeable future. Key results for fiscal year 2010 included total revenue of $67.1 billion and total expenses of $75.6 billion, resulting in (1) a record loss of $8.5 billion--up $4.7 billion from fiscal year 2009, (2) a $1.8 billion increase in outstanding debt to the Treasury, thus making the total outstanding debt $12 billion, and (3) a $1.2 billion cash balance at the end of the fiscal year. USPS's budget for fiscal year 2011 projects (1) a $6.4 billion loss, (2) a $3 billion increase in debt to the $15 billion statutory limit, and (3) an end-of-year cash shortfall of $2.7 billion. USPS has reported achieving close to $13 billion in cost savings in the past 5 fiscal years. However, as its most profitable core product, First-Class Mail, continues to decline, USPS must modernize and restructure to become more efficient, control costs, keep rates affordable, and meet changing customer needs. To do so, USPS needs to become much leaner and more flexible. Key challenges include: changing use of the mail; compensation and benefit costs that are close to 80 percent of total costs; difficulties realigning networks to remove costly excess capacity and improve efficiency; constrained capital investment, which has declined to one of the lowest levels in two decades and led to delays in buying new vehicles; lack of borrowing capacity when USPS reaches its statutory debt limit; and large unfunded financial obligations and liabilities of roughly $100 billion at the end of fiscal year 2010. Proposed postal legislation, including S. 3831, provides a starting point for addressing key issues facing USPS and facilitating changes, such as rightsizing networks, that will take time to implement and produce results. Also, decisions on postal issues may involve trade-offs related to USPS's role as a federal entity expected to provide universal postal service while being self-financing through businesslike operations. Three key areas addressed by the bill include compensation and benefits; rightsizing USPS networks and workforce; and whether to allow USPS to expand its nonpostal activities. For example, resolving large USPS funding requirements for retiree health benefits is important, while continuing to prefund retiree health benefits to the extent USPS's finances permit. It is equally important to address constraints and legal restrictions, such as those related to closing facilities, so that USPS can take more aggressive action to reduce costs. Allowing USPS to expand into nonpostal activities raises issues of how to mitigate risks associated with new lines of business, assure fair competition with the private sector, and how to finance such efforts. Congress and USPS urgently need to take action to restore USPS's financial viability as business and consumer use of the mail continues to evolve.

The final medical privacy regulation requires that most providers obtain patient consent to use or disclose health information before engaging in treatment, payment, or health care operations. As defined in the regulation, health care operations include a variety of activities such as undertaking quality assessments and improvement initiatives, training future health care professionals, conducting medical reviews, and case management and care coordination programs. The consent form must alert patients to the provider's notice of privacy practices (described in a separate document) and notify them of their right to request restrictions on the use and disclosure of their information for routine health care purposes. Providers are not required to treat patients who refuse to sign a consent form, nor are they required to agree to requested restrictions. The consent provision applies to all covered providers that have a direct treatment relationship with patients. The regulation also specifies several circumstances where such prior patient consent is not required. The privacy regulation does not require health plans to obtain written patient consent. This approach to patient consent for information disclosures differs from that in HHS' proposed privacy regulation, issued for public comment November 3, 1999. The proposed regulation would have permitted providers to use and disclose information for treatment, payment, and health care operations without written consent. At the time, HHS stated that the existing consent process had not adequately informed patients of how their medical records could be used. Comments HHS received on this provision were mixed. Some groups approved of this approach, saying it would ensure that covered entities could share information to provide effective clinical care and operate efficiently, while not creating administrative requirements that would add little to individual privacy. However, others wrote that individuals should be able to control to whom, and under what circumstances, their individually identifiable health information would be disclosed, even for routine treatment, payment, or health care operations. The extent to which the privacy regulation's consent requirement will be a departure from business as usual varies by type of provider. Under current practices, physicians and hospitals generally obtain consent to use patient data for processing insurance claims, but they obtain consent substantially less often for treatment or health care operations. Pharmacists, however, typically do not have consent procedures in place for any of the routine purposes included in the regulation. Specifically: Most, but not all, physicians get signed written consent to use patient data for health insurance payment. Exceptions to this practice include emergency situations and patients who choose to pay for their treatment "out of pocket" to avoid sharing sensitive information with an insurer. However, physicians do not typically seek approval to use patient data to carry out treatment or health care operations. Nearly all hospitals routinely obtain written consent at the time of admission, at least for release of information to insurance companies for payment purposes. A 1998 study of large hospitals found that 97 percent of patient consent forms sought release of information for payment, 50 percent addressed disclosure of records to other providers, and 45 percent requested consent for utilization review, peer review, quality assurance, or prospective review--the types of health care management activities considered health care operations in the federal privacy regulation. Pharmacies do not routinely obtain patient consent related to treatment (i.e., before filling a prescription), payment, or health care operations. However, industry representatives told us that pharmacies conducting disease management programs (specialized efforts to ensure appropriate pharmaceutical use by patients with certain chronic conditions) typically seek consent to share information with physicians about the patients' condition, medical regimen, and progress. The new consent requirement makes several important changes to current practices that have implications for patients and providers. For patients, they will be made aware that their personal health information may be used or disclosed for a broad range of purposes including health care operations. Other provisions of the privacy regulation grant patients additional protections, including the right to access their records, to request that their records be amended, to obtain a history of disclosures, and to request restrictions on how their information is used. For providers directly treating patients, they will have a legal obligation to obtain prior written consent and to use a form that meets specific content requirements. Supporters of the consent requirement argue that the provision gives patients an opportunity to be actively involved in decisions about the use of their data. Yet, many groups recognize that signing a provider's consent form does not, per se, better inform patients of how their information will be used or disclosed. In addition, most provider organizations we interviewed told us that the privacy regulation's consent requirement will be a challenge to implement and may impede some health care operations. The American Medical Association (AMA), the Bazelon Center for Mental Health Law, and the Health Privacy Project (HPP) indicated that the consent process offers important benefits to patients. These groups view the process of signing a consent form as a critical tool in focusing patient attention on how personal health information is being used. They assert that only providing patients with a notice of privacy practices is not sufficient because most patients are not likely to understand its importance, much less read it. The patient advocacy groups told us that the act of signing the consent can help make patients aware of their ability to affect how their information is used. This heightened awareness, in turn, may make patients more likely to read the notice of privacy practices or to discuss privacy issues with their health care provider. HPP cited the process of signing consent as offering an "initial moment" in which patients have an opportunity to raise questions about privacy concerns and learn more about the options available to them. This opportunity may be especially valuable to patients seeking mental health and other sensitive health care services. In contrast, many groups we interviewed question the value of the consent form for patients. For example, the Medical Group Management Association (MGMA) and the American Hospital Association (AHA) assert that the process of signing a consent form may be perfunctory, at best, and confusing, at worst. To some extent, patient advocacy groups we spoke with agree. They say that patients will be under pressure to sign the form without reading the notice, as providers can condition treatment upon obtaining consent. They contend that many patients may not find the consent process meaningful. They maintain that nevertheless it should be required for the benefit it offers patients who may be particularly interested in having a say about how their health information will be used. Health plan and provider organizations we interviewed told us that the consent requirement poses implementation difficulties for patients and providers both during the regulation's initial implementation and beyond. The extent of these challenges and their potential implications vary by type of provider. In general, these organizations do not favor written consents for routine uses of patient information, although they support the regulation's requirement to provide patients with privacy notices. The consent requirement would require pharmacists to change their current practices. Under the regulation, a patient must sign a consent form before a pharmacist can begin filling the prescription. According to the American Pharmaceutical Association and the National Association of Chain Drug Stores, this requirement would result in delays and inconvenience for patients when they use a pharmacy for the first time.Also, pharmacies would not be able to use patient information currently in their systems to refill prescriptions or send out refill reminders before receiving patient consent to do so. In addition, patients who spent time in different parts of the country and were accustomed to transferring their prescriptions to out-of-state pharmacies would have to provide consent to one or more pharmacies before their prescriptions could be filled. Pharmacy and other organizations have suggested that the privacy regulation should recognize a physician-signed prescription as indicative of patient consent or that pharmacies could be considered indirect providers and thus not subject to the consent requirement. Hospital organizations also raised concern about disruption of current practice and some loss of efficiency. AHA and Allina Health System representatives stated that the consent requirement could impede the ability of hospitals to collect patient information prior to admission, thus creating administrative delays for hospitals and inconvenience for some patients. In advance of nonemergency admissions, hospitals often gather personal data needed for scheduling patient time in operating rooms, surgical staff assignments, and other hospital resources. If the regulation is interpreted to include such activities as part of treatment or health care operations, hospitals would be required to get the patient's signed consent before setting the preadmissions process in motion. Either a form would have to be mailed or faxed to the patient and sent back, or the patient would have to travel to the hospital to sign it. Physician and hospital groups expressed concern that the requirement would hinder their ability to conduct health care management reviews using archived records. For example, AMA and AHA told us that the regulation will not permit them to use much of the patient data gathered under previous consent forms. While the regulation has a transition provision that allows providers to rely on consents acquired before the regulation takes effect, the continuing validity of those preexisting consents would be limited to the purposes specified on the consent form. In most cases, the purposes specified were either treatment or billing. This means that providers would not be able to draw on those data for other purposes, including common health care management functions, such as provider performance evaluations, outcome analyses, and other types of quality assessments. Moreover, they said that in many cases it might not be feasible to retroactively obtain consent from former patients. Some have suggested revising the regulation to allow providers to use, without consent, all health information created prior to the regulation's effective date. All of the organizations representing providers and health plans anticipate an additional administrative burden associated with implementing the new consent procedures, but the magnitude of the potential burden is uncertain. For example, if the use of new forms elicits more questions from patients about medical records privacy, as the provision's supporters expect will happen, providers will have to devote more staff time to explaining consent and discussing their information policies. Similarly, health plan and provider advocates contend that focusing patients' attention on their right to request restrictions on how their information is used could result in many more patients seeking to exercise that right. This, some believe, would require increased staff time for considering, documenting, and tracking restrictions. The privacy regulation expands the scope of the consent process to include the use and disclosure of personal health information for a wide range of purposes. This may help some patients become aware of how their medical information may be used. However, in general, provider and health plan representatives believe that the consent requirement's benefits are outweighed by its shortcomings, including delays in filling prescriptions, impediments to hospital preadmission procedures, and difficulty in using archived patient information. Regardless of the presence of the consent requirement, providers are obligated under the regulation to protect the confidentiality of patient information. Moreover, with or without the consent requirement, patients' rights established by the privacy regulation--to see and amend their records, to learn of all authorized uses of their information, and to request restrictions on disclosures--remain unchanged. HHS provided written technical comments on a draft of this report. In them, HHS remarked on the consent requirement's applicability to archived patient medical records. Agency officials explained that a consent for either treatment, payment, or health care operations acquired before the regulation's compliance date would be valid for continued use or disclosure of those data for all three of these purposes after that date. Under this interpretation, for example, prior consents to disclose patient information for insurance claims would permit uses for the full range of health care operations as well, unless specifically excluded in the consent that the patient signed. In our view, a better understanding of the implications of this provision may emerge from any revisions to the final regulation. Referring to material in appendix I, the agency expressed concern that we overgeneralized current state consent laws, which have complex requirements and vary significantly from one to another. HHS pointed out that some state laws require written consent in some circumstances that would be considered treatment, payment, or health care operations. We recognize that state laws are complex and vary widely in the type of health care information that is protected and the stringency of those protections. While it is difficult to generalize about state laws, we found that the statutes in the 10 states we examined were fairly consistent in not requiring written consent for the full range of uses and disclosures of patient information for treatment, payment, and health care operations. The agency provided other technical comments that we incorporated where appropriate. We are sending copies of this report to the Honorable Tommy G. Thompson, Secretary of HHS, and others who are interested. We will also make copies available to others on request. If your or your staff have any questions, please call me at (312) 220-7600 or Rosamond Katz, Assistant Director, at (202) 512-7148. Other key contributors to this report were Jennifer Grover, Joel Hamilton, Eric Peterson, and Craig Winslow. To examine how state privacy laws address the issue of patient consent to use health information, we reviewed certain laws in 10 states (Hawaii, Maine, Maryland, Minnesota, Montana, Rhode Island, Texas, Virginia, Washington, and Wyoming). We found that none of these state privacy statutes include a consent requirement as broad as that found in the privacy regulation. Although they generally prohibit using or disclosing protected health information without the patient's permission, they include significant exceptions not present in the federal regulation. Essentially, none of the state statutes we reviewed requires consent for the full range of uses and disclosures of patient information for treatment and health care operations. The Minnesota and Wyoming statutes require consent to use patient health information for payment purposes. Two states recently attempted to enhance patient control over their personal health information. In 1996, Minnesota enacted a law that placed stringent consent requirements on the use of patient data for research. It stipulated that patient records created since January 1, 1997, not be used for research without the patient's written authorization. Because such authorization was not obtained at the start of treatment, researchers had to retroactively seek permission. They soon found that many patients did not respond to requests for such authorization, either to approve or to reject the use of their data. The law was amended to permit the use of records in cases where the patient had not responded to two requests for authorization mailed to the patient's last known address. At one major research institution in Minnesota, the Mayo Clinic, that change decreased the percentage of patient records that the patient consent requirement made unavailable for studies from 20.7 percent to 3.2 percent. In late 1998, Maine enacted a comprehensive law requiring specific patient authorization for many types of disclosures and uses of health information. The law took effect January 1, 1999, but was soon suspended by the state legislature in response to numerous complaints from the public. Particularly problematic was that "hospital directory" information could not be released without the patient's specific written authorization. Therefore, until routine paperwork was completed, hospitals could not disclose patients' room or telephone numbers when friends, family, or clergy tried to contact or visit them. Based on this experience, the Maine legislature substantially modified the law, which became effective on February 1, 2000. Among other changes, the revised law allows a hospital to list current patients in a publicly available directory unless a patient specifically requests to be excluded.

The Department of Health and Human Services issued a final regulation in December 2000 that established rights for patients with respect to the use of their medical records. The regulation requires that most providers obtain patient consent to use or disclose health information before engaging in treatment, payment, or health care operations. The privacy regulation's consent requirement will be more of a departure from current practice for some providers than for others. Most health care providers, with the exception of pharmacists, obtain some type of consent from patients to release information to insurers for payment purposes. The new requirement obligates most providers to obtain consent before they can use and disclose patient information. It also broadens the scope of consent to include treatment and a range of health care management activities. Supporters of the requirement believe that the process of signing a consent form provides an opportunity to inform and focus patients on their privacy rights. Others, however, are skeptical and assert that most patients will simply sign the form with little thought. In addition, provider and other organizations interviewed are concerned that the new consent requirement poses implementation difficulties. They contend that it could cause delays in filling prescriptions for patients who do not have written consents on file with their pharmacies, impede the ability of hospitals to obtain patient information prior to admission, hamper efforts to assess health care quality by precluding the use of patient records from years past, and increase administrative burdens on providers.

The tax gap is an estimate of the difference between the taxes--including individual income, corporate income, employment, estate, and excise taxes--that should have been paid voluntarily and on time and what was actually paid for a specific year. The estimate is an aggregate of estimates for the three primary types of noncompliance: (1) underreporting of tax liabilities on tax returns; (2) underpayment of taxes due from filed returns; and (3) nonfiling, which refers to the failure to file a required tax return altogether or on time. IRS's tax gap estimates for each type of noncompliance include estimates for some or all of the five types of taxes that IRS administers. As shown in table 1, underreporting of tax liabilities accounted for most of the tax gap estimate for tax year 2001. IRS has estimated the tax gap on multiple occasions, beginning in 1979, relying on its Taxpayer Compliance Measurement Program (TCMP). IRS did not implement any TCMP studies after 1988 because of concerns about costs and burdens on taxpayers. Recognizing the need for current compliance data, in 2002 IRS implemented a new compliance study called the National Research Program (NRP) to produce such data for tax year 2001 while minimizing taxpayer burden. IRS has concerns with the certainty of the tax gap estimate for tax year 2001 in part because some areas of the estimate rely on old data, IRS has no estimates for other areas of the tax gap, and it is inherently difficult to measure some types of noncompliance. IRS used data from NRP to estimate individual income tax underreporting and the portion of employment tax underreporting attributed to self-employed individuals. The underpayment segment of the tax gap is not an estimate, but rather represents the tax amounts that taxpayers reported on time but did not pay on time. Other areas of the estimate, such as corporate income tax and employer-withheld employment tax underreporting, rely on decades-old data. Also, IRS has no estimates for corporate income, employment, and excise tax nonfiling or for excise tax underreporting. In addition, it is inherently difficult for IRS to observe and measure some types of underreporting or nonfiling, such as tracking cash payments that businesses make to their employees, as businesses and employees may not report these payments to IRS in order to avoid paying employment and income taxes, respectively. IRS's overall approach to reducing the tax gap consists of improving service to taxpayers and enhancing enforcement of the tax laws. IRS seeks to improve voluntary compliance through efforts such as education and outreach programs and by attempting to simplify the tax process, such as by revising forms and publications to make them electronically accessible and more easily understood by diverse taxpayer communities. IRS uses its enforcement authority to ensure that taxpayers are reporting and paying the proper amounts of taxes through efforts such as examining tax returns and matching the amount of income taxpayers report on their tax returns to the income amounts reported on information returns it receives from third parties. IRS reports that it collected over $47 billion in 2005 from noncompliant taxpayers it identified through its various enforcement programs. In spite of IRS's efforts to improve taxpayer compliance, the rate at which taxpayers pay their taxes voluntarily and on time has tended to range from around 81 percent to around 84 percent over the past three decades. Any significant reduction of the tax gap would likely depend on an improvement in the level of taxpayer compliance. Tax law simplification and reform both have the potential to reduce the tax gap by billions of dollars. The extent to which the tax gap would be reduced depends on which parts of the tax system would be simplified and in what manner as well as how any reform of the tax system is designed and implemented. Neither approach, however, will eliminate the gap. Further, changes in the tax laws and system to improve tax compliance could have unintended effects on other tax system objectives, such as those involving economic behavior or equity. Simplification has the potential to reduce the tax gap for at least 3 broad reasons. First, it could help taxpayers to comply voluntarily with more certainty, reducing inadvertent errors by those who want to comply but are confused because of complexity. Second, it may limit opportunities for tax evasion, reducing intentional noncompliance by taxpayers who can misuse the complex code provisions to hide their noncompliance or to achieve ends through tax shelters. Third, tax code complexity may erode taxpayers' willingness to comply voluntarily if they cannot understand its provisions or they see others taking advantage of complexity to intentionally underreport their taxes. Simplification could take multiple forms. One form would be to retain existing laws but make them simpler. For example, in our July 2005 report on postsecondary tax preferences, we noted that the definition of a qualifying postsecondary education expense differed somewhat among some tax code provisions, for instance with some including the cost to purchase books and others not. Making definitions consistent across code provisions may reduce taxpayer errors. Although we cannot say the errors were due to these differences in definitions, in a limited study of paid preparer services to taxpayers, we found some preparers claiming unallowable expenses for books. Further, the Joint Committee on Taxation suggested that such dissimilar definitions may increase the likelihood of taxpayer errors and increase taxpayer frustration. Another tax code provision in which complexity may have contributed to the individual tax gap involves the earned income tax credit, for which IRS estimated a tax loss of up to about $10 billion for tax year 1999. Although some of this noncompliance may be intentional, we and the National Taxpayer Advocate have previously reported that confusion over the complex rules governing eligibility for claiming the credit could cause taxpayers to fail to comply inadvertently. Although retaining but simplifying tax code provisions may help reduce the tax gap, doing so may not be easy, may conflict with other policy decisions, and may have unintended consequences. The simplification of the definition of a qualifying child across various code sections is an example. We suggested in the early 1990s that standardizing the definition of a qualifying child could reduce taxpayer errors and reduce their burden. A change was not made until 2004. However, some have suggested that the change has created some unintended consequences, such as increasing some taxpayers' ability to reduce their taxes in ways Congress may not have intended. Another form of simplification could be to eliminate or consolidate tax expenditures. Among the many causes of tax code complexity is the growing number of preferential provisions in the code, defined in statute as tax expenditures, such as tax exemptions, exclusions, deductions, credits, and deferrals. The number of these tax expenditures has more than doubled from 1974 through 2005. Tax expenditures can contribute to the tax gap if taxpayers claim them improperly. For example, IRS's recent tax gap estimate includes a $32 billion loss in individual income taxes for tax year 2001 because of noncompliance with these provisions. Simplifying these provisions of the tax code would not likely yield $32 billion in revenue because even simplified provisions likely would have some associated noncompliance. However, the estimate suggests that simplification could have important tax gap consequences, particularly if simplification also accounted for any noncompliance that arises because of complexity on the income side of the tax gap for individuals. However, these credits and deductions serve purposes that Congress has judged to be important to advance federal goals. Eliminating them or consolidating them likely would be complicated, and would likely create winners and losers. Elimination also could conflict with other objectives such as encouraging certain economic activity or improving equity. Similar trade-offs exist with possible fundamental tax reforms that would move away from an income tax system to some other system, such as a consumption tax, national sales tax, or value added tax. Fundamental tax reform would most likely result in a smaller tax gap if the new system has few tax preferences or complex tax code provisions and if taxable transactions are transparent. However, these characteristics are difficult to achieve in any system and experience suggests that simply adopting a fundamentally different tax system may not by itself eliminate any tax gap. Any tax system could be subject to noncompliance, and their design and operation, including the types of tools made available to tax administrators affect the size of any corresponding tax gap. Further, the motivating forces behind tax reform likely include factors beyond tax compliance, such as economic effectiveness, equity, and burden, which could in some cases carry greater weight in designing an alternative tax system than ensuring the highest levels of compliance. Changing the tax laws to provide IRS with additional enforcement tools, such as expanded tax withholding and information reporting, could also reduce the tax gap by many billions of dollars, particularly with regard to underreporting--the largest segment of the tax gap. Tax withholding promotes compliance because employers or other parties subtract some or all of the taxes owed from a taxpayer's income and remit them to IRS. Information reporting tends to lead to high of compliance because income taxpayers earn is transparent to them and IRS. In both cases, high levels of compliance tend to be maintained over time. Also, because through withholding and information reporting IRS can better identify noncompliant taxpayers and prioritize contacting them by the potential for additional revenue, these tools can enable IRS to better allocate its resources. However, designing new withholding or information reporting requirements to address underreporting can be challenging given that many types of income are already subject to at least some form of withholding or information reporting, there are varied forms of underreporting, and the requirements could impose costs and burdens on third parties. Taxpayers tend to report income subject to tax withholding or information reporting with high levels of compliance, as shown in figure 1, because the income is transparent to the taxpayers as well as to IRS. Additionally, once withholding or information reporting requirements are in place for particular types of income, compliance tends to remains high over time. For example, for wages and salaries, which are subject to tax withholding and substantial information reporting, the percentage of income that taxpayers misreport report has consistently been measured at around 1 percent over time. In the past, we have identified a few specific areas where additional withholding or information reporting requirements could serve to improve compliance: Require more data on information returns dealing with capital gains income from securities sales. Recently, we reported that an estimated 36 percent of taxpayers misreported their capital gains or losses from the sale of securities, such as corporate stocks and mutual funds. Further, around half of the taxpayers who misreported did so because they failed to report the securities' cost, or basis, sometimes because they did not know the securities' basis or failed to take certain events into account that required them to adjust the basis of their securities. When taxpayers sell securities like stock and mutual funds through brokers, the brokers are required to report information on the sale, including the amount of gross proceeds the taxpayer received; however, brokers are not required to report basis information for the sale of these securities. We found that requiring brokers to report basis information for securities sales could improve taxpayers' compliance in reporting their securities gains and losses and help IRS identify noncompliant taxpayers. However, we were unable to estimate the extent to which a basis reporting requirement would reduce the capital gains tax gap because of limitations with the compliance data on capital gains and because neither IRS nor we know the portion of the capital gains tax gap attributed to securities sales. Requiring tax withholding and more or better information return reporting on payments made to independent contractors. Past IRS data have shown that independent contractors report 97 percent of the income that appears on information returns, while contractors that do not receive these returns report only 83 percent of income. We have also identified other options for improving information reporting for independent contractors, including increasing penalties for failing to file required information returns, lowering the $600 threshold for requiring such returns, and requiring businesses to report separately on their tax returns the total amount of payments to independent contractors. IRS's Taxpayer Advocate Service recently recommended allowing independent contractors to enter into voluntary withholding agreements. 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. The Taxpayer Advocate Service has recommended requiring information reporting on payments made to corporations, and the administration's fiscal year 2007 budget has proposed requiring additional information reporting on certain good and service payments by federal, state, and local governments. In addition to improving taxpayer compliance, information reporting can help IRS to better allocate its resources to the extent that it helps IRS better identify noncompliant taxpayers and the potential for additional revenue that could be obtained by contacting these taxpayers. For example, IRS officials told us that receiving information on basis for taxpayers' securities sales would allow IRS to determine more precisely taxpayers' income for securities sales through its document matching programs and would allow it to identify which taxpayers who misreported securities income have the greatest potential for additional tax assessments. Similarly, IRS could use basis information to improve both aspects of its examination program--examinations of tax returns through correspondence and examinations of tax returns face-to-face with the taxpayer. Currently, capital gains issues are too complex and time consuming for IRS to examine through correspondence. However, IRS officials told us that receiving cost basis information might enable IRS to examine noncompliant taxpayers through correspondence because it could productively select tax returns to examine. Also, having cost basis information could help IRS identify the best cases to examine face-to-face, making the examinations more productive while simultaneously reducing the burden imposed on compliant taxpayers who otherwise would be selected for examination. As a result of all these benefits, basis reporting would allow IRS to better allocate its resources that focus on securities misreporting across its enforcement programs. Although withholding and information reporting lead to high levels of compliance, designing new requirements to address underreporting could be challenging given that many types of income, including wages and salaries, dividend and interest income, and income from pensions and Social Security are already subject to withholding or substantial information reporting. Also, there are challenges involved with establishing new withholding or information reporting requirements for certain other types of income where there is extensive underreporting of income. Challenges exist because taxable income may be difficult to determine because of complex tax laws, complex transactions, or the lack of a practical and reliable third-party source to provide the information. For example, with regard to reporting securities basis information, we reported that it would be difficult for brokers to report information for some types of transactions because of complex tax laws and that representatives from the securities industry told us that a set of rules would need to be developed to establish clearly what types of transactions would be subject to any reporting requirement. Likewise, a persistent and large part of the tax gap relates to nonfarm sole proprietor and informal supplier income. As shown in figure 1, this income is not subject to information reporting, and these taxpayers misreported about half of the income they earned for tax year 2001. Although establishing withholding or information reporting requirements for these forms of income would likely improve taxpayers' compliance, practical and effective information reporting mechanisms are difficult to identify. For example, informal suppliers by definition receive income in an informal manner through services they provide to a variety of individual citizens or small businesses. Whereas businesses may have the capacity to perform withholding and information reporting functions for their employees, it may be challenging to extend withholding or information reporting responsibilities to the individual citizens that receive services, who may not have the resources or knowledge to comply with such requirements. Consequently, innovative approaches likely will be needed if tools like withholding and information returns are to be extended to cover more sources of the tax gap. Finally, implementing tax withholding and information reporting requirements generally imposes costs and burdens on the businesses that must implement them, and, in some cases, on taxpayers. For example, expanding information reporting on securities sales to include basis information will impose costs on the brokers that would track and report the information. Further, trying to close the entire tax gap with these enforcement tools could entail more intrusive recordkeeping or reporting than the public is willing to accept. Considering these costs and burdens should be part of any evaluation of additional withholding or information reporting requirements. Although I have focused on information reporting and tax withholding, I want to mention one other enforcement tool that can potentially deter noncompliance, which is the use of penalties for filing inaccurate or late tax and information returns. Congress has placed a number of civil penalty provisions in the tax code. However, as with civil penalties related to other federal agencies, inflation may have weakened the deterrent effect of IRS penalties. For example, the Treasury Inspector General for Tax Administration has noted that the $50 per partner per month penalty for a late-filed partnership tax return, established by Congress in 1978, would equate to $17.22 in 2004 dollars. In its fiscal year 2007 budget, the administration has proposed expanding penalty provisions applicable to paid tax return preparers to include non-income tax returns and related documents. In addition, Congress recently increased certain penalties related to tax shelters and other tax evasion techniques. Given Congress's recent judgment that some tax penalties were too low and concerns that inflation may have weakened the effectiveness of the civil penalty provisions in the tax code, additional increases may need to be considered to ensure that all penalties are of sufficient magnitude to deter tax noncompliance. Devoting more resources to enforcement has the potential to help reduce the tax gap by billions of dollars in that IRS would be able to expand its enforcement efforts to reach a greater number of potentially noncompliant taxpayers. However, determining the appropriate level of enforcement resources to provide IRS requires taking into account many factors, such as how effectively and efficiently IRS is currently using its resources, how to strike the proper balance between IRS's taxpayer service and enforcement activities, and competing federal funding priorities. If Congress were to provide IRS more enforcement resources, the amount of the tax gap that could be reduced depends in part on the size of any increase in IRS's budget, how IRS would manage any additional resources, and the indirect increase in taxpayers' voluntary compliance that would likely result from expanded IRS enforcement. As I previously mentioned, IRS is able to secure tens of billions of dollars in tax revenue from noncompliant taxpayers it identifies through its various enforcement programs. However, given resource constraints, IRS is unable to contact millions of additional taxpayers for whom it has evidence on potential noncompliance. With additional resources, IRS would be able to assess and collect additional taxes and further reduce the tax gap. In 2002, IRS estimated that a $2.2 billion funding increase would allow it to take enforcement actions against potentially noncompliant taxpayers it identifies but cannot contact and would yield an estimated $30 billion in revenue. For example, IRS estimated that it contacted about 3 million of the over 13 million taxpayers it identified as potentially noncompliant through its matching of tax returns to information returns. IRS estimated that contacting the additional 10 million potentially noncompliant taxpayers it identified, at a cost of about $230 million, could yield nearly $7 billion in potentially collectible revenue. However, we did not evaluate the accuracy of the estimate, and as will be discussed below, many factors suggest that it is difficult to estimate reliably net revenue increases that might come from additional enforcement efforts. Although additional enforcement funding has the potential to reduce the tax gap, the extent to which it would help depends on several factors. First, and perhaps most obviously, the amount of tax gap reduction would depend in part on the size of any budget increase. Generally, larger budget increases should result in larger reductions in the tax gap. IRS prioritizes the cases of potentially noncompliant taxpayers it reviews through its enforcement programs based on factors, such as the likelihood that a taxpayer is noncompliant, the potential amount of additional taxes that could be assessed, and collection potential. As such, it is likely that IRS would begin to experience diminishing returns as it began to review additional, lower priority cases of potentially noncompliant taxpayers. Given the diminishing returns IRS would likely experience as it moves to working less and less productive cases, the amount of expected reduction in the tax gap for each additional dollar of funding would decline. Further, reductions in the tax gap that could be derived from additional enforcement funding may not be immediate. The reductions may occur gradually as IRS is able to hire and train enforcement personnel. Recently, IRS obtained some additional funding targeted for enforcement activities that it estimated will result in additional revenue. In its fiscal year 2006 budget request, IRS requested millions of dollars to expand its tax return examination and tax collection activities with the goal of increasing individual taxpayer compliance and addressing concerns raised by GAO and others regarding the erosion of IRS's enforcement presence and the continued growth in noncompliance. In estimating the revenue that it would obtain from the increased funding, IRS took several factors into account, including opportunity costs because of training, which draws experienced enforcement personnel away from the field; differences in average enforcement revenue obtained per full-time employee by enforcement activity; and differences in the types and complexity of cases worked by new hires and experienced hires. IRS forecasted that in the initial year after expanding enforcement activities, the additional revenue it expects to collect is less than half the amount it expects to collect annually in later years. This example underscores the logic that if IRS is to receive a relatively large funding increase, it likely would be better to provide it in small but steady amounts. The amount of tax gap reduction likely to be achieved from any budget increase Congress may choose to provide also depends on how well IRS can manage the additional resources. As previously mentioned, IRS does not have compliance data for some segments of the tax gap and others are based on old data. 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. Also, regardless of the type of noncompliance, IRS has concerns with its information on whether taxpayers unintentionally or intentionally fail to comply with the tax laws. Knowing the reasons why taxpayers are noncompliant can help IRS decide whether its efforts to address specific areas of noncompliance should focus on nonenforcement activities, such as improved forms or publications, or enforcement activities to pursue intentional noncompliance. For those portions of the tax gap that rely on old data and where IRS does not know the reason for taxpayers' noncompliance, IRS may be less able to target resources efficiently to achieve the greatest tax gap reduction at the least burden to taxpayers. As part of an effort to make the best use of its enforcement resources, IRS has developed rough measures of return on investment in terms of tax revenue that it assesses from uncovering noncompliance. Generally, IRS cites an average return on investment for enforcement of 4:1, that is, IRS estimates that it collects $4 in revenue for every $1 of funding. Where IRS has developed return on investment estimates for specific programs, it finds substantial variation depending on the type of enforcement action. For instance, the ratio of estimated tax revenue gains to additional spending for pursuing known individual tax debts through phone calls is 13:1 versus a ratio of 32:1 for matching the amount of income taxpayers report on their tax returns to the income amounts reported on information returns. However, in addition to current returns on investment estimated being rough, IRS also lacks information on the incremental returns on investment for some enforcement programs. Developing such measures is difficult because of incomplete information on all the costs and all the tax revenue ultimately collected from specific enforcement efforts. Because IRS's current estimates of the revenue effects of additional funding are imprecise, the actual revenue that might be gained from expanding differing enforcement efforts is subject to uncertainty. Given the variation in estimated returns on investment for differing types of IRS compliance efforts, the amount of tax gap reduction that may be achieved from an increase in IRS's resources would depend on IRS's decisions about how to allocate the increase. Although it might be tempting to allocate resources heavily toward those areas with the highest estimated return, allocation decisions must take into account diverse and difficult issues. For instance, although one enforcement activity may have a high estimated return, that return may drop off quickly as IRS works its way through potential noncompliance cases. In addition, IRS dedicates examination resources across all types of taxpayers so that all taxpayers receive some signal that noncompliance is being addressed. Further, issues of fairness can arise if IRS focuses its efforts only on particular groups of taxpayers. Importantly, expanded enforcement efforts could reduce the tax gap more than through direct tax revenue collection, as widespread agreement exists that IRS enforcement programs have an indirect effect through increases in voluntary tax compliance. The precise magnitude of the indirect effects of enforcement is not known with a high level of confidence given challenges in measuring compliance; developing reasonable assumptions about taxpayer behavior; and accounting for factors outside of IRS's actions that can affect taxpayer compliance, such as changes in tax law. However, several research studies have offered insights to help better understand the indirect effects of IRS enforcement on voluntary tax compliance and show that they could exceed the direct effect of revenue obtained. Although closing the entire tax gap is neither feasible nor desirable due to costs and intrusiveness, reducing the tax gap is worthwhile for many reasons, including fairness to those who are compliant and also because it is a means to improve our nation's fiscal position. Each of the three approaches I have discussed could make a contribution to reducing the tax gap, although using multiple approaches may be the most effective strategy since no one approach is likely to address noncompliance fully and cost effectively. However, in deciding on one or more of the three broad approaches to use, many factors or issues could affect strategic decisions. Among the broad factors to consider are the likely effectiveness of any approach, fairness, enforceability, and sustainability. Beyond these, our work points to the importance of the following: Measuring compliance levels periodically. Regularly measuring the magnitude of, and the reasons for, noncompliance provides insights on how to reduce the gap through potential changes to tax laws and IRS programs. In July 2005, we recommended that IRS periodically measure tax compliance, identify reasons for noncompliance, and establish voluntary compliance goals. IRS agreed with the recommendations and established a voluntary tax compliance goal of 85 percent by 2009. In terms of measuring tax compliance, we have also identified alternative ways to measure compliance, including conducting examinations of small samples of tax returns over multiple years, instead of conducting examinations for a larger sample of returns for one tax year, to allow IRS to track compliance trends annually. Leveraging technology. Better use of technology could help IRS be more efficient in reducing the tax gap. IRS is modernizing its technology, which has paid off in terms of telephone service, resource allocation, electronic filing, and data analysis capability. However, this ongoing modernization will need strong management and prudent investments to maximize potential efficiencies. Considering the costs and burdens. Any action to reduce the tax gap will create costs and burdens for IRS; taxpayers; and third parties, such as those who file information returns. As discussed earlier, for example, withholding and information reporting requirements impose some costs and burdens on those that track and report information. These costs and burdens need to be reasonable in relation to the improvements expected to arise from new compliance strategies. Optimizing resource allocation. As previously discussed, developing reliable measures of the return on investment for strategies to reduce the tax gap would help inform IRS resource allocation decisions. IRS has rough measures of return on investment based on the additional taxes it assesses. Developing such measures is difficult because of incomplete data on the costs of enforcement and collected revenues. Beyond direct revenues, IRS's enforcement actions have indirect revenue effects, which are difficult to measure. However, indirect effects could far exceed direct revenue effects and would be important to consider in connection with continued development of return on investment measures. Evaluating the results. Evaluating the actions taken by IRS to reduce the tax gap would help maximize IRS's effectiveness. Evaluations can be challenging because it is difficult to isolate the effects of IRS's actions from other influences on taxpayers' compliance. Our work has discussed how to address these challenges, for example by using research to link actions with the outputs and desired effects. When taxpayers do not pay all of their taxes, honest taxpayers carry a greater burden to fund government programs and the nation is less able to address its long-term fiscal challenges. Thus, reducing the tax gap is important, even though closing the entire tax gap is neither feasible nor desirable because of costs and intrusiveness. All of the approaches I have discussed have the potential to reduce the tax gap alone or in combination, and no one approach is clearly and always superior to the others. As a result, IRS needs a strategy to attack the tax gap on multiple fronts with multiple approaches. Mr. Chairman and Members of the Subcommittee, this concludes my testimony. I would be happy to answer any question you may have at this time. For further information on this testimony, please contact Michael Brostek on (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include Tom Short, Assistant Director; Jeff Arkin; Cheryl Peterson; and Jeff Procak. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The tax gap--the difference between the tax amounts taxpayers pay voluntarily and on time and what they should pay under the law--has been a long-standing problem in spite of many efforts to reduce it. Most recently, the Internal Revenue Service (IRS) estimated a gross tax gap for tax year 2001 of $345 billion and estimated it would recover $55 billion of this gap, resulting in a net tax gap of $290 billion. When some taxpayers fail to comply, the burden of funding the nation's commitments falls more heavily on compliant taxpayers. Reducing the tax gap would help improve the nation's fiscal stability. For example, each 1 percent reduction in the net tax gap would likely yield $3 billion annually. GAO was asked to discuss the tax gap and various approaches to reduce it. This testimony discusses to what extent the tax gap could be reduced through three approaches--simplifying or reforming the tax system, providing IRS with additional enforcement tools, and devoting additional resources to enforcement--as well as various factors that could guide decision-making when devising a strategy to reduce the tax gap. This statement is based on prior GAO work. Simplifying the tax code or fundamental tax reform has the potential to reduce the tax gap by billions of dollars. IRS has estimated that errors in claiming tax credits and deductions for tax year 2001 contributed $32 billion to the tax gap. Thus, considerable potential exists. However, these provisions serve purposes Congress has judged to be important and eliminating or consolidating them could be complicated. Fundamental tax reform would be most likely to result in a smaller tax gap if the new system has few, if any, exceptions (e.g., few tax preferences) and taxable transactions are transparent to tax administrators. These characteristics are difficult to achieve, and any tax system could be subject to noncompliance. Withholding and information reporting are particularly powerful tools to reduce the tax gap. They could help reduce the tax gap by billions of dollars, especially if they can make currently underreported income transparent to IRS. These tools have been shown to lead to high, sustained levels of taxpayer compliance. Using these tools can also help IRS better allocate its resources to the extent they help IRS identify and prioritize its contacts with noncompliant taxpayers. As GAO previously suggested, reporting the cost, or basis, of securities sales is one option to improve taxpayers' compliance. However, designing additional withholding and information reporting requirements may be challenging given that many types of income are already subject to reporting, there are many forms of underreporting, and withholding and reporting requirements impose costs on third parties. Devoting additional resources to enforcement has the potential to help reduce the tax gap by billions of dollars. However, determining the appropriate level of enforcement resources for IRS requires taking into account many factors such as how well IRS is currently using its resources, how to strike the proper balance between IRS's taxpayer service and enforcement activities, and competing federal funding priorities. If Congress decides to provide IRS more enforcement resources, the amount the tax gap could be reduced would depend on factors such as the size of budget increases, how IRS manages any additional resources, and the indirect increase in taxpayers' voluntary compliance resulting from expanded enforcement. Increasing IRS's funding would enable it to contact millions of potentially noncompliant taxpayers it identifies but does not have resources to contact. Finally, using multiple approaches may be the most effective strategy to reduce the tax gap, as no one approach is likely to fully and cost effectively address noncompliance. Key factors to consider in devising a tax gap reduction strategy include periodically measuring noncompliance and its causes, setting reduction goals, leveraging technology, optimizing IRS's allocation of resources, and evaluating the results of any initiatives.

To be eligible for the 7(a) loan program, a business must be an operating for-profit small firm (according to SBA's size standards) located in the United States. To determine whether a business qualifies as small for the purposes of the 7(a) program, SBA uses size standards that it has established for each industry. SBA relies on the lenders that process and service 7(a) loans to ensure that borrowers meet the program's eligibility requirements. In addition, lenders must certify that small businesses meet the "credit elsewhere" requirement. SBA does not extend credit to businesses if the financial strength of the individual owners or the firm itself is sufficient to provide or obtain all or part of the financing the firm needs or if the business can access conventional credit. To certify borrowers as having met the credit elsewhere requirement, lenders must first determine that the firm's owners are unable to provide the desired funds from their personal resources. Second, lenders must determine that the business cannot secure the desired credit for similar purposes and the same period of time on reasonable terms and conditions from nonfederal sources (lending institutions) without SBA assistance, taking into account the prevailing rates and terms in the community or locale where the firm conducts business. According to SBA's fiscal year 2003-2008 Strategic Plan, the agency's mission is to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters. SBA describes the 7(a) program as contributing to an agencywide goal to "increase small business success by bridging competitive opportunity gaps facing entrepreneurs." As reported annually in SBA's Performance and Accountability Reports (PAR), the 7(a) program contributes to this strategic goal by fulfilling each of the following three long-term, agencywide objectives: increasing the positive impact of SBA assistance on the number and success of small business start-ups, maximizing the sustainability and growth of existing small businesses that receive SBA assistance, and significantly increasing successful small business ownership within segments of society that face special competitive opportunity gaps. Groups facing these special competitive opportunity gaps include those that SBA considers to own and control little productive capital and to have limited opportunities for small business ownership (such as African Americans, American Indians, Alaska Natives, Hispanics, Asians, and women) and those that are in certain rural or low-income areas. For each of its three long-term objectives, SBA collects and reports on the number of loans approved, the number of loans funded (i.e., money that was disbursed), and the number of firms assisted. Loan guarantee programs can result in subsidy costs to the federal government, and the Federal Credit Reform Act of 1990 (FCRA) requires, among other things, that agencies estimate the cost of these programs-- that is, the cost of the loan guarantee to the federal government. In recognizing the difficulty of estimating credit subsidy costs and acknowledging that the eventual cost of the program may deviate from initial estimates, FCRA requires agencies to make annual revisions (reestimates) of credit subsidy costs for each cohort of loans made during a given fiscal year using new information about loan performance, revised expectations for future economic conditions and loan performance, and improvements in cash flow projection methods. These reestimates represent additional costs or savings to the government and are recorded in the budget. FCRA provides that reestimates that increase subsidy costs (upward reestimates), when they occur, be funded separately with permanent indefinite budget authority. In contrast, reestimates that reduce subsidy costs (downward reestimates) are credited to the Treasury and are unavailable to the agency. In addition, FCRA does not count administrative expenses against the appropriation for credit subsidy costs. Instead, administrative expenses are subject to separate appropriations and are recorded each year as they are paid, rather than as loans are originated. The legislative basis for the 7(a) program recognizes that the conventional lending market is the principal source of financing for small businesses and that the loan assistance that SBA provides is intended to supplement rather than compete with that market. The design of the 7(a) program has SBA collaborating with the conventional market in identifying and supplying credit to small businesses in need of assistance. Specifically, we highlight three design features of the 7(a) program that help it address concerns identified in its legislative history. First, the loan guarantee, which plays the same role as collateral, limits the lender's risk in extending credit to a small firm. Second, the "credit elsewhere" requirement is intended to provide some assurance that guaranteed loans are offered only to firms that are unable to access credit on reasonable terms and conditions in the conventional lending market. Third, an active secondary market for the guaranteed portion of a 7(a) loan allows lenders to sell the guaranteed portion of the loan to investors, providing additional liquidity that lenders can use for additional loans. Furthermore, numerous amendments to the Small Business Act and to the 7(a) program have laid the groundwork for broadening small business ownership among certain groups, including veterans, handicapped individuals, and women, as well as among persons from historically disadvantaged groups, such as African Americans, Hispanic Americans, Native Americans, and Asian Pacific Americans. The 7(a) program also includes provisions for extending financial assistance to small businesses that are located in urban or rural areas with high proportions of unemployed or low-income individuals or that are owned by low-income individuals. The program's legislative history highlights its role in, among other things, helping small businesses get started, allowing existing firms to expand, and enabling small businesses to develop foreign markets for their products and services. All nine performance measures we reviewed provided information that related to the 7(a) loan program's core activity, which is to provide loan guarantees to small businesses. In particular, the indicators all provided the number of loans approved, loans funded, and firms assisted across the subgroups of small businesses the 7(a) program was intended to assist. We have stated in earlier work that a clear relationship should exist between an agency's long-term strategic goals and its program's performance measures. Outcome-based goals or measures showing a program's impact on those it serves should be included in an agency's performance plan whenever possible. However, all of the 7(a) program's performance measures are primarily output measures. SBA does not collect any outcome-based information that discusses how well firms are doing after receiving a 7(a) loan. Further, none of the measures link directly to SBA's long-term objectives. As a result, the performance measures do not fully support SBA's strategic goal of increasing the success of small businesses by "bridging competitive opportunity gaps facing entrepreneurs." SBA officials have recognized the importance of developing performance measures that better assess the 7(a) program's impact on the small firms that receive the guaranteed loans. SBA is still awaiting a final report, originally expected sometime during the summer of 2007, from the Urban Institute, which has been contracted to undertake several evaluative studies of various SBA programs, including 7(a), that provide financial assistance to small businesses. SBA officials explained that, for several reasons, no formal decision had yet been made about how the agency might alter or enhance the current set of performance measures to provide more outcome-based information related to the 7(a) program. The reasons given included the agency's reevaluation of its current strategic plan in response to requirements in the Government Performance and Results Act of 1993 that agencies reassess their strategic plans every 3 years, a relatively new administrator who may make changes to the agency's performance measures and goals, and the cost and legal constraints associated with the Urban Institute study. However, SBA already collects information showing how firms are faring after they obtain a guaranteed loan. In particular, SBA regularly collects information on how well participating firms are meeting their loan obligations. This information generally includes, among other things, the number of firms that have defaulted on or prepaid their loans--data that could serve as reasonable proxies for determining a firm's financial status. However, the agency primarily uses the data to estimate some of the costs associated with the program and for internal reporting purposes, such as monitoring participating lenders and analyzing its current loan portfolio. Using this information to expand its performance measures could provide SBA and others with helpful information about the financial status of firms that have been assisted by the 7(a) program. To better ensure that the 7(a) program is meeting its mission responsibility of helping small firms succeed through guaranteed loans, we recommended in our report that SBA complete and expand its current work on evaluating the 7(a) program's performance measures. As part of this effort, we indicated that, at a minimum, SBA should further utilize the loan performance information it already collects, including but not limited to defaults, prepayments, and number of loans in good standing, to better report how small businesses fare after they participate in the 7(a) program. In its written response, SBA concurred with our recommendation. We found limited information from economic studies that credit constraints such as credit rationing could have some effect on small businesses in the conventional lending market. Credit rationing, or denying loans to creditworthy individuals and firms, generally stems from lenders' uncertainty or lack of information regarding a borrower's ability to repay debt. Economic reasoning suggests that there exists an interest rate--that is, the price of a loan--beyond which banks will not lend, even though there may be creditworthy borrowers willing to accept a higher interest rate. Because the market interest rate will not climb high enough to convince lenders to grant credit to these borrowers, these applicants will be unable to access credit and will also be left out of the lending market. Of the studies we identified that empirically looked for evidence of this constraint within the conventional U.S. lending market, almost all provided some evidence consistent with credit rationing. For example, one study found evidence of credit rationing across all sizes of firms. However, another study suggested that the effect of credit rationing on small firms was likely small, and another study suggested that the impact on the national economy was not likely to be significant. Because the underlying reason for having been denied credit can be difficult to determine, true credit rationing is difficult to measure. In some studies we reviewed, we found that researchers used different definitions of credit rationing, and we determined that a broader definition was more likely to yield evidence of credit rationing than a narrower definition. For example, one study defined a firm facing credit rationing if it had been denied a loan or discouraged from applying for credit. However, another study pointed out that firms could be denied credit for reasons other than credit rationing--for instance, for not being creditworthy. Other studies we reviewed that studied small business lending found evidence of credit rationing by testing whether the circumstances of denial were consistent with a "credit rationing" explanation such as a lack of information. Two studies concluded that having a preexisting relationship with the lender had a positive effect on the borrower's chance of obtaining a loan. The empirical evidence from another study suggested that lenders used information accumulated over the duration of a financial relationship with a borrower to define loan terms. This study's results suggested that firms with longer relationships received more favorable terms--for instance, they were less likely to have to provide collateral. Because having a relationship with a borrower would lead to the lender's having more information, the positive effect of a preexisting relationship is consistent with the theory behind credit rationing. However, the studies we reviewed regarding credit rationing used data from the early 1970s through the early 1990s and thus did not account for several recent trends that may have impacted, either positively or negatively, the extent of credit rationing within the small business lending market. These trends include, for example, the increasing use of credit scores, changes to bankruptcy laws, and consolidation in the banking industry. Discrimination on the basis of race or gender may also cause lenders to deny loans to potentially creditworthy firms. Discrimination would also constitute a market imperfection, because lenders would be denying credit for reasons other than interest rate or another risk associated with the borrower. A 2003 survey of small businesses conducted by the Federal Reserve examined differences in credit use among racial groups and between genders. The survey found that 48 percent of small businesses owned by African Americans and women and 52 percent of those owned by Asians had some form of credit, while 61 percent of white- and Hispanic-owned businesses had some form of credit. Studies have attempted to determine whether such disparities are due to discrimination, but the evidence from the studies we reviewed was inconclusive. Certain segments of the small business lending market received a higher share of 7(a) loans than of conventional loans between 2001 to 2004, including minority-owned businesses and start-up firms. More than a quarter of 7(a) loans went to small businesses with minority ownership, compared with an estimated 9 percent of conventional loans (fig. 1). However, in absolute numbers many more conventional loans went to the segments of the small business lending market we could measure, including minority-owned small businesses, than loans with 7(a) guarantees. Compared with conventional loans, a higher percentage of 7(a) loans went to small new (that is, start-up) firms from 2001 through 2004 (fig. 2). Specifically, 25 percent of 7(a) loans went to small business start-ups, in contrast to an estimated 5 percent of conventional loans that went to newer small businesses over the same period. Only limited differences exist between the shares of 7(a) and conventional loans that went to other types of small businesses from 2001 through 2004. For example, 22 percent of all 7(a) loans went to small women-owned firms, compared with an estimated 16 percent of conventional loans that went to these firms. The percentages of loans going to firms owned equally by men and women were also similar--17 percent of 7(a) loans and an estimated 14 percent of conventional loans (fig. 3). However, these percentages are small compared with those for small firms headed by men, which captured most of the small business lending market from 2001 to 2004. These small businesses received 61 percent of 7(a) loans and an estimated 70 percent of conventional loans. Similarly, relatively equal shares of 7(a) and conventional loans reached small businesses in economically distressed neighborhoods (i.e., zip code areas) from 2001 through 2004--14 percent of 7(a) loans and an estimated 10 percent of conventional loans. SBA does not specifically report whether a firm uses its 7(a) loan in an economically distressed neighborhood but does track loans that go to firms located in areas it considers "underserved" by the conventional lending market. SBA's own analysis found that 49 percent of 7(a) loans approved and disbursed in fiscal year 2006 went to these geographic areas. A higher proportion of 7(a) loans (57 percent) went to smaller firms (that is, firms with up to five employees), compared with an estimated 42 percent of conventional loans. As the number of employees increased, differences in the proportions of 7(a) and conventional loans to firms with similar numbers of employees decreased. Also, similar proportions of 7(a) and conventional loans went to small businesses with different types of organizational structures and in different geographic locations. Our analysis of information on the credit scores of small businesses that accessed credit without SBA assistance showed only limited differences between these credit scores and those of small firms that received 7(a) loans. As reported in a database developed by two private business research and information providers, The Dun & Bradstreet Corporation and Fair Isaac Corporation (D&B/FIC), the credit scores we compared are typically used to predict the likelihood that a borrower, in this case a small business, will repay a loan. In our comparison of firms that received 7(a) loans and those that received conventional credit, we found that for any particular credit score band (e.g., 160 to <170) the differences were no greater than 5 percentage points. The average difference for these credit score bands was 1.7 percentage points (fig. 4). More credit scores for 7(a) borrowers were concentrated in the lowest (i.e., more risky) bands compared with general borrowers, but most firms in both the 7(a) and the D&B/FIC portfolios had credit scores in the same range (from 170 to <200). Finally, the percentage of firms that had credit scores in excess of 210 was less than 1 percent for both groups. The results our analysis of credit scores should be interpreted with some caution. First, the time periods for the two sets of credit scores are different. Initial credit scores for businesses receiving 7(a) loans in our analysis are from 2003 to 2006. The scores developed by D&B/FIC for small businesses receiving conventional credit are based on data from 1996 through 2000 that include information on outstanding loans that may have originated during or many years before that period. Second, D&B/FIC's scores for small businesses receiving conventional loans may not be representative of the population of small businesses. Although D&B/FIC combined hundreds of thousands of financial records from many lenders and various loan products with consumer credit data for their credit score development sample, they explained that the sample was not statistically representative of all small businesses. Another score developed by D&B, called the Financial Stress Score (FSS), gauges the likelihood that a firm will experience financial stress--for example, that it will go out of business. SBA officials said that based on analyses of these scores, the difference in the repayment risk of lending associated with 7(a) loans was higher than the risk posed by small firms able to access credit in the conventional lending market. According to an analysis D&B performed based on these scores, 32 percent of 7(a) firms showed a moderate to high risk of ceasing operations with unpaid obligations in 2006, while only 17 percent of general small businesses had a similar risk profile. As already mentioned, SBA disagreed with the results of our credit score comparison. In its written comments to our prior report, SBA primarily reiterated the cautions included in our report and stated that the riskiness of a portfolio was determined by the distribution in the riskier credit score categories. SBA said that it had not worked out the numbers but had concluded that the impact on loan defaults of the higher share of 7(a) loans in these categories would not be insignificant. Although SBA disagreed with our results, we believe that our analysis of credit scores provides a reasonable basis for comparison. Specifically, the data we used were derived from a very large sample of financial transactions and consumer credit data and reflected the broadest and most recent information readily available to us on small business credit scores in the conventional lending market. As SBA noted in its comments, we disclosed the data limitations and necessary cautions to interpreting the credit score comparison. Taking into consideration the limitations associated with our analysis, future comparisons of comparable credit score data for small business borrowers may provide SBA with a more conclusive picture of the relative riskiness of borrowers with 7(a) and conventional loans, which would also be consistent with the intent of our recommendation that SBA develop more outcome-based performance measures. We also compared some of the characteristics of 7(a) and conventional loans, including the size of the loans. In the smallest loan categories (less than $50,000), a higher percentage of total conventional loans went to small businesses--53 percent, compared with 39 percent of 7(a) loans. Conversely, a greater percentage of 7(a) loans than conventional loans were for large dollar amounts. For example, 61 percent of the number of 7(a) loans had dollar amounts in the range of more than $50,000 to $2 million (the maximum 7(a) loan amount), compared with an estimated 44 percent of conventional loans (fig. 5). Further, almost all 7(a) loans had variable interest rates and maturities that tended to exceed those for conventional loans. Nearly 90 percent of 7(a) loans had variable rates compared with an estimated 43 percent of conventional loans, and almost 80 percent of 7(a) loans had maturities of more than 5 years, compared with an estimated 17 percent of conventional loans (fig. 6). For loans under $1 million, interest rates were generally higher for 7(a) loans than for conventional loans. From 2001 through 2004, quarterly interest rates for the 7(a) program were, on average, an estimated 1.8 percentage points higher than interest rates for conventional loans (fig. 7). Interest rates for small business loans offered in the conventional market tracked the prime rate closely and were, on average, an estimated 0.4 percentage points higher. Because the maximum interest rate allowed by the 7(a) program was the prime rate plus 2.25 percent or more, over the period the quarterly interest rate for 7(a) loans, on average, exceeded the prime rate. The current reestimated credit subsidy costs of 7(a) loans made during fiscal years 1992 through 2004 generally are lower than the original estimates, which are made at least a year before any loans are made for a given fiscal year. Loan guarantees can result in subsidy costs to the federal government, and the Federal Credit Reform Act of 1990 (FCRA) requires, among other things, that agencies estimate the cost of the loan guarantees to the federal government and revise its estimates (reestimate) those costs annually as new information becomes available. The credit subsidy cost is often expressed as a percentage of loan amounts--that is, a credit subsidy rate of 1 percent indicates a subsidy cost of $1 for each $100 of loans. As we have seen, the original credit subsidy cost that SBA estimated for fiscal years 2005 and 2006 was zero, making the 7(a) program a "zero credit subsidy" program--that is, the program no longer required annual appropriations of budget authority. For loans made in fiscal years 2005 and 2006, SBA adjusted the ongoing servicing fee that it charges participating lenders so that the initial subsidy estimate would be zero based on expected loan performance at that time. Although the federal budget recognizes costs as loans are made and adjusts them throughout the lives of the loans, the ultimate cost to taxpayers is certain only when none of the loans in a cohort remain outstanding and the agency makes a final, closing reestimate. In addition to the subsidy costs, SBA incurs administrative expenses for operating the loan guarantee program, though these costs are appropriated separately from those for the credit subsidy. In its fiscal year 2007 budget request, SBA requested nearly $80 million to cover administrative costs associated with the 7(a) program. Any forecasts of the expected costs of a loan guarantee program such as 7(a) are subject to change, since the forecasts are unlikely to include all the changes in the factors that can influence the estimates. In part, the estimates are based on predictions about borrowers' behavior--how many borrowers will pay early or late or default on their loans and at what point in time. According to SBA officials, loan defaults are the factor that exerts the most influence on the 7(a) credit subsidy cost estimates and are themselves influenced by various economic factors, such as the prevailing interest rates. Since the 7(a) program primarily provides variable rate loans, changes in the prevailing interest rates would result in higher or lower loan payments, affecting borrowers' ability to pay and subsequently influencing default and prepayment rates. For example, if the prevailing interest rates fall, more firms could prepay their loans to take advantage of lower interest rates, resulting in fewer fees for SBA. Loan defaults could also be affected by changes in the national or a regional economy. Generally, as economic conditions worsen--for example, as unemployment rises--loan defaults increase. To the extent that SBA cannot anticipate these changes in the initial estimates, it would include them in the reestimates. 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. For additional information about this testimony, please contact William B. Shear at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Affairs and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony included Benjamin Bolitzer, Emily Chalmers, Tania Calhoun, Daniel Garcia-Diaz, Lisa Mirel, and Mijo Vodopic. 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 Small Business Administration's (SBA) 7(a) program, initially established in 1953, provides loan guarantees to small businesses that cannot obtain credit in the conventional lending market. In fiscal year 2006, the program assisted more than 80,000 businesses with loan guarantees of nearly $14 billion. This testimony, based on a 2007 report, discusses (1) the 7(a) program's purpose and the performance measures SBA uses to assess the program's results; (2) evidence of any market constraints that may affect small businesses' access to credit in the conventional lending market; (3) the segments of the small business lending market that were served by 7(a) loans and the segments that were served by conventional loans; and (4) 7(a) program's credit subsidy costs and the factors that may cause uncertainty about these costs. As the 7(a) program's underlying statutes and legislative history suggest, the loan program's purpose is intended to help small businesses obtain credit. The 7(a) program's design reflects this legislative history, but the program's performance measures provide limited information about the impact of the loans on participating small businesses. As a result, the current performance measures do not indicate how well SBA is meeting its strategic goal of helping small businesses succeed. The agency is currently undertaking efforts to develop additional, outcome-based performance measures for the 7(a) program, but agency officials said that it was not clear when they might be introduced or what they might measure. Limited evidence from economic studies suggests that some small businesses may face constraints in accessing credit because of imperfections such as credit rationing, in the conventional lending market. Several studies GAO reviewed generally concluded that credit rationing was more likely to affect small businesses because lenders could face challenges in obtaining enough information on these businesses to assess their risk. However, the studies on credit rationing were limited, in part, because the literature relies on data from the early 1970s through the early 1990s, which do not account for recent trends in the small business lending market, such as the increasing use of credit scores. Though researchers have noted disparities in lending options among different races and genders, inconclusive evidence exists as to whether discrimination explains these differences. 7(a) loans went to certain segments of the small business lending market in higher proportions than conventional loans. For example, from 2001 to 2004 25 percent of 7(a) loans went to small business start-ups compared to an estimated 5 percent of conventional loan. More similar percentages of 7(a) and conventional loans went to other market segments; 22 percent of 7(a) loans went to women-owned firms in comparison to an estimated 16 percent of conventional loans. The characteristics of 7(a) and conventional loans differed in several key respects: 7(a) loans typically were larger and more likely to have variable rates, longer maturities, and higher interest rates. SBA's most recent reestimates of the credit subsidy costs for 7(a) loans made during fiscal years 1992 through 2004 indicate that, in general, the long-term costs of these loans would be lower than initially estimated. SBA makes its best initial estimate of the 7(a) program's credit subsidy costs and revises the estimate annually as new information becomes available. In fiscal years 2005 and 2006, SBA estimated that the credit subsidy cost of the 7(a) program would be equal to zero--that is, the program would no longer require annual appropriations of budget authority--by, in part, adjusting fees paid by lenders. However, the most recent reestimates, including those made since 2005, may change because of the inherent uncertainties of forecasting subsidy costs and the influence of economic conditions such as interest rates on several factors, including loan defaults and prepayment rates.

FOIA, which was originally enacted in 1966 and subsequently amended several times, establishes a legal right of access to government records and information, on the basis of the principles of openness and accountability in government. Before the act, an individual seeking access to federal records had faced the burden of establishing a right to examine them. FOIA established a "right to know" standard for access, instead of a "need to know," and shifted the burden of proof from the individual to the government agency seeking to deny access. The act has been amended several times, including in 1974, 1976, 1986, 1996, and 2002. FOIA provides the public with access to government information either through "affirmative agency disclosure"--publishing information in the Federal Register or making it available in reading rooms--or in response to public requests for disclosure. Public requests for disclosure of records are the best known type of FOIA disclosure. Any member of the public may request access to information held by federal agencies, without showing a need or reason for seeking the information. The act prescribes nine specific categories of information that is exempt from disclosure; agencies may cite these exemptions in denying access to material (see table 1). The act also includes provisions for excluding specific sensitive records held by law enforcement agencies. The act requires agencies to notify requesters of the reasons for any adverse determination and grants requesters the right to appeal agency decisions to deny access. In addition, agencies are required to meet certain time frames for making key determinations: whether to comply with requests (20 business days from receipt of the request), responses to appeals of adverse determinations (20 business days from filing of the appeal), and whether to provide expedited processing of requests (10 business days from receipt of the request). Congress did not establish a statutory deadline for making releasable records available, but instead required agencies to make them available promptly. We have reported several times in the past on the contents of the annual reports of 25 major agencies, covering fiscal years 1998 through 2002. We first reported information in 2001 on the implementation of the 1996 amendments to FOIA. At that time we recommended that Justice (1) encourage agencies to make material electronically available and (2) review agency annual reports to address specific data quality issues. Since our report was issued, Justice has taken steps to implement both of these recommendations. In 2002, we reported that the number of requests received and processed appeared for most agencies--except the Department of Veterans Affairs--to peak in fiscal year 2000 and decline slightly in fiscal year 2001. In our 2004 report, we reported that between 2000 and 2002, the number of requests received and processed declined when the Department of Veterans Affairs is excluded. We also reported that agencies' backlogs of pending requests were declining, and that the number of FOIA requests denied governmentwide had dropped dramatically between 2000 and 2001 and remained low in 2002. The Department of Justice and the Office of Management and Budget (OMB) both have roles in the implementation of FOIA. The Department of Justice oversees agencies' compliance with FOIA and is the primary source of policy guidance for agencies. OMB is responsible for issuing guidelines on the uniform schedule of fees. Specifically, Justice's requirements under the act are to * make agencies' annual FOIA reports available through a single electronic access point and notify Congress as to their availability; in consultation with OMB, develop guidelines for the required annual agency reports, so that all reports use common terminology and follow a similar format; and * submit an annual report on FOIA statistics and the efforts undertaken by Justice to encourage agency compliance. Within the Department of Justice, the Office of Information and Privacy (OIP) has lead responsibility for providing guidance and support to federal agencies on FOIA issues. OIP first issued guidelines for agency preparation and submission of annual reports in the spring of 1997 and periodically issued additional guidance. OIP also periodically issues guidance on compliance, provides training, and maintains a counselors service to provide expert, one- on-one assistance to agency FOIA staff. Further, it also makes a variety of FOIA and Privacy Act resources available to agencies and the public via the Justice Web site and on-line bulletins. In addition, the act requires OMB to issue guidelines to "provide for a uniform schedule of fees for all agencies." In charging fees for responding to requests, agencies are required to conform to the OMB guidelines. Further, in 1987, the Department of Justice issued guidelines on waiving fees when requests are determined to be in the public interest. Under the guidelines, requests for waivers or reduction of fees are to be considered on a case-by-case basis, taking into account both the public interest and the requester's commercial interests. The 1996 FOIA amendments, referred to as e-FOIA, require that agencies submit a report to the Attorney General on or before February 1 of each year that covers the preceding fiscal year and includes information about agencies' FOIA operations. The following are examples of information that is to be included in these reports: * number of requests received, processed, and pending; * median number of days taken by the agency to process different * determinations made by the agency not to disclose information and the reasons for not disclosing the information; * disposition of administrative appeals by requesters; information on the costs associated with handling of FOIA requests; and * full-time-equivalent staffing information. In addition to providing their annual reports to the Attorney General, agencies are to make them available to the public in electronic form. The Attorney General is required to make all agency reports available on line at a single electronic access point and report to Congress no later than April 1 of each year that these reports are available in electronic form. As agencies process FOIA requests, they generally place them in one of four possible disposition categories: grants, partial grants, denials, and "not disclosed for other reasons." These categories are defined as follows: * Grants: agency decisions to disclose all requested records in full. * Partial grants: decisions to withhold some records in whole or in part, because such information was determined to fall within one or more exemptions. * Denials: agency decisions not to release any part of the requested records because all information in the records is determined to be exempt under one or more statutory exemptions. * Not disclosed for other reasons: agency decisions not to release requested information for any of a variety of reasons other than statutory exemptions from disclosing records. The categories and definitions of these "other" reasons for nondisclosure are shown in table 2. When a FOIA request is denied in full or in part, or the requested records are not disclosed for other reasons, the requester is entitled to be told the reason for the denial, to appeal the denial, and to challenge it in court. FOIA also authorizes agencies to recoup certain direct costs associated with processing requests, and agencies also have the discretion to reduce or waive fees under various circumstances. Agency determinations about fees and fee waivers are complex decisions that include determining (1) a requester's fee category, (2) whether a fee waiver is to be granted, and (3) the actual fees to be charged. FOIA stipulates three types of fee categories for requesters: (1) commercial; (2) educational or noncommercial scientific institutions and representatives of the news media; and (3) other. Further, fees can be charged for three types of FOIA-related activities--search, duplication, and review--depending on the requester's fee category. In addition, fees may not be charged to a requester in certain situations, such as when a fee waiver is granted or when the applicable fees are below a certain threshold. Commercial users can be charged for the broadest range of FOIA- related activities, including document search, review, and duplication. Commercial use is defined in the OMB fee schedule guidelines as "a use or purpose that furthers the commercial, trade or profit interests of the requester or the person on whose behalf the request is being made." The second category exempts search and review fees for documents sought for noncommercial use by educational or noncommercial scientific institutions, and for documents sought by representatives of the news media. The third category of fees, which applies to all requesters who do not fall within either of the other two categories, allows for "reasonable" charges for document search and duplication. Table 3 shows the FOIA-related activities for which agencies can charge by fee category, as stipulated in the act. Although the act generally requires that requesters pay fees to cover the costs of processing their requests, in certain circumstances, fees are not to be charged. For example, as stipulated in the act, fees may not be charged when the government's cost of collecting and processing the fee is likely to equal or exceed the amount of the fee itself. Further, under certain circumstances, the act requires an agency to furnish documents without charge, or at reduced charges. This is commonly referred to as the FOIA fee-waiver provision. Based on this provision, an agency must provide a fee waiver if two conditions are met: * disclosure of the requested information is in the public interest because it is likely to contribute significantly to public understanding of the operations or activities of the government, and * disclosure of the information is not primarily in the commercial interest of the requester. Under the act and guidance, when these requirements are both satisfied, based upon information supplied by a requester or otherwise made known to the agency, the fee waiver or reduction is to be granted by the FOIA officer. When one or both of these requirements are not satisfied, a fee waiver is not warranted. As these criteria suggest, fee waivers are to be granted on a case-by- case basis. Individuals who receive fee waivers in some cases may not necessarily receive them in other cases. In addition to FOIA, the Privacy Act of 1974 includes provisions granting individuals the right to gain access to and correct information about themselves held by federal agencies. Thus the Privacy Act serves as a second major legal basis, in addition to FOIA, for the public to use in obtaining government information. The Privacy Act also places limitations on agencies' collection, disclosure, and use of personal information. Although the two laws differ in scope, procedures in both FOIA and the Privacy Act permit individuals to seek access to records about themselves--known as "first-party" access. Depending on the individual circumstances, one law may allow broader access or more extensive procedural rights than the other, or access may be denied under one act and allowed under the other. Subsequently, the Department of Justice's Office of Information and Privacy (OIP) issued guidance that it is "good policy for agencies to treat all first- party access requests as FOIA requests (as well as possibly Privacy Act requests), regardless of whether the FOIA is cited in a requester's letter." This guidance was intended to help ensure that requesters receive the fullest possible response to their inquiries, regardless of which law they cite. For more information about FOIA and the Privacy Act, see appendix I. Although the specific details of processes for handling FOIA requests vary among agencies, the major steps in handling a request are similar across the government. Agencies receive requests, usually in writing (although they may accept requests by telephone or electronically), which can come from any organization or member of the public. Once received, the request goes through several phases, which include initial processing, searching for and retrieving responsive records, preparing responsive records for release, approving the release of the records, and releasing the records to the requester. Figure 1 is an overview of the process, from the receipt of a request to the release of records. During the initial processing phase, a request is logged into the agency's FOIA system, and a case file is started. The request is then reviewed to determine its scope, estimate fees, and provide an initial response to the requester. After this point, the FOIA staff begins its search to retrieve responsive records. This step may include searching for records from multiple locations and program offices. After potentially responsive records are located, the documents are reviewed to ensure that they are within the scope of the request. During the next two phases, the agency ensures that appropriate information is to be released under the provisions of the act. First, the agency reviews the responsive records to make any redactions based on the statutory exemptions. Once the exemption review is complete, the final set of responsive records is turned over to the FOIA office, which calculates appropriate fees, if applicable. Before release, the redacted responsive records are then given a final review, possibly by the agency's general counsel, and then a response letter is generated, summarizing the agency's actions regarding the request. Finally, the responsive records are released to the requester. Some requests are relatively simple to process, such as requests for specific pieces of information that the requester sends directly to the appropriate office. Other requests may require more extensive processing, depending on their complexity, the volume of information involved, the need for the agency FOIA office to work with offices that have relevant subject-matter expertise to find and obtain information, the need for a FOIA officer to review and redact information in the responsive material, the need to communicate with the requester about the scope of the request, and the need to communicate with the requester about the fees that will be charged for fulfilling the request (or whether fees will be waived). Specific details of agency processes for handling requests vary, depending on the agency's organizational structure and the complexity of the requests received. While some agencies centralize processing in one main office, other agencies have separate FOIA offices for each agency component and field office. Agencies also vary in how they allow requests to be made. Depending on the agency, requesters can submit requests by telephone, fax, letter, or e-mail or through the Web. In addition, agencies may process requests in two ways, known as "multitrack" and "single track." Multitrack processing involves dividing requests into two groups: (1) simple requests requiring relatively minimal review, which are placed in one processing track, and (2) more voluminous and complex requests, which are placed in another track. In contrast, single-track processing does not distinguish between simple and complex requests. With single-track processing, agencies process all requests on a first-in/first-out basis. Agencies can also process FOIA requests on an expedited basis when a requester has shown a compelling need or urgency for the information. Citizens have been requesting and receiving an ever-increasing amount of information from the federal government, as reflected in the increasing number of FOIA requests that have been received and processed in recent years. In fiscal year 2004, the 25 agencies we reviewed reported receiving and processing about 4 million requests, an increase of 25 percent compared to 2003. From 2002 to 2004, the number of requests received increased by 71 percent, and the number of requests processed increased by 68 percent. The 25 agencies we reviewed handle over 97 percent of FOIA requests governmentwide. They include the 24 major agencies covered by the Chief Financial Officers Act, as well as the Central Intelligence Agency and, beginning in 2003, the Department of Homeland Security (DHS) in place of the Federal Emergency Management Agency (FEMA). While the creation of DHS in fiscal year 2003 led to a shift in some FOIA requests from agencies affected by the creation of the new department, the same major component entities are reflected in all 3 years that we reviewed. For example, in 2002, before DHS was formed, FEMA independently reported on its FOIA requests, and its annual report is reflected in our analysis. However, beginning in 2003, FEMA became part of DHS, and thus its FOIA requests are reflected in DHS figures for 2003 and 2004. In recent years, Veterans Affairs (VA) has accounted for a large portion--about half--of governmentwide FOIA requests received and processed. This is because the agency includes in its totals the many first-party medical records requests that it processes. However, VA's numbers have not driven the large increases in FOIA requests. In fact, in 2004, the agency had a decline in the number of requests received, processed, and pending compared to 2003. Thus, when VA is excluded from governmentwide FOIA request totals, the increase between 2003 and 2004 changes from 25 percent to 61 percent. Figure 2 shows total requests reported governmentwide for fiscal years 2002 through 2004, with VA's share shown separately. In 2004, most dispositions of FOIA requests (92 percent) were reported to have been granted in full, as shown in table 4. Only relatively small numbers were partially granted (3 percent), denied (1 percent), or not disclosed for other reasons (5 percent). When VA is excluded from the totals, the percentages remain roughly comparable. Agencies other than VA that reported receiving large numbers of requests in fiscal year 2004 included the Social Security Administration (SSA), the Department of Health and Human Services (HHS), and the Department of Homeland Security (DHS), as shown in figure 3. Agencies other than VA, SSA, HHS, and DHS accounted for only 9 percent of all requests. Three of the four agencies that handled the largest numbers of requests--VA, SSA, and HHS--also granted the largest percentages of requests in full. However, as shown in figure 4, the numbers of fully granted requests varied widely among agencies in fiscal year 2004. For example, three agencies--State, the Central Intelligence Agency, and the National Science Foundation --made full grants of requested records in less than 20 percent of the cases they processed. Eight of the 25 agencies we reviewed made full grants of requested records in over 60 percent of their cases. This variance among agencies in the disposition of requests has been evident in prior years as well. In addition to processing greater numbers of requests, many agencies (13 of 25) also reported that their backlogs of pending requests--requests carried over from one year to the next--have increased since 2002. In 2002, pending requests governmentwide were reported to number about 140,000; whereas in 2004, about 160,000--14 percent more--were reported. Mixed results were reported in reducing backlogs at the agency level--some backlogs decreased while others increased, as reported from 2002 through 2004. The number of requests that an agency processes relative to the number it receives is an indicator of whether an agency's backlog is increasing or decreasing. Six of the 25 agencies we reviewed reported processing fewer requests than they received each year for fiscal years 2002, 2003, and 2004-- therefore increasing their backlogs (see fig. 4). Nine additional agencies also processed less than they received in two of these three years. In contrast, five agencies (CIA, Energy, Labor, SBA, and State) had processing rates above 100 percent in all three years, meaning that each made continued progress in reducing their backlogs of pending cases. Thirteen agencies were able to make at least a small reduction in their backlogs in 1 or more years between fiscal years 2002 and 2004. FOIA does not require agencies to make records available within a specific amount of time. As I mentioned earlier, Congress did not establish a statutory deadline for making releasable records available, but instead required agencies to make them available promptly. Agencies, however, are required to inform requesters within 20 days of receipt of a request as to whether the agency will comply with the request. For 2004, the reported time required to process requests by track varied considerably among agencies (see table 5). Eleven agency components reported processing simple requests in less than 10 days, as evidenced by the lower value of the reported ranges. These components are part of the Departments of Energy, Education, Homeland Security, Health and Human Services, the Interior, Justice, Labor, Transportation, the Treasury, and Agriculture. On the other hand, some organizations are taking much more time to process simple requests, such as components of Energy, Interior, and Justice. This can be seen in upper end values of the median ranges greater than 100 days. Components of four agencies (Interior, Education, Treasury, and VA) reported processing complex requests quickly--in less than 10 days. In contrast, several other agencies (DHS, Energy, Justice, Transportation, Education, HHS, HUD, State, Treasury, and Agriculture) reported components taking longer to process complex requests, with median days greater than 100. Four agencies (HHS, NSF, OPM, and SBA) reported using single-track processing. The processing times for single track varied from 5 days (at SBA) to 182 days (at an HHS component). Based on the data in agency annual reports, it was not feasible to determine trends at the agency level in the amount of time taken to process requests (reported annually as the median number of days to process requests). This is largely because many agencies have reported median processing times at a component level, making it difficult to derive overall agency median processing times. Nearly half (12 of 25) of the agencies reported median times at a component level. Although this practice does not provide agency- level indicators, it provides visibility into differences in processing times among the various components of agencies, which can sometimes be substantial. In summary, FOIA continues to be a valuable tool for citizens to obtain information about the operation and decisions of the federal government. Agencies have received steadily increasing numbers of requests and have also continued to increase the number of requests that they process. Despite this increase in processing requests, the backlog of pending cases continues to grow. Given this steadily increasing workload, it will remain critically important that strong oversight of FOIA implementation continue in order to ensure that agencies remain responsive to the needs of citizens. 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. If you should have questions about this testimony, please contact me at (202) 512-6240 or via e-mail at [email protected]. Other major contributors included Barbara Collier, John de Ferrari, and Elizabeth Zhao. In addition to rights under the Freedom of Information Act (FOIA), individuals also have rights of access to government information under the Privacy Act of 1974. The Privacy Act restricts the federal government's use of personal information. More precisely, it governs use of information about an individual that is maintained in a "system of records," which is any group of records containing information about an individual from which information is retrieved by individual identifier. With regard to access, the Privacy Act gives individuals the right to have access to information about themselves that is maintained in a system of records so that they can review, challenge, and correct the accuracy of personal information held by the government. While both laws generally give individuals the right of access to information (subject to exemptions), there are several important differences: * While FOIA generally gives a right of access to all federal government records, the Privacy Act applies only to records pertaining to an individual that are retrieved by individual identifier. * While FOIA generally gives "any person" a right of access to records, the Privacy Act gives access to only the subject of a particular record and only if that person is a U.S. citizen or a lawfully admitted permanent resident alien. * While FOIA exempts categories of records from public release, including where disclosure would constitute an unwarranted invasion of personal privacy, the Privacy Act's exemptions pertain to a variety of the act's requirements, not just access (e.g., that agencies account for all disclosures of personal information, that they maintain only relevant and necessary personal information, and that they notify the public of their sources for obtaining records of personal information). Under current Department of Justice guidance, agencies are to treat an individual's requests for his or her own records as a request under FOIA as well as the Privacy Act. This is intended to ensure that individuals are fully afforded their rights under both laws. As a practical matter, it appears that agencies generally consider requests for access to one's own records as FOIA requests, without any separate accounting as Privacy Act requests. These requests are referred to as "first-party requests" and their addition to agency FOIA statistics can been seen, for example, in the large numbers of FOIA requests reported by agencies such as VA and SSA. Apart from questions about the role of the Privacy Act in FOIA decisions, privacy questions are often dealt with independently under FOIA. The act's two privacy exemptions protect from public release information about individuals in "personnel and medical files and similar files" and "information compiled for law enforcement purposes," the disclosure of which would constitute an "unwarranted invasion of personal privacy." These statutory provisions have resulted in an analysis that involves a "balancing of the public's right to disclosure against the individual's right to privacy." This approach led, for example, the Supreme Court to decide that there is a significant private interest in the "practical obscurity" of criminal history records even though they are officially public records. The development and refinement of such privacy principles continues as agencies and the courts make new "balancing" decisions in FOIA cases. Accordingly, it is difficult to definitively describe the extent of privacy protection under FOIA, or to characterize federal privacy protection as limited to the terms of the Privacy Act. 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 Freedom of Information Act (FOIA) establishes that federal agencies must provide the public with access to government information, thus enabling them to learn about government operations and decisions. To help ensure appropriate implementation, the act requires that agencies report annually to the Attorney General, providing specific information about their FOIA operations. GAO has reported previously on the contents of these annual reports for 25 major agencies. GAO was asked to describe the FOIA process and discuss the reported implementation of FOIA. Although the specific details of processes for handling FOIA requests vary among agencies, the major steps in handling a request are similar across the government. Agencies receive requests, usually in writing (although they may accept requests by telephone or electronically), which can be submitted by any organization or member of the public. Once requests are received, the agency responds through a process that includes several phases: initial processing, searching for and retrieving responsive records, preparing responsive records for release, approving the release of the records, and releasing the records to the requester. According to data reported by agencies in their annual FOIA reports, citizens have been requesting and receiving an ever-increasing amount of information from the federal government through FOIA. The number of requests that agencies received increased by 71 percent from 2002 to 2004. Further, agencies reported they have been processing more requests--68 percent more from 2002 to 2004. For 92 percent of requests processed in 2004, agencies reported that responsive records were provided in full to requesters. However, the number of pending requests carried over from year to year--known as the backlog--has also been increasing, rising 14 percent since 2002.

Women represent a small but rapidly growing segment of the nation's veteran population. In 1982, there were about 740,000 women veterans. By 1997, that number had increased by 66 percent to over 1.2 million, or 4.8 percent, of the veteran population. Today, women make up nearly 14 percent of the active duty force and, with the exception of the Marine Corps, 20 percent of new recruits. By 2010, women are expected to represent over 10 percent of the total veteran population. Like male veterans, female veterans who serve on active duty in the uniformed services for the minimum amount of time specified by law and who were discharged, released, or retired under conditions other than dishonorable are eligible for some VA health care services. Historically, veterans' eligibility for health care services depended on factors such as the presence and extent of service-connected disabilities, income, and period and conditions of military service. In 1996, the Congress passed the Veterans Health Care Eligibility Reform Act (P.L. 104-262), which simplified the eligibility criteria and made all veterans eligible for comprehensive outpatient care. To manage its health care services, the act requires VA to establish an enrollment process for managing demand within available resources. The seven priorities for enrollment are (1) veterans with service-connected disabilities rated at 50 percent or higher; (2) veterans with service-connected disabilities rated at 30 or 40 percent; (3) former prisoners of war, veterans with service-connected disabilities rated at 10 or 20 percent, and veterans whose discharge from active military service was for a compensable disability that was incurred or aggravated in the line of duty or veterans who with certain exceptions and limitations are receiving disability compensation; (4) catastrophically disabled veterans and veterans receiving increased non-service-connected disability pensions because they are permanently housebound; (5) veterans unable to defray the cost of medical care; (6) all other veterans in the so-called "core" group,including veterans of World War I and veterans with a priority for care based on presumed environmental exposure; and (7) all other veterans. VA may create additional subdivisions within each of these enrollment groups. With the growing women veteran population came the need to provide health care services equivalent to those provided to men. Over the past 15 years, GAO, VA, and the Advisory Committee on Women Veterans have assessed VA services available to women veterans. In 1982, GAO reported that VA lacked adequate general and gender-specific health care services, effective outreach for women veterans, and facilities that provided women veterans appropriate levels of privacy in health care delivery settings. In 1992, GAO reported that VA had made progress in correcting previously identified deficiencies, but some privacy deficiencies and concerns about availability and outreach remained. In response to concerns about the availability of women veterans' health care and to improve VA's delivery of health care to women veterans, the Congress enacted the Women Veterans Health Programs Act of 1992 (P.L. 102-585). This act authorized new and expanded health care services for women. In 1993, VA's Office of the Inspector General (OIG) for Health Care Inspections reported that problems--such as women veterans' not always being informed about eligibility for health care services as well as VA's lack of appropriate accommodations, medical equipment, and supplies to treat women patients in VA medical facilities--still existed. In December 1993, the Secretary of the Department of Veterans Affairs, established VA's first Women Veterans' Program Office (WVPO). In November 1994, the Congress enacted legislation (P.L. 103-446) that required VA to create a Center for Women Veterans to oversee VA programs for women. As a result, WVPO was reorganized into the Center for Women Veterans. The Center Director reports directly to the VA Secretary. In compliance with the Government Performance Results Act, VA has a strategic plan that includes goals for (1) monitoring the trends in women's utilization of VA services from fiscal years 1998 through 2001, (2) reporting on barriers and actions to address recommendations to correct them, and (3) assessing progress in correcting deficiencies from fiscal years 1999 through 2001. VA's performance plan also includes goals that target women veterans currently enrolled in VA for aggressive prevention and health promotion activities to screen for breast and cervical cancer. VA has taken several actions to remove barriers identified by GAO, VA, and women veteran proponents over the years that prevent women veterans from obtaining care in VA medical facilities. First, VA has increased outreach efforts to inform women veterans of their eligibility for benefits and health care services. However, it has not evaluated these efforts, so it is not known how knowledgeable women veterans are about their eligibility for health care services. VA has also designated coordinators to assist women veterans in accessing the system. In addition, VA has identified and begun to correct patient privacy deficiencies in inpatient and outpatient settings. VA has surveyed its facilities on two occasions to determine the extent to which privacy deficiencies exist. In fiscal year 1998, VA spent more than $67 million correcting deficiencies and has developed plans for correcting remaining deficiencies. However, VA continues to face obstacles addressing the inpatient mental health needs of women veterans in a predominantly male environment and has established a task force to look at this and other issues. Over the last few years, VA has increased its outreach efforts to inform women veterans of their eligibility for care in response to problems highlighted by GAO, VA, and veteran service organizations between 1982 and 1994. We and others reported that (1) women veterans were not aware that they were eligible to receive health care in VA and (2) VA did not target outreach to women veterans, routinely disseminate information to service organizations with predominantly female memberships, or adequately inform women of changes in their eligibility. To address these concerns, VA has targeted women veterans during outreach efforts at the headquarters, regional, and local levels. At the headquarters level, a number of outreach strategies have been implemented. For example, the Center for Women Veterans, as part of its strategic and performance goals for 1998 through 2000, is placing greater emphasis on the importance of outreach to women and the need for improved communication techniques. Since the inception of WVPO and the Center for Women Veterans, VA has held an average of 15 to 20 town meetings a year, along with other informational seminars. The Center also provided informational seminars at the annual conventions of the Women's Army Corp and the Women Marines; American Legion; American Veterans of World War II, Korea, and Vietnam; and Disabled American Veterans. The Center also provided information on VA programs for women veterans and other women veterans' issues at national training events for county and state veteran service officers and their counterparts in the national Veterans' Service Organizations. Further, the Center established a web site within the VA home page to provide women veterans with information about health care services and other concerns as well as the opportunity to correspond with the Center via electronic mail. At the regional and local levels, VBA regional and benefit offices, VA medical centers, and Vet Centers display posters, brochures, and other materials that focus specifically on women veterans. They also send representatives to distribute these materials and talk to women veterans during outreach activities, such as health fairs and media events, that are used to publicize the theme that "Women Are Veterans, Too." The VA facilities we visited were conducting similar activities. For example, the medical center in New Orleans directed its Office of Public Relations to work closely with the women veterans coordinator to develop an outreach program. The New Orleans Vet Center women veterans coordinator told us that she expanded her outreach efforts to colleges with nursing schools in an effort to reach women veterans who do not participate in veteran-related activities. In addition, VBA regional offices coordinate with the Department of Defense to provide information on VA benefits and services to prospective veterans during Transition Assistance Program (TAP) briefings. In addition to providing information to active-duty personnel who plan to separate from the military on how to transition into civilian life, TAP briefings provide information on the benefits they may be eligible for as veterans as well as how to obtain them. Although VA has greatly increased its outreach efforts, it has not yet evaluated the effectiveness of these efforts. Women veterans organizations have acknowledged the increase in VA's outreach efforts directed at women veterans but continue to express concern about whether women veterans are being reached and adequately informed about their eligibility for benefits and health care services. Several women veterans we talked with during our site visits said they found out by chance--during casual conversations--that they were eligible for care. Women veterans and agency staff acknowledged that "word of mouth" from satisfied patients appears to be one of the most effective ways to share information about various benefits and services to which women veterans may be entitled. In March 1998, the Advisory Committee for Women Veterans, the Center for Women Veterans, and the National Center for Veterans Statistics provided specific questions for inclusion in VA's Survey of Veterans for Year 2000 to address the extent to which women veterans are becoming more knowledgeable about their eligibility for services. This survey should allow VA to assess the effectiveness of its outreach to women veterans. Women veterans coordinators assist in obtaining care, advocate for women veterans' health care, and collaborate with medical center management to make facilities more sensitive to women veterans. This role was established in 1985 because women veterans did not know how to obtain health care services once they became aware of their eligibility for these services. However, in 1994, VA's OIG reported that these coordinators often lacked sufficient training and time to perform effectively; many women veterans coordinators performed in this capacity on a part-time basis. VA has since provided women veterans coordinators training and more time to carry out their roles and help them provide better assistance to women veterans in accessing VA's health care system and obtaining care. In an effort to make them more effective in this role, in 1994, VA implemented a national training program designed to increase women veterans coordinators' awareness of their roles and familiarize them with women veterans' issues. The program is administered by a full-time women veterans' national education coordinator and staff at the Birmingham Regional Medical Education Center. In addition, the women veterans coordinators at VA's medical centers in Tampa and Bay Pines developed a mini-residency training program for women veterans coordinators. This program, approved in 1995, is the only training program of its kind and is offered for newly appointed women veterans coordinators. To allow women veterans coordinators more time to perform their duties, in 1994, VA established positions for additional full-time women veteran coordinators at selected VA medical centers and four full-time VBA regional women veterans coordinators. As of January 1998, about 40 percent of the women veterans coordinators in VA medical facilities were full-time. According to VA's Advisory Committee on Women Veterans, the women veterans coordinator program has proven to be one of the most successful initiatives recommended by the committee. Patient privacy for women veterans has been a long-standing concern, and VA acknowledges that the correction of physical barriers that limit women's access to care in VA facilities will be an ongoing process. Between 1982 and 1994, GAO and VA's OIG reported that physical barriers, including hospital wards with large open rooms having 8 to 16 beds and a lack of separate bath facilities, concerned women veterans and inconvenienced staff. Female patients had to compete with patients in isolation units for the limited number of private rooms in VA hospitals. Also, hospitals with communal bathrooms sometimes required staff to stand guard or use signs indicating that the bathroom was occupied by female patients. As required by section 322 of the Veterans' Health Care Eligibility Reform Act of 1996, VA conducted nationwide privacy surveys of its facilities in fiscal years 1997 and 1998 to determine the types and magnitude of privacy deficiencies that may interfere with appropriate treatment in clinical areas. The surveys revealed numerous patient privacy deficiencies in both inpatient and outpatient settings. The fiscal year 1998 survey also showed that 117 facilities from all 22 Veterans Integrated Service Networks (VISN) spent nearly $68 million in construction funds in fiscal year 1998 to correct privacy deficiencies. Another 91 facilities from 20 of the 22 VISNs used a total of 130 alternatives to construction to eliminate deficiencies. These alternatives included actions such as initiating policy changes that would admit female patients only to those areas of the hospital that have the appropriate facilities or issuing policy statements that gynecological examinations would only be performed in the women's clinics or contracted out. In addition, VISN and medical center staff developed plans for correcting and monitoring the remaining deficiencies. Although the 1998 survey showed that VA has improved the health care environment to afford women patients comfort and a feeling of security, the survey also revealed that many deficiencies still exist. (See table 1.) Of those facilities with deficiencies, the most prevalent inpatient deficiency was a lack of sufficient toilet and shower privacy, and the most prevalent outpatient deficiency was the lack of curtain tracks in various rooms. Consistent with VA's strategic plan for fiscal years 1998 through 2003, a task force with representatives from VHA and the Center for Women Veterans was established to identify, prioritize, and develop plans for addressing five major issues related to women veterans' health care, one of which was patient privacy. Further, VA plans to assess the progress made in correcting patient privacy deficiencies on an annual basis between fiscal years 1999 and 2001. VA requires that each facility have a plan for corrective action and a timetable for completion; VA has also directed each VISN to integrate the planned corrections into their construction programs. To correct the remaining deficiencies, VA projects it will spend $49.3 million in fiscal year 1999 and $41 million in fiscal year 2000. Over this same period, medical centers are estimated to spend approximately $647,000 more in discretionary funds to make some of these corrections. Beyond fiscal year 2000, VA projects it will spend an additional $77 million in capital funds; six facilities in VISNs 6 and 7 account for 58 percent of the total projected spending for beyond fiscal year 2000. While correcting privacy deficiencies has allowed VA to better accommodate women veterans' health care needs, VA faces other problems accommodating women veterans who need inpatient mental health treatment. In the summer of 1998, VA established a task force of clinicians and women veterans coordinators to assess mental health services for women veterans and make recommendations by June 1999 for improving VA's capacity to provide inpatient psychiatric care to this population. This task force is chaired by the Director of the Center for Women Veterans. VA data show that in fiscal year 1997, mental disorder was the most prevalent diagnosis--26.4 percent--for women veterans hospitalized. While inpatient psychiatric accommodations are available in VA facilities, in most instances the environment is not conducive to treating women veterans. In 1997, VA's Center for Women Veterans reported that women veterans hospitalized on VA mental health wards for post-traumatic stress disorder, substance abuse, or other psychiatric diagnoses are often the only female on a ward with 30 to 40 males. This disparate ratio of women to men discourages women from discussing gender-specific issues and also makes it difficult to provide group therapy addressing women's treatment issues. Women veterans also noted that they were concerned about their safety in this environment. These concerns included male patients engaging in inappropriate remarks or behavior and inappropriate levels of privacy. During our site visits, two women veterans expressed similar concerns. VA has inpatient psychiatric facilities that have separate psychiatric units for women veterans within five areas: Battle Creek, Michigan; Brockton-West Roxbury, Massachusetts; Central Texas Health Care System; Brecksville-Cleveland, Ohio; and Palo Alto, California, Health Care System. Women veterans often do not want to or are unable to leave families and support systems to travel to one of these facilities for treatment. Staff at one of the medical centers we visited in Florida told us that a few of their women patients who had been sexually traumatized would be better served in an inpatient setting, but the nearest suitable inpatient facilities were those in California and Ohio, and the patients did not want to go that far from home. VA's greater emphasis on women veterans' health has resulted in an increase in both the availability and use of general and gender-specific services, such as pap smears, mammograms, and reproductive health care. Some VA facilities offer a full complement of health care services, including gender-specific care, on a full-time basis in separate clinics designated for women. Others may only offer certain services on a contractual or part-time basis. According to program officials and the women veterans coordinators at the locations we visited, the variation in the availability and delivery of services is generally influenced by the medical center directors' views of the health needs of the potential patient population, available resources, and demand for services. The increase in the availability of services and the emphasis on women veterans' health have contributed to increases in the number of women veterans served and visits made, with the exception of inpatient care.Between fiscal years 1994 and 1997, the number of gender-specific services provided to women veterans increased about 42 percent, from over 85,000 to over 121,000. The total number of inpatient and outpatient visits made during this same period increased nearly 56 percent, from about 893,000 to almost 1.4 million. Over the past 10 years, GAO, VA's OIG, and VA's Advisory Committee on Women Veterans reported that VA was not providing adequate care to women veterans and was not equipped to do so. These organizations found that VA (1) was not providing complete physical examinations, including gynecological exams for women; (2) lacked the equipment and supplies to provide gender-specific care to women, such as examination tables with stirrups and speculums; and (3) lacked guidelines for providing care to women. As a result, VA began to place more emphasis on women veterans' health and looked for ways to respond to these criticisms. For example, to ensure equity of access and treatment, VA designated women veterans' health as a special emphasis program that merited focused attention. In 1983, VA began requiring medical centers to develop written plans that show how they will meet the health care needs of women veterans. At a minimum, these plans must define (1) that a complete physical examination for women is to include a breast and gynecological exam, (2) provisions for inpatient and outpatient gynecology services, and (3) referral procedures for necessary services unavailable at VA facilities. VA also procured the necessary equipment and supplies to treat women. In addition, VA established separate clinics for women veterans in some of its medical facilities. The locations with separate women's clinics that we visited had written plans that contained the required information and the necessary equipment and supplies to provide gender-specific treatment to women. Also, we found evidence that women veterans coordinators were monitoring services provided to ensure proper care and follow-up. VA is more able to accommodate women patients than they were prior to the early 1990s. In 1997, VA provided inhouse 94 percent of the routine gynecological care sought by women veterans, even though its number of women's clinics fell from 126 in 1994 to 96 in 1998. Some VA facilities closed their women's clinics because of consolidation or implementation of primary care. Others are phasing their women's programs into primary care, especially the facilities that had limited services available in the women's clinic. This is consistent with VA's efforts to enhance the efficiency of its health care system. For example, since September 1995, VA has or is in the process of merging the management and operations of 48 hospitals and clinic systems into 23 locally integrated systems. While women veterans can obtain gender-specific services as well as other health care services at most VA medical facilities, the extent to which care, especially gender-specific care, is available varies by facility. Some facilities offer a full array of routine and acute gender-specific services for women--such as pap smears, pelvic examinations, mammograms, breast health, gynecological oncology, and hormone therapy--while others offer only routine or preventive gender-specific care. Of the five sites we visited, two--Tampa and Boston--are Women Veterans' Comprehensive Health Centers, which enable women veterans to obtain almost all of their health care within the center. Generally, these centers have full-time providers who may also be supported by other clinicians who provide specialty care on a part-time basis. For example, the Tampa Women Veterans' Comprehensive Health Center, which provided care to about 3,000 women in 1997, is run by a full-time internist, who is supported by another internist, four nurse practitioner primary care providers, a gynecologist, a psychologist, a psychiatrist, and other health care and administrative support staff. The Tampa center as well as the Boston center provide their services 5 days a week. Other facilities offer less extensive services than those offered within the comprehensive centers. For example, the VA medical center in Washington, D.C., offers only routine or preventive gender-specific care by a nurse practitioner about 4.5 days a week; acute or more specialized gynecological care is only offered one-half day a week with the assistance of a gynecologist and general surgeon through a sharing agreement with a local Department of Defense facility. Other health care services are available within the medical center. The range of services provided by VA's nonhospital-based clinics varies as well. Some nonhospital-based clinics, like the one in Orlando, may provide services almost comparable to those provided by the medical center or comprehensive center. Other centers, however, offer services on a more limited basis. For example, the nonhospital-based clinic associated with one of the medical centers we visited only offers gynecological services once a week. According to the women veterans coordinator, the average waiting time to get a gynecology appointment at this clinic is 51 days. She explained that if the situation is urgent, arrangements are made to have the patient seen in the urgent care clinic or at the medical center. Variation in services at VA medical facilities may be attributable to one or more factors, such as medical center management's views on the level of services needed, funding, staffing, and demand for services. The specific services offered and the manner in which they are delivered within VA facilities are left to the discretion of medical center or VISN management. Most VA facilities did not receive additional funding to establish health care programs for women and had to provide these additional services while maintaining or minimally affecting existing programs. Initially, VHA provided additional funding for the comprehensive centers, which was supplemented by funds from the medical center's budget. VHA also provided some additional funding in 1994 to help VA facilities obtain resources to counsel women veterans who had been sexually traumatized. The women veterans coordinators at the five medical center locations we visited told us that the medical center directors have a strong commitment to providing quality health care to women veterans and that without such support, it would be difficult to meet women veterans' needs or improve the women's health program. Some women's programs had to be established and operated using the medical center's existing funding and resources, which included no provisions for these services. Although the Tampa and Boston centers received VHA funding to establish a comprehensive health center, they still had to obtain additional funding from the medical center, which required management's support. The availability of gender-specific services may also be influenced by the demand for these services. At two locations we visited, the women veterans coordinators told us that when they first opened their women's clinics, they operated on a very limited scale--one-half to 1 day a week. However, the demand was so overwhelming that they increased their operations to 5 days a week. On the other hand, the women veterans population in some areas is small and may not generate a high enough demand for gender-specific services to provide them in a separate women veterans' health care program or within the medical center on a full-time basis. In such instances or if a very small number of female veterans have historically availed themselves of the services, it may not be cost-effective to provide these services in-house, as pointed out by VA's OIG in 1993.Instead, it may be appropriate to contract out for these services. In the 1990s, women veterans' utilization of gender-specific services has increased significantly. Outpatient and inpatient visits among women veterans at VA facilities increased more than 50 percent between fiscal years 1994 and 1997. Based on VA's survey of its medical facilities, the number of women veterans receiving gender-specific services increased about 42 percent from more than 85,000 to almost 121,200 during the same period. (See table 2.) Between fiscal years 1994 and 1997, the number of pap smears and mammograms provided to women veterans increased dramatically. In fiscal year 1997, almost 53,000 women veterans received pap smears, a 63-percent increase over fiscal year 1994. Similarly, in fiscal year 1997, about 36,400 women veterans received mammograms, a 47-percent increase over fiscal year 1994. Reproductive health care services, which cover the entire range of gynecological services, were provided to over 31,800 women veterans in fiscal year 1997, 12 percent more than in fiscal year 1994. According to VA, the pap smear and mammography examination rates among appropriate and consenting women veterans in 1997 are 90 percent and 87 percent, respectively. VA has set goals to increase the mammography and pap smear examination rates from their current base rates to 92 percent and 90 percent, respectively, by fiscal year 2003. Women veterans have also used more health care services in general, consistent with VA's goal to meet women veterans' total health care needs. With the exception of inpatient care, the number of women veterans who use VA health care services and the frequency of their usage continue to increase. For the 5-year period between fiscal years 1992 and 1997, the women veteran population increased only slightly, from about 1.2 million to 1.23 million. However, between fiscal years 1994 and 1997, the number of women veterans who received outpatient care increased 32 percent, from about 90,000 to more than 119,000, and the total number of outpatient visits increased 57 percent, from nearly 870,000 to over 1.3 million. (See table 3.) During this same period, the number of women veterans who received inpatient care decreased about 5 percent, from about 14,350 to 13,700, which is consistent with VA's--and the nation's--current health care trend to deliver services in the least costly, most appropriate setting. VA's health care program for women veterans has made important strides in the last few years. VA has made good progress informing women veterans about their eligibility for services and the services available, assisting women veterans in accessing the system, correcting patient privacy deficiencies, and increasing health care services for women veterans. Most importantly, VA's efforts are reflected in the increased availability of services and utilization by women veterans. While progress has been made, the importance of sustaining efforts to address the special needs of women veterans will only increase, as their percentage of the total veteran population is projected to double by 2010. Coincident with these demographic changes, VA is making changes to the way it delivers health care, including integrating and consolidating facilities while maintaining quality of care and implementing eligibility reform. VA will need to be especially vigilant to ensure that women veterans' needs are appropriately addressed as it implements these overall changes. In its comments on a draft of this report, VA agreed with our findings that progress has been made in serving women veterans through the Women Veterans' Health Program but that additional work is required to improve outreach to women, rectify privacy issues, and improve inpatient environments for women undergoing inpatient psychiatric treatment. VA also provided some technical comments, which we have incorporated as appropriate. VA's comments are included as appendix II. Copies of this report are being sent to the Secretary of Veterans Affairs, other appropriate congressional committees, and interested parties. We will also make copies available to others on request. If you have any questions about the report, please call me or Shelia Drake, Assistant Director, at (202) 512-7101. Jacquelyn Clinton, Evaluator-in-Charge, was a major contributor to this report. To determine the barriers to women veterans obtaining care within VA, we talked with officials in the Center for Women Veterans, within the Office of the Secretary; VHA; two VBA regional offices; and Readjustment Counseling Centers (Vet Centers) in Tampa, Florida; St. Petersburg, Florida; and New Orleans, Louisiana. We also reviewed Women Veterans Advisory Committee reports and talked with women veterans and VA program officials in five medical centers: Bay Pines, Florida; Boston, Massachusetts; Tampa; New Orleans; and Washington, D.C. These medical centers were selected because they offered different levels of health care services to women veterans. To determine the availability and use of gender-specific care, we discussed women veterans' health care services with officials at VA's Central Office and the five medical centers we visited. We reviewed VA medical centers' women veterans health care plans, relevant VA policy directives, and women veterans health care utilization data. We also reviewed quality assurance plans, annual reports, minutes of Women Veterans Advisory Committee meetings, outreach materials, and other written documentation and materials. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the status of the Department of Veterans Affairs' (VA) health care program for women, focusing on: (1) the progress VA made in removing barriers that may prevent women veterans from obtaining VA health care services; and (2) the extent to which VA health care services, particularly gender-specific services, are available to and used by women veterans. GAO noted that: (1) VA has made considerable progress in removing barriers that prevent women veterans from obtaining care; (2) VA has increased outreach to women veterans to inform them of their eligibility for health care services and designated women veterans coordinators to assist women veterans in accessing VA's health care system; (3) VA has also improved the health care environment in many of its medical facilities, especially with respect to accommodating the privacy needs of women veterans; (4) however, VA recognizes that it has more working these areas and plans to address concerns about the effectiveness of its outreach efforts and privacy barriers that still exist in some facilities; (5) in response to women veterans' concerns, VA has begun to assess its capacity to women veterans; (6) with regard to gender-specific services, VA's efforts to emphasize women veterans' health care have contributed to a significant increas of all services over the last 3 years; (7) the range of services differs by facility; services may be provided in clinics designated specifically for women veterans, or they may be provided in the overall medical facility health care system; (8) more importantly, utilization has increased significantly between 1994 and 1997; (9) for example, gender-specific services grew from over 85,000 to more than 121,000; and (10) during the same time period, the number of women veterans treated for all health care services on an outpatient basis increased by about 32 percent or 119,300.

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

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

Consumers may access location-based services through smartphones or from in-car location-based services. Four types of companies are primarily responsible for smartphone products and services in the United States: mobile carriers, such as AT&T and Verizon; developers of operating systems, such as Apple's iPhone iOS and Google's Android; manufacturers, such as HTC and Samsung; and developers of applications such as games like Angry Birds, social networking applications like Facebook, or navigation tools like Google Maps. We refer to these companies as mobile industry companies. In-car location- based services are delivered by in-car communications systems known as "telematics" systems, portable navigation devices, and map and navigation applications for mobile devices. Companies can obtain location data in various ways. Mobile devices and in-car navigation devices determine location information through methods such as cell tower signal-based technologies, Wi-Fi Internet access point technology, crowd-sourced positioning, and GPS technology. Assisted- GPS (A-GPS), a hybrid technology that uses more than one data collection methodology, is also widely used. For example, companies such as Google and Apple use customer data to compile large databases of cell tower and Wi-Fi access points. Non-carriers use these crowd- sourced location maps to determine location by analyzing which cell tower and Wi-Fi signals are received by a device. Consumers' location data are transmitted over the cellular network or Wi-Fi access points to companies providing the services. These location data may then be shared with third parties for various uses. For example, companies may choose to partner with third parties to provide a specific location-based service, such as real-time traffic information. Several agencies have responsibility to address consumers' privacy and create related guidance. The Federal Trade Commission (FTC) has authority to enforce action against unfair or deceptive acts or practices of companies; the Federal Communications Commission (FCC) has regulatory and enforcement authority over mobile carriers; and the Department of Commerce's (Commerce) National Telecommunications and Information Administration (NTIA) advises the President on telecommunications and information policy issues. Additionally, the Department of Justice disseminates guidance on how law enforcement might request electronic evidence, such as a person's current or historical location data. Representatives from mobile industry companies we spoke to for the September 2012 report and in-car navigation service companies we spoke to for the December 2013 report told us they primarily collect and share location data to provide location services and to improve those services. Mobile carriers and application developers offer a diverse array of services that use location information, such as services providing navigation and social networking services that are linked to consumers' locations. To provide these services, carriers and developers need to quickly and accurately determine location. Location data can also be used to enhance the functionality of other services that do not need to know the consumer's location to operate. Search engines, for example, can use location data as a frame of reference to return results that might be more relevant. For instance, if a consumer were to search for a pizza restaurant using a location-aware search engine, the top result may be a map of nearby pizza restaurants instead of the homepage of a national chain. In- car location services use location data to provide services such as turn- by-turn directions or roadside assistance. Representatives from both mobile industry companies and in-car navigation services companies told us they also use location data to improve the accuracy of their services. Representatives from some in-car navigation service companies said they share aggregated location data associated with traffic flows with third parties to augment and improve the accuracy of real-time traffic services provided to consumers. Additionally, as we reported in 2012, mobile industry companies can use and sell location data to target the advertising that consumers receive through mobile devices. Doing so may make an advertisement more relevant to a consumer than a non-targeted advertisement, boosting advertising revenue. Advertising is particularly important to application developers, as many developers give their products away and rely on advertising to consumers through free applications for revenue. Companies may also aggregate and store individual consumer data to create consumer profiles. Profiles can be used to tailor marketing or service performance to an individual's preferences. Mobile industry companies and providers of in-car location services must also share consumer location data if a court finds that the information is warranted for law enforcement purposes. Because consumers generally carry their mobile devices with them, law enforcement can use device location data to determine the consumer's location. Because of this correlation, location data are valuable to law enforcement for tracking the movements of criminal suspects. Mobile carriers must comply with court orders directing the disclosure of historical location data (i.e., where the device was in the past) and in certain circumstances, real-time location data (i.e., where the device is now). Although consumers can benefit from location-based services designed to make their lives easier, consumers also expose themselves to privacy risks when they allow companies to access their location data. In some cases, consumers of location-based services may be unaware that companies share their location data for purposes other than providing those services. As we stated in our September 2012 and December 2013 reports, these privacy risks include, but are not limited to the following: Disclosure to Unknown Third Parties for Unspecified Uses: According to privacy advocates, when a consumer agrees to use a service that accesses location data, the consumer is unlikely to know how his or her location data may be used in ways beyond enabling the service itself. For example, location data may be shared with third parties unknown to the consumer. Because consumers do not know who these entities are or how they are using consumers' data, consumers may be unable to judge whether they are disclosing their data to trustworthy entities. Third parties that receive shared location information may vary in the levels of security protection they provide. If any of these entities has weak system protections, there is an increased likelihood that the information may be compromised. Tracking Consumer Behavior: When location data are collected and shared, these data could be used in ways consumers did not intend, such as to track their travel patterns or to target consumers for unwanted marketing solicitations. Since consumers often carry their mobile devices with them and can use them for various purposes, location data along with data collected on the device may be used to form a comprehensive record upon which an individual's activities may be inferred. Amassing such data over time allows companies to create a richly detailed profile of individual behavior, including habits, preferences, and routines--private information that could be exploited. Consumers may believe that using these personal profiles for purposes other than providing a location-based service constitutes an invasion of privacy, particularly if the data are used contrary to consumers' expectations and results in unwanted solicitations or other nuisances. Identity Theft: Criminals can use location data to steal identities when location data are disclosed, particularly when they are combined with other personal information. The risk of identity theft grows whenever entities begin to collect data profiles, especially if the information is not maintained securely. By illicitly gaining access to these profiles, criminals acquire information such as a consumer's name, address, interests, and friends' and co-workers' names. In addition, a combination of data elements--even elements that do not by themselves identify anyone, such as individual points of location data--could potentially be used in aggregate to identify or infer a consumer's behavior or patterns. Such information could be used to discern the identity of an individual. Furthermore, keeping data long-term, particularly if it is in an identifiable profile, increases the likelihood of identity theft. Personal Security: Location data may be used to form a comprehensive record of an individual's movements and activities. If disclosed or posted, location data may be used by criminals to identify an individual's present or probable future location, particularly if the data also contain other personally identifiable information. This knowledge may then be used to harm the individual or his property through, for instance, stalking or theft. Access to location information also raises child safety concerns as more children access mobile devices and location-based services. According to the American Civil Liberties Union (ACLU), location updates that consumers provide through social media have been linked to robberies, and GPS technology has been involved in stalking cases. Surveillance: Law enforcement agencies can obtain location data through various methods, such as a court order, and such data can be used as evidence. However, according to a report by the ACLU, law enforcement agents could potentially track innocent people, such as those who happened to be in the vicinity of a crime or disturbance. Consumers generally do not know when law enforcement agencies access their location data. In addition to information related to a crime, the location data collected by law enforcement may reveal potentially sensitive destinations, such as medical clinics, religious institutions, courts, political rallies, or union meetings. Industry and privacy advocacy groups have recommended practices for companies to follow in order to better protect consumers' privacy while using their personal information. These recommended practices include: (1) providing disclosures to consumers about data collection, use, and sharing; (2) obtaining consent and providing controls over location data; (3) having data retention practices and safeguards; and (4) providing accountability for protecting consumers' data. For the September 2012 report, we examined 14 mobile industry companies, and the for December 2013 report, we examined 10 in-car navigation services companies. These companies have taken steps that are consistent with some, but not all, of the recommended practices: Disclosures: All of the companies we examined for both reports have privacy policies, terms-of-service agreements, or other practices--such as on-screen notifications--to notify consumers that they collect location data and other personal information. However, some companies have not consistently or clearly disclosed to consumers what they are doing with these data or which third parties they may share them with. For example, most of the in-car navigation service companies we examined for the 2013 report provide broadly worded reasons for collecting location data that potentially allow for unlimited data collection and use. One of those company's terms of service states that the provided reasons for location data collection were not exhaustive. Furthermore, about half of the in-car navigation service companies' disclosures allow for sharing for location data when they are de-identified, but most of these companies' disclosures did not describe the purposes for sharing such data. Consent and Controls: All of the companies we examined for both reports indicated they obtain consumer consent to collect location data and obtain this consent in various ways, some of which are more explicit than others. Companies also reported providing methods for consumers to control collection and use of location data, but the methods and amount of control varied. For example, most of the 14 mobile industry companies we examined for the 2012 report indicated that consumers could control smartphones' use of their location data from the phone; however, the ability to control this varied by operating system, with some providing more options. For example, the iPhone iOS operating system displays a pop-up window the first time a consumer activates a new application that includes location-based services. The pop-up states that the application seeks to use the consumer's location and allows the consumer to accept or decline at that time. Similarly, Android smartphones notify consumers that an application will use location data at the time a consumer downloads a new application and seeks consumer consent through this process. Some in-car navigation systems we examined for the 2013 report use similar methods to notify consumers that they will collect location data to provide services. In contrast, other in- car navigation services obtain consent when a consumer purchases a vehicle. According to one privacy group we met with, if consent is obtained in this manner, consumers may not be as likely to review a company's stated privacy practices because they may be a part of a larger set of documentation about the vehicle. Additionally, none of the 10 in-car navigation service companies we examined allow consumers to delete the location data that are, or have been, collected. Retention and Safeguards: Officials from most of the companies we interviewed for the 2012 and 2013 reports said they kept location data only as long as needed for a specific purpose; however, in some cases, this could mean keeping location data indefinitely. Most of the privacy policies of the 14 mobile services companies we examined did not state how long companies keep location data, and there was wide variation in how long in-car navigation services companies retain vehicle-specific or personally identifiable location data when a customer requests services, ranging from not at all to up to 7 years. All the mobile industry companies we examined reported ways they safeguard consumers' personal information. However, in some cases, it was not clear whether these protections covered location data, since some privacy policies did not state whether location was considered a form of personal information. Thus it was unclear whether stated safeguards for personal information applied to location data. As we reported in 2013, companies may safeguard location data that they use or share, in part, by de-identifying them, but companies we examined used different de-identification methods. De-identified data are stripped of personally identifiable information. The de-identification method a company uses affects the extent to which consumers may be re-identified and exposed to privacy risks. Location data that are collected along with a consumer's name or other identifying information are, by definition, personally identifiable data and present the greatest privacy risks to consumers because a consumer's identity is known. Privacy risks decrease when companies de-identify location data, but the level of risk falls on a spectrum depending on how easy it is to re-identify consumers. For example, de-identifying location data with unique identification numbers prevents the direct association of location data with a specific vehicle or individual. However, if the same identification number is re- used for the same consumer on multiple trips, then the consumer's history or patterns can potentially be discerned. Conversely, consumers face little to no privacy risks when location data are stripped of any identification numbers and aggregated with other consumers' data because the data are anonymous, meaning that the data cannot be linked to an individual at all (see fig. 1). All of the in-car navigation service companies we examined stated in their disclosures, or in interviews with us, that they use or share de-identified location data. Accountability: We reported in 2012 and 2013 that companies' accountability practices varied. For example, all 10 of the in-car navigation services companies we examined for the 2013 report stated in their disclosures or in interviews with us that they take steps to protect location data that they share with third parties. Additionally, some mobile carriers we examined for the 2012 report said they use their contracts with third parties they share consumers' personal data with to require those third parties to adhere to industry recommended practices for location data. In the 2013 report, we found that while not disclosed to consumers, representatives of in-car navigation services companies said their employees must follow the companies' internal polices to protect data, including location data, and some of the representatives further explained that employees who violate such policies are subject to disciplinary action and possibly termination. Separately, representatives from one of the in-car navigation service companies told us that it had conducted an independent audit of its practices to provide reasonable assurance that it was in line with company privacy policies. Additionally, three of the mobile industry companies we examined for the 2012 report had their privacy practices certified by TRUSTe, a company that helps companies address privacy issues by certifying businesses' privacy programs. Lacking clear information about how companies use and share consumers' location data, consumers deciding whether to allow companies to collect, use, and share data on their location would be unable to effectively judge whether their privacy might be violated. In our September 2012 report on mobile device location data, we reported that federal agencies that have responsibility for consumer data privacy protection have taken steps to promote awareness of privacy issues, such as providing educational outreach and recommending actions aimed at improving consumer privacy. For example, in February 2012, NTIA prepared a report for the White House on protecting privacy and promoting innovation in the global digital economy. The report offered a framework and expectations for companies that use personal data. The framework includes a consumer privacy bill of rights, a multistakeholder process to specify how the principles in the bill of rights apply in particular business contexts, and effective enforcement. In February 2012, FTC issued a report on privacy disclosures for mobile applications aimed at children. This report highlighted the lack of information available to parents prior to downloading mobile applications for their children and called on the mobile industry to provide greater transparency about their data practices. FTC also issued a consumer privacy report in March 2012 with recommendations for companies that collect and use consumer data, including location data. Finally, the Department of Justice has developed guidance on how law enforcement may obtain mobile location data. In our 2012 report, we concluded that NTIA and FTC could take additional actions to further protect consumers. For example, we found that NTIA had not defined specific goals, milestones, or performance measures for its proposed multistakeholder process, which consists of different groups involved with consumer privacy coming together to discuss relevant issues with the goal of developing codes of conduct for consumer privacy. Therefore, it was unclear whether the process would address location privacy. Consequently, we recommended that NTIA, in consultation with stakeholders in the multistakeholder process, develop specific goals, time frames, and performance measures for the multistakeholder process to create industry codes of conduct. In a December 2012 response to our report, the Department of Commerce (NTIA is an agency of Commerce) said it disagreed with this recommendation, stating that it is the role of the stakeholders, not the agency, to develop goals, time frames, and performance measures for the multistakeholder process. Additionally, the letter stated that stakeholders had made progress to develop their own goals, time frames, and performance measures for their efforts to create a code of conduct for mobile application transparency. We will continue to monitor NTIA's efforts in this area. Additionally, we found that FTC had not issued comprehensive guidance to mobile industry companies with regard to actions companies should take to protect mobile location data privacy. Doing so could inform companies of FTC's views on the appropriate actions companies should take to protect consumers' mobile location privacy. We recommended that FTC consider issuing industry guidance establishing FTC's views of the appropriate actions mobile industry companies could take to protect mobile location data privacy. In February 2013, FTC issued a staff report on mobile privacy disclosures; the report provided guidance for mobile industry companies to consider when disclosing their information collection and use practices. In particular, the report suggested best practices for operating systems, application developers, advertising networks and other third parties, and trade associations and other experts and researchers. For example, FTC said that operating systems should provide disclosures at the point in time when consumers access location- based services and obtain their affirmative express consent before allowing applications to access sensitive content like location data. Currently, no comprehensive federal privacy law governs the collection, use, and sale of personal information by private-sector companies; rather, various federal laws pertain to the privacy of consumers' data: The Federal Trade Commission Act prohibits unfair or deceptive acts or practices in or affecting commerce and authorizes FTC enforcement action. This authority allows FTC to take remedial action against a company that engages in a practice that FTC has found is unfair or deceives customers. For example, FTC could take action against a company if it found the company was not adhering to the practices to protect a consumer's personal information that the company claimed to abide by in its privacy policy. The Electronic Communications Privacy Act of 1986 (ECPA), as amended, sets out requirements under which the government and providers of electronic communications can access and share the content of a consumer's electronic communications. ECPA also prohibits providers of electronic communications from voluntarily disclosing customer records to government entities, with certain exceptions, but companies may disclose such records to a person other than government entities. The act does not specifically address whether location data are considered content or part of consumers' records. Some privacy groups have stated that ECPA should specifically address the protection of location data. The act also provides legal procedures for obtaining court orders to acquire information relevant to a law enforcement inquiry. The Communications Act of 1934 (Communications Act), as amended, imposes a duty on telecommunications carriers to secure information and imposes particular requirements for protecting information identified as customer proprietary network information (CPNI), including the location of customers when they make calls.The Communications Act requires that companies obtain express authorization from consumers before they access or disclose call location information, subject to certain exceptions. Carriers must also comply with FCC rules implementing the E911 requirements of the Wireless Communications and Public Safety Act of 1999, including providing location information to emergency responders when mobile phone consumers dial 911. We have previously concluded that the current privacy framework warrants reconsideration in relation to a number of issues. In our 2013 report on consumer data collected and shared by information resellers, we found that changes in technology and the marketplace have vastly increased the amount and nature of personal information, including location data that are collected, used, and shared. We reported that while some stakeholders' views differed, the current statutory framework does not fully address these changes. Moreover, we reported that while current laws protect privacy interests in specific sectors and for specific uses, consumers have little control over how their information is collected, used, and shared with third parties. This includes consumers' ability to access, correct, and control their personal information used for marketing, such as location data, and privacy controls related to the use of new technologies and applications, such as mobile and in-car navigation devices. In 2012, FTC and NTIA called on Congress to pass data privacy legislation that would provide a minimum level of protection for consumer data, including location data. Some Members of Congress have introduced legislative proposals that address the privacy of consumers' location data. Chairman Franken, Ranking Member Flake, and Members of the Subcommittee, this concludes my prepared remarks. I am happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For questions about this statement, please contact Mark L. Goldstein, Director, Physical Infrastructure Issues, 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 who made key contributions to this statement include Andrew Von Ah (Assistant Director), Michael Clements, Roshni Dave, Colin Fallon, Andrew Huddleston, Lori Rectanus, and Crystal Wesco. 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Smartphones and in-car navigation systems give consumers access to useful location-based services, such as mapping services. However, questions about privacy can arise if companies use or share consumers' location data without their knowledge. Several agencies have responsibility to address consumers' privacy issues, including FTC, which has authority to take enforcement actions against unfair or deceptive acts or practices, and NTIA, which advises the President on telecommunications and information policy issues. This testimony addresses (1) companies' use and sharing of consumers' location data, (2) consumers' location privacy risks, and (3) actions taken by selected companies and federal agencies to protect consumers' location privacy. This testimony is based on GAO's September 2012 and December 2013 reports on mobile device location data and in-car location-based services and December 2012 and May 2013 updates from FTC and NTIA on their actions to respond to the 2012 report's recommendations. Fourteen mobile industry companies and 10 in-car navigation providers that GAO examined in its 2012 and 2013 reports--including mobile carriers and auto manufacturers with the largest market share and popular application developers--collect location data and use or share them to provide consumers with location-based services and improve consumer services. For example, mobile carriers and application developers use location data to provide social networking services that are linked to consumers' locations. In-car navigation services use location data to provide services such as turn-by-turn directions or roadside assistance. Location data can also be used and shared to enhance the functionality of other services, such as search engines, to make search results more relevant by, for example, returning results of nearby businesses. While consumers can benefit from location-based services, their privacy may be at risk when companies collect and share location data. For example, in both reports, GAO found that when consumers are unaware their location data are shared and for what purpose data might be shared, they may be unable to judge whether location data are shared with trustworthy third parties. Furthermore, when location data are amassed over time, they can create a detailed profile of individual behavior, including habits, preferences, and routes traveled--private information that could be exploited. Additionally, consumers could be at higher risk of identity theft or threats to personal safety when companies retain location data for long periods or in a way that links the data to individual consumers. Companies can anonymize location data that they use or share, in part, by removing personally identifying information; however, in its 2013 report, GAO found that in-car navigation providers that GAO examined use different de-identification methods that may lead to varying levels of protection for consumers. Companies GAO examined in both reports have not consistently implemented practices to protect consumers' location privacy. The companies have taken some steps that align with recommended practices for better protecting consumers' privacy. For example, all of the companies examined in both reports used privacy policies or other disclosures to inform consumers about the collection of location data and other information. However, companies did not consistently or clearly disclose to consumers what the companies do with these data or the third parties with which they might share the data, leaving consumers unable to effectively judge whether such uses of their location data might violate their privacy. In its 2012 report, GAO found that federal agencies have taken steps to address location data privacy through educational outreach events, reports with recommendations to protect consumer privacy, and guidance for industry. For example, the Department of Commerce's National Telecommunications and Information Administration (NTIA) brought stakeholders together to develop codes of conduct for industry, but GAO found this effort lacked specific goals, milestones, and performance measures, making it unclear whether the effort would address location privacy. Additionally, in response to a recommendation in GAO's 2012 report, the Federal Trade Commission (FTC) issued guidance in 2013 to inform companies of the Commission's views on the appropriate actions mobile industry companies should take to disclose their privacy practices and obtain consumers' consent. GAO made recommendations to enhance consumer protections in its 2012 report. GAO recommended, for example, that NTIA develop goals, milestones, and measures for its stakeholder initiative. NTIA stated that taking such actions is the role of the stakeholders and that its stakeholders had made progress in setting goals, milestones, and performance measures. GAO will continue to monitor this effort.

I am pleased to be here today to discuss the implementation of the Paperwork Reduction Act of 1995 (PRA). As you requested, I will summarize our recent reports and testimonies on the PRA and provide our analysis of data on expired paperwork authorizations that were recently submitted to the Subcommittee by the Office of Management and Budget (OMB). In brief, our reports and testimonies all indicate that federal paperwork burden estimates have increased dramatically since the PRA was first enacted in 1980, although some of that increase is due to changes in measurement techniques. Agencies' burden estimates have continued to increase since 1995 despite congressional expectations for reductions in federal paperwork burden. The increase in the governmentwide paperwork estimate appears largely attributable to continued increases in the Internal Revenue Service's (IRS) estimates. However, IRS said these increases are due to increased economic activity and new statutory requirements--factors it does not control. In addition,we believe that OMB's Office of Information and Regulatory Affairs (OIRA) has not fully satisfied all of the responsibilities that the PRA assigns to that Office. Regarding the data that OMB provided to the Subcommittee, we believe it indicates a troubling disregard by agencies for the requirement that they obtain OMB approval before collecting information from the public. Using OMB's measure of the costs associated with federal paperwork, we estimate that agencies have imposed at least $3 billion in unauthorized burden in recent years. OMB can do more to encourage agencies that are not complying with the PRA to come into compliance, and we offer some options in that regard. Before discussing these issues in detail, it is important to recognize that some federal paperwork is necessary and can serve a useful purpose. Information collection is one way that agencies carry out their missions. For example, IRS needs to collect information from taxpayers and their employers to know the amount of taxes owed. Next spring, the Bureau of the Census will distribute census forms to millions of Americans that will be used to apportion congressional representation and for a myriad of other purposes. However, federal agencies have an obligation under the PRA to keep the paperwork burden they impose as low as possible. The original PRA of 1980 established OIRA within OMB to provide central agency leadership and oversight of governmentwide efforts to reduce unnecessary paperwork and improve the management of information resources. Under the act, OIRA has overall responsibility for determining whether agencies' proposals for collecting information comply with the act. Agencies must receive OIRA approval for each information collection request before it is implemented. OIRA is also required to keep Congress "fully and currently informed" of the major activities under the act and must report to Congress on agencies' progress toward reducing paperwork. To do so, OIRA develops an Information Collection Budget (ICB) by gathering data from executive branch agencies on the total number of "burden hours" OIRA approved for collections of information at the end of the fiscal year and agency estimates of the burden for the coming fiscal year. The PRA of 1995 defines the term "collection of information" as "obtaining, causing to be obtained, soliciting, or requiring the disclosure to third parties or the public, of facts or opinions by or for an agency, regardless of form or format." Burden hours has been the principal unit of measure of paperwork burden for more than 50 years and has been accepted by agencies and the public because it is a clear, easy-to-understand concept. However, it is important to recognize that these estimates have limitations. Estimating the amount of time it will take for an individual to collect and provide information or how many individuals an information collection will affect is not a simple matter. Therefore, the degree to which agency burden-hour estimates reflect real burden is unclear. Nevertheless, these are the best indicators of paperwork burden available, and we believe they can be useful as long as their limitations are kept in mind. Although referred to as a "budget," the ICB does not limit the number of burden hours an agency is permitted to impose. As figure 1 shows, federal agencies' annual paperwork burden-hour estimate rose from about 1.5 billion hours in 1980 to about 7.0 billion hours by the end of fiscal year 1995--just before the PRA of 1995 took effect. The figure also shows the degree to which IRS' paperwork estimate drives the governmentwide estimate. Statement Paperwork Reduction Act: Burden Increases and Unauthorized Information Collections Burden hours (in billions) As you can see, a large part of the increase in the governmentwide burden- hour estimate during this period occurred in 1989, when IRS changed the way it calculated its estimates. That reestimate increased the agency's paperwork estimate by 3.4 billion hours and nearly tripled the governmentwide burden-hour estimate. However, it is important to remember that the amount of paperwork actually imposed on the public did not change, only IRS' estimate of the burden that was already there. In every year since 1989, IRS has accounted for nearly 80 percent of the governmentwide burden estimate. burden to the "maximum practicable opportunity." Therefore, if federal agencies had been able to accomplish the reduction in burden contemplated by the PRA for the 3-year period ending on September 30, 1998, the 7.0 billion burden-hour estimate would have fallen 25 percent, or to less than 5.3 billion hours. However, as figure 2 shows, the anticipated 25-percent reduction in burden during this 3-year period did not happen. In fact, the recently developed ICB for fiscal year 1999 shows that the governmentwide burden-hour estimate actually declined by less than one-half of 1 percent during this period. estimate. Therefore, as illustrated in figure 1, changes in IRS' estimate can have a highly significant--and even determinative--effect on the governmentwide total. As figure 3 shows, non-IRS departments and agencies estimated that, in the aggregate, they had reduced their paperwork burden by more than 23 percent between fiscal years 1995 and 1998--close to the 25-percent burden-reduction goal envisioned in the PRA. However, IRS' burden-hour estimate increased by 6.9 percent during this period. That increase offset the estimated reductions in the other agencies and was largely responsible for the relatively minor decline in the governmentwide paperwork burden-hour estimate. Also, as I will discuss later, the estimate for the non-IRS agencies' reductions was overstated. their aggregate burden to increase by more than 4 percent between fiscal years 1998 and 2000. However, IRS will again lead the way, accounting for more than 85 percent of the governmentwide increase in estimated burden during this period. raised the threshold for which businesses had to maintain receipts to substantiate expenses for travel, entertainment, gifts, and listed property, thereby reducing burden by an estimated 12.5 million hours during fiscal year 1997; and required those who file 250 or more of IRS Form 1042-S (used by withholding agents to report income and tax withheld from payees) to do so on magnetic media, thereby producing an estimated burden reduction of 21.1 million hours during fiscal year 1997. As a result of these and other actions, IRS and other parts of the Department of the Treasury said they had eliminated more than 100 million hours of paperwork burden between fiscal years 1995 and 1998. However, despite these efforts, IRS' overall burden estimate increased by about 400 million hours during this period. The ICBs that OIRA developed during this period indicated that this net increase was because of increased economic activity and new legislation that required IRS to establish new information collections. For example, the ICB for fiscal year 1999 said the Taxpayer Relief Act of 1997 (P.L. 105-34) significantly increased IRS' paperwork burden, much of which was caused by new provisions for the calculation and reporting of taxes owed on capital gains. Overall, the ICB indicated that the Taxpayer Relief Act had increased burden by more than 92 million hours as of December 1998. IRS officials told us that these factors are outside of the agency's control and have caused the recent increases in its burden-hour estimates. They also said the agency would not be able to reduce its paperwork burden if new statutes requiring information collections continue to be enacted and unless changes are made to the substantive requirements in the current tax code. Our July 1998 report examined the way in which OIRA has carried out some of its responsibilities under the PRA. Although OIRA pointed to a number of actions it had taken in each area of its responsibilities that we examined, those actions often appeared to fall short of the act's requirements. practicable opportunity" in each agency. The act's legislative history suggests a relationship between the agency goals and the governmentwide goals, and it is logical to assume that the agency-specific goals would be the means by which the governmentwide goals would be achieved. However, OIRA says that the agency-specific goals may not total to the governmentwide goal because of the agencies' statutory and program responsibilities. The PRA of 1995 also required OIRA to conduct pilot projects to reduce federal paperwork burden. However, as of last July, OIRA had not formally designated any such pilot projects. OIRA officials told us that other burden-reduction efforts are under way, and that pilot projects used to satisfy another statute meet the PRA's requirements. However, in most cases, those other pilots predated the act and did not appear to have been initiated in response to the act's requirements. The PRA also required OIRA to develop and maintain a governmentwide strategic plan for information resources management (IRM), which was defined in the act as the process of managing those resources to accomplish agency missions and improve agency performance. OIRA officials said that information contained in their annual reports to Congress under the PRA, the budget, and other documents satisfy this requirement. However, those documents do not appear to contain all of the elements that the PRA requires in a govermentwide IRM strategic plan. Similarly, the PRA requires OIRA to periodically review selected agencies' IRM activities, and OIRA officials and staff said they do so through their reviews of agencies' information collection requests, OMB's budget formulation and execution process, and other means. However, none of the mechanisms that they mentioned would allow OIRA to address all of the elements that the PRA requires in the reviews. OIRA's lack of action in some of these areas may be a function of its resource and staffing limitations. As we reported last July, OIRA has taken between 3,000 and 5,000 actions on agencies' information collection requests in each year since the PRA of 1995 was enacted. At the same time, the 20 to 25 OIRA staff members assigned to this task were responsible for reviewing the substance of about 500 significant rules each year and carrying out other responsibilities as well. Although the number of PRA-related actions that OIRA has taken each year has been relatively constant since 1980, the number of OIRA desk officers responsible for those reviews has declined by more than 35 percent between 1989 and 1997. The second general issue you asked us to address involves data that OIRA recently sent to the Subcommittee concerning expired authorizations to collect information. The PRA prohibits an agency from conducting or sponsoring a collection of information unless (1) the agency has submitted the proposed collection and other documents to OIRA, (2) OIRA has approved the proposed collection, and (3) the agency displays an OMB control number on the collection. The act also requires agencies to establish a process to ensure that each information collection is in compliance with these clearance requirements. Finally, the PRA says no one can be penalized for failing to comply with a collection of information subject to the act if the collection does not display a valid OMB control number. OMB may not approve a collection of information for more than 3 years. In his March 3, 1999, letter to you, Chairman McIntosh, the Acting OIRA Administrator described the results of OIRA staff's review of 91 paperwork clearance dockets that it conducted at your instigation. In one part of the letter, the Acting Administrator described the status of 52 information collections for which OIRA approval had expired. He indicated that 17 of these collections were still being carried out by the agencies after OIRA's approval had expired, which was in violation of the PRA's requirements. A table enclosed with the Acting Administrator's letter provided the details for each of these collections, including the date that OMB's authorization expired and the annual burden-hour estimate for each collection. The table indicated that some of these information collections had continued to be administered for more than 2 years after OIRA's approval had expired, and one had been out of compliance for more than 3 years. The table also indicated that at least one of these collections had been disapproved by OIRA, but the agency (the Department of Agriculture) went ahead with the information collection anyway. Using the information in the Acting Administrator's letter, we prepared table 1, which shows, by agency and information collection, the total number of burden hours that have been imposed in violation of the PRA since OMB's authorizations expired or were disapproved. The table also shows that, for all 17 collections, the agencies have continued to impose nearly 64 million burden hours of unauthorized paperwork even though OMB's approval had expired. Statement Paperwork Reduction Act: Burden Increases and Unauthorized Information Collections Estimated costs in millions ($) the burden hours associated with the collection, and that wage rate should be "loaded" to include overhead and fringe benefit costs. OMB also noted that the hourly cost of a technical employee might well exceed $40. In its 1997 report to Congress on the costs and benefits of federal regulations,OMB estimated the "opportunity cost" associated with filling out tax forms at $26.50 per hour. Therefore, multiplying IRS' 5.3 billion burden-hour estimate times $26.50 yielded a $140 billion cost of tax compliance paperwork. As table 1 shows, multiplying the nearly 64 million burden hours of paperwork imposed in violation of the PRA times this estimate of opportunity cost yields a dollar value of nearly $1.7 billion of unauthorized paperwork burden from these 17 information collections. The Acting Administrator's March 3 letter also indicated that OMB's authorization for another 11 collections had expired and were later reinstated, but not before they were used to collect information in violation of the PRA's requirements. The table enclosed in the letter provided the annual burden-hour estimate and the period that elapsed without OMB authorization. Although the authorizations for most of these collections had lapsed for about 6 months or less, one collection was unauthorized for nearly 2 years. Using this information, we prepared table 2, which shows, by agency and information collection, the total number of burden hours that were imposed in violation of the PRA between the date that OMB's authorizations expired and the date the authorizations were reinstated. For all 11 collections, the agencies imposed more than 47 million hours of unauthorized burden. Using the same $26.50 per hour "opportunity cost" multiplier, these agencies imposed nearly $1.3 billion in paperwork burden in violation of the PRA. Estimated costs in millions ($) Title CHAMPUS claim form Medicare/ Medicaid Claim 12/31/96 Premarket Approval of Medical Devices Home Health Agencies Info for Medicare Good Faith Estimate and Special Information Employment for Low and Very Low Income Employment Eligibility Verification12/31/97 Repair and Maintenance Eligibility Verification Report Customer Survey for EO 12862 Application for Medical, Funeral, etc. Totals The number of burden hours between expiration and reapproval was calculated by multiplying the annual burden hour requirement by an elapsed-time multiplier (number of months elapsed since approval expiration and reapproval, divided by 12). violation of the PRA. In dollar terms, that amounts to nearly $3 billion in unauthorized burden. However, this is clearly not the full extent of unauthorized information collections that have taken place. The ICB that OIRA recently developed identifies 800 violations of the PRA in fiscal year 1998. These violations included both other collections with expired OMB authorizations (some of which were subsequently reauthorized) and information collections that were never authorized in the first place. Some agencies (the Departments of Agriculture, Health and Human Services, and Veterans Affairs) had more than 100 PRA violations. As disconcerting as these violations are, even more troubling is that OIRA's ICB reflects the hours associated with unauthorized information collections ongoing at the end of the fiscal year as burden reductions. However, the public has seen no real reduction in paperwork burden associated with these information collections; although the agencies are still requiring the paperwork, OMB is no longer counting the burden because its authorization had expired. As a result, OMB credits agencies for burden-reduction accomplishments that have not been achieved, when in reality the agencies are actually violating the PRA. When OMB's approval for an information collection expires, OMB subtracts the estimated annual number of burden hours associated with the collection from the agency's total. For example, when OMB's approval for the Department of Agriculture's (USDA) Noninsured Crop Disaster Assistance Program's information collection expired on May 31, 1998, the estimated 8.1 million burden hours imposed by this collection each year was subtracted from OMB's database. However, USDA continued to collect this information without OMB's approval. Because this violation was ongoing as of September 30, 1998, the estimate of USDA's paperwork burden at the end of fiscal year 1998 in the ICB for fiscal year 1999 was inappropriately recorded as being reduced by 8.1 million hours. an additional 3 million hours of estimated burden. Adding these 3 million hours and the 15 million hours from the five collections listed in the Acting Administrator's letter to the 72 million hours reported in the ICB indicates that USDA's burden estimate should have been about 90 million hours. Although the ICB indicated that USDA had reduced its estimated burden by 59 million hours (45 percent) by the end of fiscal year 1998, the actual reduction appears to have been about 41 million hours (31 percent). Similar adjustments appear to be needed in other agencies' estimates as well. In his March 3 letter, the Acting Administrator said OIRA believed that compliance with the PRA is important, and that OIRA desk officers have worked closely with agency staff to stress the importance of full and timely compliance with the act. He also said that OIRA learns of agency violations from public comment and through direct monitoring of reporting from the agencies. The Acting Administrator said that OIRA's database tracks and records OIRA activities in reviewing agency submissions for clearance under the PRA. However, he said the database is not designed or able to identify what he termed "bootleg" information collections that did not obtain OMB approval, or for which its approval had expired. Last November, Chairman McIntosh, you suggested that OIRA prepare and submit a monthly report listing expirations of OMB PRA approval. In response, the Acting Administrator said OIRA would add information about expired approvals to OMB's Internet home page. As a result, he said potential respondents would be able to inform the collecting agency, OMB, and Congress of the need for the agency to either obtain reinstatement of OMB approval or discontinue the collection. the database to identify information collections whose authorizations are about to expire, and therefore perhaps prevent violations of the act. The PRA of 1995 requires that OIRA's annual report to Congress include a list of all violations of the act. OIRA reported 39 pages of violations in the ICB for fiscal year 1998, broken down into collections for which authorizations had expired and collections for which authorizations were never initially provided. The ICB for fiscal year 1999 contains 59 pages of these violations. However, OIRA officials and staff told us that they have no authority to do much more than publish the list of violations and inform the agencies directly that they are out of compliance with the act. We do not agree that OIRA is as powerless as this explanation would suggest. If an agency does not respond to an OIRA notice that one of its information collections is out of compliance with the PRA, the Acting Administrator could take any number of actions to encourage compliance, including any or all of the following: Publicly announce that the agency is out of compliance with the PRA in meetings of the Chief Information Officer's Council and the President's Management Council. Notify the "budget" side of OMB that the agency is collecting information in violation of the PRA and encourage the appropriate resource management office to use its influence to bring the agency into compliance. Notify the Vice President of the agency's violation. (The Vice President is charged under Executive Order 12866 with coordinating the development and presentation of recommendations concerning regulatory policy, planning, and review.) Place a notice in the Federal Register notifying the affected public that they need not provide the agency with the information requested in the expired collection. OIRA could also notify agencies that the PRA requires them to establish a process to ensure that each information collection is in compliance with the act's clearance requirements. Agencies that repeatedly collect information without OMB approval or after OMB approval has expired are clearly not complying with this requirement. Although OIRA's current workload is clearly substantial, we do not believe these kinds of actions would require significant additional resources. Primarily, the actions require a commitment to improve the operation of the current paperwork clearance process. This completes 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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Pursuant to a congressional request, GAO discussed the implementation of the Paperwork Reduction Act (PRA). GAO noted that: (1) GAO's reports and testimonies all indicate that federal paperwork burden estimates have increased dramatically since the PRA was first enacted in 1980, although some of that increase is due to changes in measurement techniques; (2) agencies' burden estimates have continued to increase since 1995 despite congressional expectations for reductions in federal paperwork burden; (3) the increase in the governmentwide paperwork estimate appears largely attributable to continued increases in the Internal Revenue Service's (IRS) estimates; (4) however, IRS said these increases are due to increased economic activity and new statutory requirements--factors it does not control; (5) in addition, GAO believes that the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs has not fully satisfied all of the responsibilities that the PRA assigns to that office; (6) regarding the data that OMB provided to the House Committee on Government Reform, Subcommittee on National Economic Growth, Natural Resources and Regulatory Affairs, GAO believes it indicates a troubling disregard by agencies for the requirement that they obtain OMB approval before collecting information from the public; (7) using OMB's measure of the costs associated with federal paperwork, GAO estimates that agencies have imposed at least $3 billion in unauthorized burden in recent years; and (8) OMB can do more to encourage agencies that are not complying with the PRA to come into compliance, and GAO offers some options in that regard.

Unaccompanied personnel who are not assigned to government-owned housing, or are above certain pay grades, are authorized to receive the BAH, and the amount of the allowance is based on factors that include a servicemember's pay grade, dependency status, and geographic location. Additionally, each service determines pay grades at which personnel are no longer assigned to government-owned housing. Junior unaccompanied personnel are generally required to live in government- owned unaccompanied housing on their installation, commonly referred to as barracks (Army and Navy), dormitories (Air Force), or bachelor enlisted quarters (Marine Corps), and may be eligible for the housing allowance only if on-installation, government-owned housing is not available. In table 1, we list the pay-grade thresholds each military service has established for junior unaccompanied personnel permanently assigned to installations in the United States and required to live in government- owned housing. In 1995, DOD adopted a new construction standard that called for more space and increased privacy in new government-owned housing for servicemembers permanently assigned to an installation. The new standard, which was modified in 2007, provided each junior unaccompanied servicemember with a private sleeping room and a kitchenette and bath shared by one other member. DOD justified the adoption of the new standard primarily as an investment in quality of life aimed at improving military readiness and retention. All the military services except the Marine Corps accepted the new standard, and developed various initiatives to implement it, as discussed below. The Marine Corps believed that the new standard did not allow for the unit cohesion and team building needed to reinforce Marine Corps values and develop a stronger bond among junior Marines. Therefore, the Marine Corps obtained a permanent waiver from the Secretary of the Navy to use a different design standard--one sleeping room and bath shared by two junior Marines. According to a February 2013 DOD report to Congress on government-owned housing for unaccompanied personnel, from fiscal years 1996 through 2012, DOD spent over $20 billion of military construction funds to build and modernize on-installation housing for unaccompanied personnel. Army: Between fiscal years 1996 and 2012, the Army spent over $12 billion of military construction funds on its barracks modernization program to modernize housing for all Army unaccompanied personnel permanently assigned to an installation. The renovated facilities meet the current DOD standard configuration, and each module includes two bedrooms, one bathroom, a cooking area, and appliances. The housing complex also includes laundry facilities. Navy: The Navy spent about $2.5 billion of military construction funds between fiscal years 1996 and 2012 on improving the condition of its housing for unaccompanied personnel. A key component of the Navy's modernization program for unaccompanied housing is the Homeport Ashore program, which was created to improve the quality of life among ship-based junior sailors by moving them off ships and into unaccompanied housing on shore while their ships were docked in their homeport. The Navy expects to complete this initiative by fiscal year 2016 utilizing both privatization and military construction authorities. However, the BAH statute (37 U.S.C. SS 403(f)) prohibits E- 1 to E-3's without dependents on sea duty from receiving the BAH, and privatized housing projects are not generally feasible unless military members are receiving a housing allowance. Congress, in the Bob Stump National Defense Authorization Act for Fiscal Year 2003, amended the housing privatization authorities by adding a new section (10 U.S.C. SS 2881a) that authorized the Navy to carry out up to three pilot unaccompanied housing privatization projects in which junior enlisted members without dependents could be authorized higher rates of partial BAH to pay their rent. Per 37 U.S.C SS 403(n), partial BAH is a payment at a rate determined by the Secretary of Defense based on a specified historical rate (typically around $8 per month, as of 2011) paid to members not authorized to receive BAH, such as those assigned to live aboard ships or in government quarters. The 10 U.S.C. SS2881a authority expired on September 30, 2009, and the Navy executed two of the three authorized projects prior to the expiration of the authority. Air Force: The Air Force spent almost $3 billion of military construction funds from fiscal years 1996 to 2012 on modernizing its dormitories for unaccompanied personnel. Air Force housing officials told us that the service has adequate housing for all its airmen. The Air Force also implemented a policy in 1996 whereby each unaccompanied airman permanently assigned to an installation is assigned to a private bedroom. In 2006, the Air Force started requiring that its dorms be built or renovated according to a four-bedroom module design, called Dorms-4-Airmen, specifically for unaccompanied personnel in the pay grades from E-1 to E-3 and E-4 with less than 3 years of service. The design was based on Air Force criteria, detailed analysis of square- footage requirements and constraints, and prototype development. It was designed to achieve the goal of providing privacy while boosting social interaction. Marine Corps: The Commandant of the Marine Corps approved the Bachelor Enlisted Quarters campaign plan in 2006. The goals of the plan were to eliminate existing space deficiencies, demolish inadequate housing, and achieve the new standard of one sleeping room and bath shared by two junior Marines by fiscal year 2014. From fiscal years 1996 to 2012, the Marine Corps spent about $3.5 billion of military construction funds to replace and renovate its housing for unaccompanied personnel. In June 1997, DOD and the Office of Management and Budget (OMB) agreed to a set of guidelines that would be used as a frame of reference for scoring privatization projects. The implications of scoring depend on which MHPI authority will be used. For example, the guidelines state that if a project provides an occupancy guarantee, then funds for the project must be available and obligated "up front" at the time the government makes the commitment of resources. In other words, if a project provides an occupancy guarantee, then the net present value of the guarantee-- the cumulative value of the rents to be paid for the housing over the entire contract term--must be obligated at the beginning of the project. According to Army and Navy officials, none of the privatized projects for housing unaccompanied personnel discussed in this report include an occupancy guarantee. From 1997 to 2011, the services conducted several analyses of the costs and suitability of privatization as a financing method for their housing needs for unaccompanied personnel. Using different methods, such as business-case and life-cycle cost analyses, and using different assumptions about how repairs and upkeep for housing would be funded, the services reached different conclusions about the potential for cost savings from using either privatization or the traditional government- funded military construction approach. The Army concluded that privatization is feasible but more costly in most cases, while the Navy found that privatization is feasible in certain locations. The Air Force and Marine Corps concluded that privatization was not desirable for housing their unaccompanied personnel. The Army conducted three sets of analyses to determine whether to privatize housing for unaccompanied personnel. These analyses used different scenarios and data gathered from multiple locations. The Army documented the analytical processes used, and communicated its conclusions to service leadership. In 2004, the Army formed a task force to assess the feasibility and desirability of privatization of unaccompanied personnel housing. Task-force members conducted the study over 6 months, visiting six sites, including Fort Detrick, Maryland; Fort Leonard Wood, Missouri; Fort Lewis, Washington; Fort Stewart, Georgia; Fort Hood, Texas; and the Presidio of Monterey, California. There appeared to be no consistent criteria applied for site selection in the task-force study in that the reasons for selection differed in each case. For example, Fort Lewis was selected in part because of command interest, and Fort Leonard Wood was selected because it is a training installation that represents the consolidation of training missions at a larger site. Study authors also considered 18 scenarios, 5 of which were Army-wide. These scenarios involved different assumptions about the number and pay grades of unaccompanied personnel housed on and off installations, as well as the amount of money spent by the Army to construct and sustain new facilities. The study concluded that privatization of housing for unaccompanied personnel was financially feasible at selected installations, such as Fort Stewart and Fort Hood, in part because a majority of senior enlisted personnel there were already receiving the BAH and living off the installation; however, all members of the leadership task force responsible for the study could not reach consensus on the study's findings. For example, the study authors suggested that soldiers should not be mandatorily assigned to privatized housing. OMB scoring rules require that mandatory assignment be treated as an occupancy guarantee, which would have the effect of committing the government to a large long-term expenditure. However, other members of the task force questioned whether mandatory assignment might be necessary to support the building of cohesive units, which is fostered by working and living together as a team. The Army completed an additional analysis of privatization in response to a 2009 congressional inquiry. The Army prepared a report that focused on the privatization of housing for junior unaccompanied personnel. The analysis included a review of privatization's effect on costs, soldiers' quality of life, and the Army's traditions and culture. The study was conducted over a 3-month period and included modeling scenarios at Fort Polk, Louisiana; Fort Irwin, California; and Fort Meade, Maryland, and one U.S.-wide extrapolation. The three locations were chosen because their barracks needed renovations and local commanders and private- sector developers supported privatization. The analysis concluded that privatization was feasible, but the cost to privatize barracks would be higher than what the Army was currently spending on barracks construction and sustainment. The Army also conducted a series of due diligence studies at Fort Benning, Georgia; Fort Irwin, California; Fort Knox, Kentucky; Fort Leonard Wood, Missouri; Fort Meade, Maryland; and Fort Polk, Louisiana, in April and May 2010. The purpose of these studies was, among other things, to assist the Army in determining the feasibility of implementing barracks privatization pilot projects. In July and August 2010, the results of the studies were condensed into business-case analyses to show the potential costs or savings the Army would experience at each of the six sites if barracks privatization projects were executed. According to the Army report, the bottom-line finding of the analyses was that such projects would result in a significant net cost to the Army if executed, because the Army was not funding all barracks requirements at 100 percent. The report further stated that the Army's expected BAH payments would be greater than the actual barracks funding that was currently taking place. Fort Meade was the only exception of the six sites because less than 50 percent of the junior servicemembers were Army, but the Army was funding all barracks for all the services. The report concluded that the Army's expected BAH payments at Fort Meade would be less than the current Army Military Construction, Operation and Maintenance, and Sustainment, Restoration and Modernization funding. Like the Army, the Navy developed analyses that considered multiple scenarios. In 2009, the Navy conducted a business-case analysis using three scenarios and data collected from site visits at San Diego, California; and Norfolk, Virginia; which were the only Navy locations with privatized projects for unaccompanied housing. The service used both quantitative and qualitative data, drawing on the pro forma financial statements and requests for proposals from the San Diego and Norfolk privatization projects, military construction budget, and BAH data from multiple years, as well as interviews with personnel across the Navy. The study compared three alternative scenarios with a baseline scenario. One of the scenarios involved privatization, another featured construction with military construction funds, and the third assumed the community provided the majority of the housing needs. Under the baseline scenario, the assumptions were that the Navy would own and operate all housing for unaccompanied personnel, and would underfund building maintenance and support. Briefings to leadership documented the analytical process and summarized the results of the study. The Navy analysis concluded that privatization of housing for unaccompanied personnel would be more cost-effective for housing junior sailors based on their receiving a higher partial rate of BAH (versus the full BAH rate), rather than building new quarters using traditional military construction funding. In 2011, 2 years after the initial analysis, the Navy reviewed the issue of the privatization of housing for unaccompanied personnel again and reached similar conclusions. The Navy study found that privatization requires lower operating costs than housing funded through annual appropriations requested through the military construction budgeting process and sustained at the required levels of operation and maintenance. However, the study noted that privatization of housing for unaccompanied personnel is only viable at select locations, such as where there is a stable population and a need to provide sailors with housing ashore when their ship is in its homeport. In such areas, enough population might exist to sustain the necessary level of occupancy in unaccompanied housing while sailors are at sea. The Air Force and Marine Corps analyses of whether to privatize unaccompanied personnel housing reviewed privatization at a few selected locations. The Air Force developed three analyses reviewing privatization over a 5-year period beginning in 1997. Air Force officials documented the analytical processes used through reports and memorandums and communicated the conclusions to service leadership in briefings. The first effort, the Dormitory Privatization Feasibility Study, lasted for 5 months and included site visits to two bases where data were collected for a feasibility analysis. The Air Force selected the two locations--Dover Air Force Base, Delaware; and Tinker Air Force Base, Oklahoma--from eight candidate bases nominated by the major commands, in part because both bases had housing shortages. Tinker had the largest housing shortage of the eight candidate bases with 59 percent of the total demand for unaccompanied housing unmet, compared with 12 percent at Dover, and both had rooms that would require future renovation or replacement. Based on post-site-visit financial analyses, the study authors found that privatization would be less expensive than traditional military construction at Tinker but not at Dover. A 51-year life-cycle cost comparison conducted in 1997, provided to us by Air Force officials, showed the cost of privatization at Tinker to be $163.7 million, compared with the military construction cost of $205.7 million. For Dover, the analysis showed a cost of $110.5 million for a traditional military construction approach compared with $132.5 million for privatization. The study authors concluded that privatization was more suitable for installations with a slow local economy, high installation and local support for privatization, degraded existing facilities, and a large unaccompanied housing shortage--conditions that existed at Tinker. Further, the study concluded that since privatization of housing for unaccompanied personnel was suitable only for certain locations, it could be used only to augment traditional military construction funding, not to replace it. Later, in 1997, the Air Force organized an exercise to discuss whether to use privatization as a tool to construct dormitories. The team conducting the exercise was composed of more than a dozen Air Force headquarters housing and installation officials. The team discussed the results of the Dormitory Privatization Feasibility Study, as well as other factors such as the effects of utilities, leasing, and mandatory assignment of personnel to privatized housing on OMB scoring, and leadership control over housing residents' activities. The team recommended that the Air Force not pursue privatization to construct dormitories, primarily because the team found that privatization was not a cost effective alternative to using military construction funding for building dormitories. In 2002, 5 years later, another team composed of new members from all levels of the Air Force met to establish a baseline for an Air Force dormitory privatization program. This team also identified a number of issues, such as unit integrity, the scale of necessary government commitment of funds, enforcing discipline among tenants, and conducting inspections in a building that was not solely government-owned, that would make privatization projects unfeasible unless they were resolved. In an April 2000 memorandum, the Air Force Chief of Staff argued against privatizing unaccompanied personnel housing. The official indicated that residing in on-base dormitories ensures that junior enlisted personnel acclimate to the Air Force, build esprit de corps with members of their unit, and have access to base services such as medical, fitness, recreation, commissary, and exchange facilities. Ultimately, according to Air Force officials, the Air Force decided that military construction would meet their needs for housing and decided against using privatization. In 2008, the Marine Corps completed a feasibility analysis to decide whether to privatize housing for unaccompanied personnel at a single location--Camp Pendleton, California--as it lacked sufficient high-quality housing for unaccompanied personnel. The service documented this analysis in a briefing submitted to Marine Corps leadership and a memorandum prepared the following year. The feasibility analysis included an examination of the cash contributions required from the Navy, a participation test for the 336-bed project, and a life-cycle cost analysis. The feasibility analysis concluded that privatization of housing for unaccompanied personnel would be 55 percent more expensive than building new quarters using military construction funds. A 2009 Marine Corps summary on the subject of bachelor housing privatization noted that Marines are assigned to barracks with others from their unit, which promotes unit integrity and unit cohesion. However, the direct or mandatory assignment of servicemembers to privatized housing could be viewed as providing an occupancy guarantee to the developer, which under the OMB guidelines would require that the full value of the guarantee must be available and obligated "up front" at the time the government makes the commitment of resources. In interviews, Marine Corps officials stated that privatized housing is incompatible with Marine Corps culture because Marines do not deploy as individuals; they deploy as units. Moreover, E-1 to E-3 Marines, like E-1 to E-3 sailors on sea duty, are assigned to shared rooms. This configuration is an important element of the Marine Corps' philosophy and goal of fostering team building, companionship, camaraderie, and unit cohesion, according to the 2010 report by the LMI company on unaccompanied personnel housing for junior enlisted members, which was commissioned by DOD to provide a comprehensive view of housing programs for unaccompanied personnel across the services. The Marine Corps conducted no additional analyses of privatization for unaccompanied personnel. Starting in 2008, the Marine Corps undertook a $2.8 billion military construction initiative to build new barracks over a 6-year period from fiscal year 2008 through fiscal year 2014. According to Marine Corps officials, the Marine Corps decided that military construction would meet its needs for housing and decided against using privatization. In addition to the three issues of OMB scoring, the life-cycle cost of government construction and operation of housing versus that of privatized construction and operation of housing, and unit integrity, the services' analyses and our interviews with service officials identified three other factors that influenced the services' decisions about whether to privatize housing for unaccompanied personnel: BAH: Most junior unaccompanied personnel without dependents are not eligible to receive a housing allowance (and, in the case of junior shipboard sailors, are not entitled by law to receive a BAH). Without the assurance of a steady stream of income from the BAH, which junior unaccompanied personnel could use to pay rent for privatized housing, private-sector developers would likely be unwilling to participate in privatized housing projects, the Army's 2005 Unaccompanied Personnel Housing Privatization Task Force Study concluded. In interviews and in some analyses, such as the Army's task-force study report, the services expressed reluctance to assume any additional costs, particularly a cost relating to personnel since such obligations to pay costs in the future must typically be funded at the time the obligation is made. In the Army's privatization task-force report, the Army's resource-management officials noted that even just a few pilot privatization projects could lock the Army into a 50-year BAH bill that must be funded, because the leases for privatization projects generally run for 50 years. The frequency or duration of unit deployments: With privatized family housing, the frequency of deployments of the servicemember generally does not affect the rent received because the servicemember's family remains behind and maintains the leased property. However, unaccompanied personnel living in privatized housing do not receive the BAH when they are deployed, if they do not have a lease. Therefore, frequent or prolonged deployments can reduce the occupancy rates of privatized housing. Occupancy rates are a key indicator of a housing project's financial viability. The uncertainty about the future size of the force: According to a 2012 DOD budget-priorities document, the department plans to reduce the size of the active Army from a post-9/11 peak of about 570,000 in fiscal year 2010 to 490,000 by fiscal year 2017, and the active Marine Corps from a peak of about 202,000 in fiscal year 2010 to 182,000 by fiscal year 2017. None of the services' analyses discussed the current uncertainty about the future size of the force, partly because most of them were written before the current force-structure reductions were announced. These reductions may eliminate current housing deficits and create a disincentive for private-sector developers to participate in privatization projects. Between 1996 and 2013, the Army and the Navy implemented seven privatized unaccompanied personnel housing projects. As stated previously in this report, both the Army and Navy have also used military construction funding to upgrade and renovate their housing for unaccompanied personnel The Air Force and the Marine Corps have not used the privatization authorities, and are instead using military construction funds to improve the quality of their unaccompanied personnel housing. Air Force housing officials told us that the Air Force unaccompanied personnel housing inventory generally meets current housing needs. According to Marine Corps officials, the Marine Corps intends to eliminate existing housing deficiencies by demolishing inadequate unaccompanied personnel housing, and using military construction funds to replace or renovate such housing by the end of fiscal year 2014. According to Office of the Secretary of Defense and military-service housing officials, none of the services have plans to pursue any future privatized housing projects for unaccompanied personnel. The Army has projects to privatize housing for unaccompanied personnel at five locations. Four of these projects are at Fort Irwin, California; Fort Drum, New York; Fort Bragg, North Carolina; and Fort Stewart, Georgia. At each of these locations, sufficient adequate and affordable housing was not available off the installation. These projects were intended to house unaccompanied personnel at pay grades E-6/Staff Sergeant and above, who are eligible to receive the BAH. In 2012, the Army made a decision to implement a fifth privatization project at Fort Meade, Maryland, for unaccompanied personnel E-5/Sergeant and below. These junior unaccompanied personnel currently receive the BAH and are living off the installation because Fort Meade does not have enough housing for unaccompanied personnel on-site. The initial development cost for the Army projects was about $219 million, all of which was incurred by the privatized housing project companies.costs generally included the costs of construction and project financing. The Army's investment in the projects was in the form of land leased to the privatized housing project companies to serve as the sites for the projects. Table 2 summarizes the status of the Army's five projects to privatize housing for unaccompanied personnel. In 2002, Congress amended the MHPI to provide the Navy with the authority to carry out not more than three pilot projects using the private sector for the acquisition or construction of unaccompanied personnel housing. The amendment to the MHPI also authorized the payment of higher rates of partial BAH to personnel occupying housing acquired using the pilot authority. The Navy implemented two such projects--at San Diego, California, and at Hampton Roads, Virginia--before its pilot authority expired on September 30, 2009. According to Navy officials, these locations were selected because both are fleet concentration areas, and the privatization projects also support the Navy's Homeport Ashore Program. The Navy's projects include 8 existing buildings (1 at San Diego and 7 at Hampton Roads) that the Navy conveyed to the private- sector developer and 91 new buildings (3 at San Diego; 1 mid-rise building and 87 "manor homes," each consisting of five two-bedroom apartments, at Hampton Roads). San Diego has 2,398 bedrooms, while Hampton Roads has 3,682 bedrooms, for a total of 6,080 bedrooms. The development costs for both projects totaled around $1.1 billion, of which the Navy provided cash equity investments of about $80 million, with the developers providing about $1 billion. The developers' costs generally included the costs of construction, project financing, and operating expenses. Table 3 summarizes the status of the Navy's two projects to privatize housing for junior and mid-level unaccompanied personnel. Details about each project follow. In December 2006, the Navy awarded its first pilot project to privatize housing for junior unaccompanied personnel at Naval Station San Diego, California. The project included the privatization of one existing building and the construction of three new buildings. According to Navy officials, the existing building includes 258 "modules" built to the 1995 DOD standards for housing for unaccompanied personnel, each featuring two sleeping rooms and a small common area. The new buildings include 941 "market-style" two-bedroom apartments, and, in total, the San Diego project provides 2,398 bedrooms. The existing building, which was conveyed to the developer, was intended to house junior unaccompanied personnel (E-4/ Petty Officer Third Class and below), and the new buildings were intended to house mid-level unaccompanied personnel (E- 4/ Petty Officer Third Class with more than 4 years of service to E-6/Petty Officer First Class). The three new buildings became available to rent within a 4-month period, beginning in December 2008. Navy officials told us that delivering 1,882 new beds within 4 months caused significant occupancy challenges, and that the target population of E-4 to E-6 has never been realized because of the on-base location of the project. In addition, they stated that while the sailors recognize the superior facilities and amenities, they are reluctant to return to quarters inside the installation's fence line with restricted access for their friends and family. Therefore, the private-sector developer and the Navy decided to temporarily expand the target demographic from E-4 with more than 4 years of service through E-6 to now include Homeport Ashore sailors and junior shore-based sailors (E-4 and below). According to Navy officials, this shift has largely solved the occupancy challenges, yet it has strained revenues for the private developer, as Homeport Ashore sailors receive only a partial BAH rate based on the market rent for the existing building, but the private-sector developer's financial projections were based on the market rent for the new buildings. The new buildings were constructed to higher standards compared with the existing one, and have a higher rent structure that is equivalent to current market rents for comparable housing in the San Diego area. The Navy's evaluation of the developer's proposed budget for 2013 noted that although the overall occupancy rate for the San Diego project at the end of 2012 was about 96 percent, the revenues being received were insufficient to sustain the project over the long term. Therefore, in June 2013, the Office of the Assistant Secretary of the Navy (Energy, Installations and Environment) requested the Under Secretary of Defense (Personnel and Readiness) to authorize a higher partial rate of the BAH for junior unaccompanied sailors residing in the new buildings. The higher partial rate of BAH requested would be equivalent to the market rents for the new buildings. In September 2013, the Office of the Assistant Secretary of Defense approved the Navy's request for an increase in the partial rate for the BAH. The private-sector developer's cost for the project was about $321 million, with the Navy providing a cash equity investment of about $43 million for a total of about $364 million. Figure 1 shows a bedroom in one of the new buildings at San Diego, California. The Navy's Hampton Roads, Virginia, project, awarded in December 2007, was built to house junior unaccompanied personnel (E-4/Petty Officer Third Class with fewer than 4 years of service and below). The project included 7 existing buildings on two installations (Naval Station Norfolk, Virginia, and Naval Support Activity, Norfolk, Virginia) that were conveyed to the developer and 88 newly constructed buildings on three separate locations off the installation. Although the new buildings are off the installation, two locations are on Navy property leased to the developer, and one location (Newport News) is on land donated by the city. In total, the Hampton Roads project includes 1,913 apartments and 3,682 bedrooms. Specifically, the 7 existing buildings include 723 apartments and 1,315 bedrooms, and the 88 new buildings include 1,190 apartments and 2,367 bedrooms. According to Navy officials, the Hampton Roads project initially struggled to meet lease expectations because of the reluctance of commanding officers to allow sailors off their ships. As a result, the Commander, Naval Surface Force Atlantic, directed commanding officers to comply with the Navy's Homeport Ashore initiative by allowing sailors to move off the ship. The private-sector developer's cost for the project was about $713 million, with the Navy providing a cash equity investment of $37 million for a total of about $750 million. According to data provided by the Navy, the project's average occupancy rate is about 94 percent. We are not making any recommendations in this report. DOD opted not to provide formal comments on a draft of this report, but provided technical comments, which were incorporated into this report as appropriate. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; and the Commandant of the Marine Corps. In addition, this report will be available at no charge on our website at http://www.gao.gov. If you or your staff has any questions about this report, please contact 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 report. GAO staff who made major contributions to this report are listed in appendix I. In addition to the contact named above, Kimberly Seay, Assistant Director; Vijay J. Barnabas; Julie Corwin; Mae Jones; Barbara Joyce; Carol Petersen; Michael Silver; and Michael Willems made key contributions to this report. Defense Infrastructure: Improved Guidance Needed for Estimating Alternatively Financed Project Liabilities. GAO-13-337. Washington, D.C.: April 18, 2013. Military Housing: Enhancements Needed to Housing Allowance Process and Information Sharing Among Services. GAO-11-462. Washington, D.C.: May 16, 2011. Military Housing Privatization: DOD Faces New Challenges Due to Significant Growth at Some Installations and Recent Turmoil in the Financial Markets. GAO-09-352. Washington, D.C.: May 15, 2009. Military Housing: Management Issues Require Attention as the Privatization Program Matures. GAO-06-438. Washington, D.C.: April 28, 2006. Military Housing: Further Improvements Needed in Requirements Determination and Program Review. GAO-04-556. Washington, D.C.: May 19, 2004. Military Housing: Better Reporting Needed on the Status of the Privatization Program and the Costs of Its Consultants. GAO-04-111. Washington, D.C.: October 9, 2003. Military Housing: Opportunities That Should Be Explored to Improve to Housing and Reduce Costs for Unmarried Junior Servicemembers. GAO-03-602. Washington, D.C.: June 10, 2003. Military Housing: Management Improvements Needed as the Pace of Privatization Quickens. GAO-02-624. Washington, D.C.: June 21, 2002. Military Housing: DOD Needs to Address Long-Standing Requirements Determination Problems. GAO-01-889. Washington, D.C.: August 3, 2001. Military Housing: Continued Concerns in Implementing the Privatization Initiative. GAO/NSIAD-00-71. Washington, D.C.: March 30, 2000. Military Housing: Privatization Off to a Slow Start and Continued Management Attention Needed. GAO/NSIAD-98-178. Washington, D.C.: July 17, 1998.

Partly in response to concerns that inadequate housing might be contributing to servicemembers' decisions to leave the military, Congress enacted the MHPI in 1996. The initiative gave the Department of Defense (DOD) legal authorities to replace or renovate inadequate housing for unaccompanied military personnel (those without dependents) and military families using private-sector financing, ownership, operation, and maintenance. Certain military personnel receive the BAH, which can be used to pay rent to live in privatized housing. Since 1996, DOD has built and modernized on-installation unaccompanied personnel housing using military construction funds. According to a February 2013 DOD report to Congress, from fiscal years 1996 through 2012, DOD spent over $20 billion of military construction funds to build and modernize on-installation housing for unaccompanied military personnel. GAO was asked to review DOD's efforts to privatize unaccompanied housing. GAO discusses the (1) analyses the military services conducted to make decisions about privatizing housing for unaccompanied personnel and (2) status of housing projects the military services have privatized for unaccompanied personnel. GAO obtained and reviewed fiscal years 1996-2013 housing plans and analyses the services conducted, reviewed information on privatization projects, and interviewed DOD and service officials. GAO is not making recommendations in this report. Since Congress enacted the Military Housing Privatization Initiative (MHPI) in 1996, the military services conducted several analyses and considered other factors to determine whether to privatize housing for unaccompanied personnel. These analyses were conducted between 1997 and 2011. The Army's and the Navy's analyses compared different scenarios--such as whether to rely on privatization or use traditional military construction funding to improve housing quality--and considered information from multiple installations in these analyses. In contrast, the Air Force and Marine Corps analyzed the feasibility of privatizing unaccompanied housing at a few selected installations. For example, the Air Force based its initial analysis on information for two locations, while the Marine Corps based its 2008 analysis on information specific to one installation. The Navy and Army concluded that privatization could be used under a narrow set of circumstances at specific installations, such as where unaccompanied servicemembers were already receiving the basic allowance for housing (BAH). The Air Force and Marine Corps concluded that privatization was not suitable for meeting any of their housing needs. For example, an April 2000 Air Force memorandum indicated that privatization could have a negative effect on building unit cohesion. Other factors also played a role in the four services' decisions about whether to privatize housing, including (1) the limited availability of the BAH for junior unaccompanied personnel, which may result in not having a dedicated stream of income to pay rent for privatized housing; (2) the frequency or duration of unit deployments, which could affect the occupancy rates of unaccompanied housing; and (3) uncertainty about the future size of the military, and whether there would be sufficient demand for privatized housing. Between 1996 and 2013, the Army and Navy implemented seven privatized unaccompanied personnel housing projects. The Air Force and Marine Corps have not used the privatization authorities, and are instead using military construction funds to improve the quality of their unaccompanied personnel housing. Air Force housing officials told us that Air Force unaccompanied personnel housing inventory generally meets current housing needs. According to Marine Corps officials, the Marine Corps intends to eliminate existing housing deficiencies by demolishing inadequate unaccompanied personnel housing and using military construction funds to replace or renovate housing by the end of fiscal year 2014. According to Office of the Secretary of Defense and military service housing officials, none of the services have plans to pursue any future privatized housing projects for unaccompanied personnel. GAO is not making recommendations in this report.

Financial literacy can be described as the ability to use knowledge and skills to manage money effectively. It includes the ability to understand financial choices, plan for the future, spend wisely, and manage the challenges that come with life events such as a job loss and saving for retirement or a child's education. It can also encompass financial education--the process by which people improve their understanding of financial products, services, and concepts. Financial literacy has received increased attention in recent years because poor financial management and decision making can result in a lower standard of living and prevent families from reaching important long-term goals, such as buying a home. Financial literacy has broader public policy implications as well. For example, the recent financial crisis can be attributed, at least in part, to unwise decisions by consumers about the use of credit. Moreover, educating the public about the importance of saving may be critical to boosting our national saving rate, an important element to improving America's economic growth. The population of adults with limited English proficiency in the United States is diverse with respect to immigration status, country of origin, educational background, literacy in native language, age, and family status. Generally, adults with limited English proficiency have immigrated to the United States and include legal permanent residents, naturalized citizens, refugees, and undocumented individuals, but some of these adults are native born. According to the Census Bureau's 2006-2008 American Community Survey, about 12.4 million adults in the United States--or 5.5 percent of the total U.S. adult population--reported speaking English not well or not at all. As shown in table 1, our analysis of the Census data shows that Spanish was the native language of about 74 percent of those adults who did not speak English well or at all, with Chinese, Vietnamese, Korean, and Russian representing the next most common native languages. The number of American residents who reported speaking English not well or not at all grew by about 29 percent from the 2000 Census to the 2006-2008 American Community Survey data, as compared to those who reported speaking English very well or well, which grew by about 8 percent during the same timeframe. As shown in figure 1, populations with limited English proficiency tend to be more concentrated in certain parts of the country. More than 13 percent of California's population was limited English proficient in 2008, as were more than 8 percent of the populations of Texas, Arizona, and New York. Persons in the United States with limited English proficiency appear to have lower incomes, on average, than fluent English speakers. While limited data exist specifically on the relationship between limited English proficiency and economic status, an analysis of 2007 American Community Survey data by the Migration Policy Institute found that 20 percent of those who spoke Spanish at home lived in poverty, as did 11.8 percent of those who spoke Asian or Pacific Island languages, and 21.1 percent of those who spoke other languages--as compared with a poverty rate of 11.2 percent among persons who spoke only English. A study by the Federal Reserve Bank of Chicago and the Brookings Institution, using 2004 data from the Congressional Budget Office, reported that the median income of a family headed by an immigrant (irrespective of English language proficiency) was $42,980--and $34,798 for a family headed by an immigrant from Latin America--compared with $54,686 for families headed by someone born in the United States. There are also indications that English proficiency correlates with educational attainment. For example, the Migration Policy Institute analysis found that 41 percent of adults in Spanish-speaking households in the United States did not finish high school, as compared with 12 percent of adults in English-only speaking households. Little prior research has been conducted specifically on the relationship between financial literacy and lack of proficiency in English. A 2005 research review by Lutheran Immigration and Refugee Service revealed almost no studies that examined how the immigrant experience influences financial literacy. Similarly, a literature search that we conducted found a significant amount of research on financial literacy in general and with regard to certain populations, but almost nothing that examined the role that language itself plays in financial literacy and financial education. Further, experts on financial literacy that we consulted in the nonprofit and federal sectors told us they were aware of little or no existing work specifically on the barriers to financial literacy faced by those with limited English proficiency. Some data do exist on financial literacy among Hispanic populations; however, the data do not generally distinguish between Hispanics who are and are not proficient in English. (About 70 percent of Hispanics in the United States self-report that they only speak English or they speak it well or very well, according to 2006-2008 American Community Survey data.) Among the studies that did not directly address English language ability, a 2009 survey by the Financial Industry Regulatory Authority found that Hispanic respondents were less likely than Asian Americans and non- Hispanic Caucasians to answer basic financial literacy questions correctly. Further, a 2003 survey on retirement issues by the Employee Benefit Research Institute found that 43 percent of Hispanic workers described their personal knowledge as "knowing nothing" about investing or saving for retirement, as compared to 12 percent for all workers in the United States. The institute also found that those with the least amount of knowledge were much more likely to have poor English language skills. Despite a lack of systematic research, a variety of stakeholders agree that a lack of proficiency in English can create significant barriers to financial literacy and to conducting everyday financial affairs, particularly given the complexity of financial products and the language often used to describe them. Staff we spoke with at financial institutions, federal agencies, and community and advocacy organizations that work with non-English speaking populations consistently told us that, in their experience, a lack of proficiency in English can be a significant barrier to financial literacy. Some explained that because language is the medium most used to access information and ideas, individuals lacking English language skills are limited in their ability to communicate with English-speaking financial service providers and to perform certain tasks necessary to initiate financial transactions and access financial tools and educational materials. For example: Completing key documents. Service providers and consumers with limited English proficiency told us that most financial documents are available only in English, which limits the ability of individuals with limited English proficiency to complete applications, understand and sign contracts, and conduct other everyday financial affairs without assistance. Several representatives from financial institutions told us that they are reluctant to provide translations of documents, such as disclosures and contracts, because of liability concerns. Managing bank accounts. Several bankers and others with whom we spoke noted that individuals who can not write in English find it difficult to write checks, which requires spelling out a dollar amount. For this reason, they said, debit card use has become popular among some individuals with limited English proficiency. The financial literacy study by Lutheran Immigration and Refugee Service noted that some refugees with limited literacy skills have difficulty using banks because they are not able to track deposits and withdrawals from their accounts. Resolving problems. Some consumers and service providers we spoke with said that limited English proficiency serves as a particular barrier when it comes to asking questions, such as inquiring about additional fees on credit card statements, or resolving problems, such as correcting erroneous billing statements. One consumer with limited English proficiency told us that although he speaks some English, he has difficulty understanding and negotiating automated telephone menu systems that one must often use to get assistance. Accessing financial education. Although there is a multitude of print material, Web sites, broadcast media, and classroom curricula provided by government, nonprofit, and private sources aimed at improving financial education, these resources are not always available in languages other than English. Financial education initiatives that are provided in languages other than English or that are aimed at particular immigrant populations do exist (see appendix II), but are more limited, especially for speakers of languages other than Spanish. Information and documents related to financial products tend to be very complex and can be hard to understand, even for native English speakers. The Financial Literacy and Education Commission, which is comprised of 20 federal agencies, has noted that personal financial management is an extremely complex matter that requires significant resources and commitment for consumers to understand and evaluate the multitude of financial products available in the marketplace. Moreover, the language used in financial documents can be extremely confusing. For instance, in 2006 we reported that credit card disclosures were often written well above the eighth-grade level at which about half of U.S. adults read. In a separate report, we similarly found that the disclosures made by various lenders to inform consumers of the risks of alternative mortgage products, such as interest-only loans, used language too complex for many adults to understand. A study by the Federal Trade Commission in 2007 on consumer mortgage disclosures reported that home loan borrowers were frequently confused by the disclosures about their mortgages and experienced significant misunderstandings about the terms of their loans. Having limited proficiency in English clearly exacerbates these challenges. In 2008, the National Council of La Raza sponsored four focus groups on credit issues and found that, for some Hispanics, language barriers compounded the difficulties that all participants faced in understanding the jargon and fine print of applications, contracts, and credit reports. The report by Lutheran Immigration and Refugee Service stated that advanced literacy skills are needed to understand the terms and conditions tied to most financial contracts and that it can take up to 5 years of regular English communication and practice for an immigrant who is not a native English speaker to achieve that level of advanced literacy. These findings were corroborated through focus groups we conducted with a wide range of individuals who provide financial and social services to populations who lack English proficiency. These providers frequently noted that the complexity and specialized language of financial services can make conducting financial affairs particularly challenging for individuals with limited English proficiency. In some cases, written financial materials are provided in languages other than English, but the translation may not be fully comprehensible if it is not written using colloquial or culturally appropriate language. A 2004 report by the National Council of La Raza noted that financial education materials are often translated from English to their literal equivalent in Spanish, which may be unintelligible or difficult for the reader to understand. The report recommended the use of translation that attempts to convey images or messages without regard to literal phrasing and that would account for cultural differences and capture and cla meaning of terms. Financial service providers we spoke with also noted that many specific terms used in the U.S. financial system--such as "subprime" and "401K"--do not always have equivalent terms in other languages, which can make translation particularly difficult. Some financial education materials for those with limited English proficiency provide English and translated versions side-by-side to help readers improve their financial vocabulary and recognize key terms. Interpretation--that is, oral translation--can also be problematic. The service providers we spoke with said that individuals with limited English proficiency frequently rely on friends and family members to serve as interpreters when dealing with financial affairs. However, interpreters may not be reliable because they may not fully understand or be able to explain the material. In particular, advocates for immigrant communities told us that adults often use as interpreters their minor children, who may not have the ability to accurately convey complex information. The Lutheran Immigration and Refugee Service report noted that many immigrants rely on relatives already residing in the United States to introduce them to the American financial system even though their family members may not have complete or accurate information themselves. In focus groups conducted for a report by Freddie Mac on Asian homebuyers, Chinese, Korean, and Vietnamese immigrants said that one of the key reasons they would rather use Asian real estate agents is because they preferred to conduct business in their native language, even when they were proficient in English. Some financial institutions have staff that can interpret or provide information in languages other than English, but it is unclear how widely this occurs. A report by the public interest group Appleseed on expanding and improving services for immigrants noted that the absence of culturally competent bilingual staff and services is a barrier to providing financial services to the low- and moderate-income immigrant market. In the same way, the financial education report by the National Council of La Raza stated that U.S. banks do not always employ bicultural, bilingual staff who can meet the diverse needs of Hispanics, especially immigrants. One provider told us that providing bilingual customer service can be challenging because even bilingual employees may not be able to accurately explain all the financial products offered by the institution. The representative of one financial services firm told us it forbids its staff from translating information or serving as interpreters for fear of providing incorrect or incomplete information. Similarly, an article in the trade journal Employee Benefit News cautioned that asking bilingual employees to present benefits information can be risky because the employee may lack financial expertise and the knowledge to explain industry-specific terms. Federal agency officials as well as financial literacy experts and staff from service providers such as nonprofit organizations, credit unions, and banks that work with immigrant communities informed us that factors other than language often serve as barriers to financial literacy for people with limited English proficiency. These factors can include a lack of familiarity with the U.S. financial system, cultural differences, general mistrust of financial institutions, and income and education levels. Lack of familiarity with the U.S. financial system. Some immigrants to the United States--some of whom are not proficient in English--lack familiarity with the U.S. financial system and its products, which may differ greatly from those in their native countries. These individuals may not have had exposure to mainstream financial institutions, such as banks, or may not have had experience with credit cards or retirement programs. A 2006 study sponsored by the Inter-American Development Bank noted that many new Hispanic immigrants have never had a bank account and that this is one of the obstacles that stand in the way of greater financial integration of recent Hispanic immigrants. Similarly, in focus groups conducted by Freddie Mac for its report on Asian homebuyers, new Asian immigrants cited unfamiliarity with the U.S. financial system as one challenge that they faced. Officials at the Internal Revenue Service told us that individuals with limited English proficiency often face addition al challenges understanding the U.S. tax system, in part because the tax system in their home country was very different. Further, in the report by Lutheran Immigration and Refugee Service, service providers noted that new immigrants with limited banking experience were generally unclear about what happens to money they deposit and how they can access these funds; many are also new to the very concept of a credit system. Additionally, one service provider told us that many new immigrants do not have their parents' or previous generations' financial experiences and lessons in the United States to learn from. The role of culture. Cultural differences can play a role in financial literacy and the conduct of financial affairs because different populations have dissimilar norms, attitudes, and experiences related to managing money. For example, in some cultures the practice of borrowing money and carrying debt is viewed negatively, which may deter immigrants from such cultures from taking loans to purchase homes or cars and build credit histories. In focus groups of Asian homebuyers conducted by Freddie Mac, most participants expressed an aversion to debt, and some participants said they were accustomed to spending cash rather than using credit cards because they do not like to be in debt. Religious traditions can also influence the use of credit. The Lutheran Immigration and Refugee Service report notes that Muslims who adhere to religious prohibitions against receiving and paying interest face challenges participating in such mainstream financial products as home mortgages and retirement plans. Mistrust of financial institutions. Some immigrants' attitudes toward financial institutions have been shaped by their observations and experiences in their home countries. One academic paper on immigrants' access to financial services noted that some U.S. immigrant households do not have bank accounts because of mistrust of banks, particularly if financial institutions in their home countries were marked by instability, lack of transparency, or fraud. A study sponsored by the Inter-American Development Bank similarly noted that negative attitudes towards depository financial institutions or a desire to keep financial information private has been an obstacle to using banks among some Hispanic immigrants. Income and socioeconomic status. Some studies have reported a correlation between income and financial literacy. As noted earlier, individuals with limited English proficiency have lower incomes, on average, than the U.S. population as a whole. In a 2008 survey of young American adults for the Jump$tart Coalition for Personal Financial Literacy, respondents whose family income was less than $20,000 per year received an average score of about 43 percent on a test of personal finance basics, as compared to a score of about 52 percent for students whose parents' income was more than $80,000. A few financial service providers to immigrant communities we spoke with noted that low-income individuals may not have access to tools, such as educational courses and Internet sites, to improve their money management skills and overall financial literacy. The financial education report by the National Council of La Raza stated that the many Hispanic low-wage earners with work schedule restrictions or multiple jobs were limited in the ways in which they could participate in financial education programs. Education. As noted earlier, there is evidence that people in the United States with limited English proficiency are more likely to have low educational attainment. Moreover, overall levels of education can affect financial literacy. For example, the Jump$tart Coalition survey found a correlation between test scores on the basics of financial literacy and the educational attainment of test takers and their parents. Similarly, researchers with the Board of Governors of the Federal Reserve System who reviewed consumer survey data from the University of Michigan found a statistically significant correlation between respondents' levels of formal education and their ability to correctly answer a series of true-false questions concerning savings, credit, and other general financial management matters. Staff at organizations that serve or advocate for immigrants told us that one factor in the ability to conduct financial affairs effectively is basic literacy--that is, the ability to read or write even in one's native language. People with limited English proficiency who are not literate in any language face clear barriers to learning about and understanding financial issues, which can greatly impede their ability to conduct their everyday financial affairs. Some service providers and advocates told us that because factors other than language affect the financial literacy of people with limited English proficiency, translations of financial products and financial education materials may not be sufficient to address obstacles to financial literacy. While overcoming language barriers is important, they said, efforts to improve the financial literacy and well-being of people with limited English proficiency must also address underlying cultural and socioeconomic issues. Evidence suggests that people with limited English proficiency are more likely than the U.S. population as a whole not to have accounts at banks and other mainstream financial institutions. This condition is commonly referred to as being "unbanked" or "underbanked." A 2009 national survey by the Federal Deposit Insurance Corporation (FDIC) found that 35.6 percent of households where only Spanish was spoken at home were unbanked, compared with 7.1 percent of households in which Spanish was not the only language spoken at home. Similarly, another study on the use of financial services by Hispanic immigrants found that they were significantly more likely to be unbanked than nonimmigrants, although it did not report specifically on the role of language. The FDIC survey found that among households who had never had a bank account, 9.1 and 6.9 percent cited that it was because "banks do not feel comfortable or welcoming" and "there are language barriers at banks," respectively. Further, as noted earlier, immigrants may come from countries with corrupt or insecure financial systems, which can diminish their trust in mainstream financial institutions in the United States. In addition, persons with limited English proficiency who are undocumented may be further deterred from opening a bank account because of fear that the institution will share personal information with immigration authorities, according to the Lutheran Immigration and Refugee Service study and a few service providers we spoke with. According to FDIC, unbanked or underbanked consumers may pay excessive fees for basic financial services, be more vulnerable to loss or theft, and struggle to build credit histories and achieve financial security. FDIC has also reported that households that are unbanked are more likely to use alternative financial services, and about two-thirds of these households used pawn shops, payday loans, rent-to-own agreements, nonbank money orders, or check-cashing services in the past year. There are a number of reasons why populations with limited English proficiency may be more likely to use alternative financial services. First, alternative financial service providers, such as payday lenders and check-cashing outlets, generally cluster in and around neighborhoods with lower-income, minority, and Hispanic families, according to a 2004 analysis by the Urban Institute. The Lutheran Immigration and Refugee Service study said that in each of the five cities researchers visited, alternative financial services appeared to be widely available in neighborhoods where new immigrants lived, noting that immigrants were often aggressively targeted for these services through direct mail, telemarketing, and door-to-door sales. Some immigrants are attracted to alternative financial service providers because these institutions often cater specifically to their communities by, among other things, requiring little or no documentation, hiring staff who speak the language of their community, and offering convenient hours. However, concerns exist about the widespread use of such alternative financial service providers since the loan fees they charge are generally much higher than those charged by traditional financial institutions, and other terms and conditions of such loans are often unfavorable to the borrower. Further, evidence suggests that some populations with limited English language skills may be more susceptible to fraudulent and predatory practices. The Lutheran Immigration and Refugee Service report noted that some immigrants may trust financial service providers who speak their native language even if they do not understand the legalities of agreements they make. Service providers that work with limited English proficient communities told us that in some cases unscrupulous individuals use their ability to converse fluently in someone's native language to build trust and then take advantage of the person. Some service providers described to us scams they have observed in which individuals with limited English skills are told the terms of an agreement orally in their native language and then asked to sign a written contract in English with terms different than those described. Credit counselors we spoke with said that having limited proficiency in English can make it difficult to understand the distinctions between various financial products. The report by the Appleseed organization notes that language and cultural barriers may also make it harder for immigrants, including those with limited English skills, to register a complaint about an abusive practice or product. The Federal Trade Commission has similarly noted that Hispanic immigrants, especially those with limited English proficiency, may be more susceptible to consumer fraud such as credit card fraud and other abusive practices. According to the agency, it pursued 37 cases involving Spanish-language frauds targeted at Hispanic consumers as part of its Hispanic Law Enforcement and Outreach Initiative between April 2004 and September 2006. The Federal Trade Commission has also translated dozens of its consumer education publications into Spanish, in part to reduce the susceptibility of Spanish-speaking consumers to fraud and scams. Several service providers we spoke with said that financial education can play an important role in helping consumers with limited English proficiency avoid abusive and predatory practices. We provided a draft of this report to the Department of the Treasury and the Federal Trade Commission for their review and neither agency had any comments. We are sending copies of this report to the Secretary of the Treasury, the Chairman of the Federal Trade Commission, and interested 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) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our reporting objective was to examine the extent, if any, to which individuals with limited English proficiency are impeded in their financial literacy and conduct of financial affairs. To address this objective, we conducted a review of relevant literature related to financial literacy among immigrants and people with limited English proficiency. To identify existing studies, reports, articles, and surveys, we conducted searches of several databases, including Business & Industry, Banking Info Source, and EconLit, using key words to link financial literacy or financial education to language, English proficiency, and other concepts. We also asked for recommendations for studies, reports, and articles from academic experts and from representatives of organizations that address issues related to financial literacy or limited English proficient communities. We also conducted focused Internet searches, and we reviewed the bibliographies of reports we had already obtained to identify additional material. Each of the documentary sources cited in our report was reviewed for methodological strength and reliability and determined to be sufficiently reliable for our purposes. We performed our searches from August 2009 to April 2010. To describe the U.S. population of individuals with limited English proficiency, we obtained and analyzed data from the United States Census Bureau's 2006-2008 American Community Survey and the 2000 U.S. Census. The Census Bureau does not define the term "limited English proficient." As such, we developed our measures of the limited English proficient population based on questions in the American Community Survey that asked "Does this person speak a language other than English at home?", "What is the language?", and "How well does this person speak English?" For our purposes, we included in the limited English proficient estimate individuals over the age of 18 who self-reported that they speak English "not well" or "not at all". We determined the total number of limited English proficient individuals as compared to the population that is proficient in English (those who reported they speak English "very well" or "well") for both the 2006-2008 American Community Survey data and the 2000 U.S. Census data to show the growth over a period of time. Because the American Community Survey data is a probability sample based on random selections, this sample is only one of a large number of samples that might have been selected. Since 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 (e.g., plus or minus 4.5 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn. In this report, all Public User Microdata Area level percentage estimates derived from the 2006-2008 American Community Survey have 95 percent confidence levels of plus or minus 4.5 percentage points or less, unless otherwise noted. We also conducted interviews at and gathered relevant studies and educational materials from federal agencies, organizations that provide financial literacy and education, and organizations that serve or advocate for populations with limited English proficiency. We interviewed staff at the Department of the Treasury's Office of Financial Education, Federal Trade Commission, Internal Revenue Service, Federal Deposit Insurance Corporation, and the Department of Health and Human Services' Office of Refugee Resettlement. We also interviewed representatives and gathered documentation from organizations that address financial literacy issues, including Consumer Action, Consumer Federation of America, and the Jump$tart Coalition for Personal Financial Literacy; organizations that represent the interests of populations that include individuals with limited English proficiency, including the Asian American Justice Center, National Coalition for Asian Pacific American Community Development, National Council of La Raza, and Southeast Asia Resource Action Center; and organizations that represent financial service providers, including the American Bankers Association, Credit Union National Association, and National Foundation for Credit Counseling. We also gathered information from three academic researchers who focus on issues related to financial literacy or limited English proficiency. In addition, we conducted a series of 10 focus groups to discuss the barriers that individuals with limited English proficiency may face in improving financial literacy and conducting their financial affairs. Information we collected from our focus groups and from the organizations we contacted provided context on the issues discussed, but this information is not generalizable to the entire populations represented by the focus groups. Further, our work may not have addressed all of the different perspectives of the many diverse cultures comprised by people with limited English proficiency in the United States. For each focus group, we used a series of semi-structured questions to learn about participants' observations and experiences related to language and other barriers that impede financial literacy and how they address these challenges. The focus groups included: 1 with 11 limited English proficient consumers whose native language was Spanish and who were enrolled in English-language classes sponsored by the Hispanic Committee of Virginia; 1 with 11 limited English proficient consumers whose native language was Vietnamese and who utilize the services of Boat People SOS, a community- based organization based in the Washington, D.C. area; 4 that collectively included 20 staff members representing 15 financial institutions--large banks, community banks, and credit unions across the country whose clients include a large number of limited English proficient individuals with a wide range of native languages; 1 with 10 staff members representing 5 credit counseling and financial education agencies that provide services in multiple languages; 2 that collectively included 19 staff members representing 16 nonprofit community-based organizations that largely serve Hispanic communities; and 1 with 9 staff members representing 8 nonprofit community-based organizations that largely serve a variety of Asian communities. We conducted our work from August 2009 to May 2010 in accordance with all sections of GAO's Quality Assurance Framework that are relevant to our objective. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objective and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this product. Many entities--including federal agencies, state and local governments, financial institutions and other private sector entities, schools, community- based agencies, and other nonprofit organizations--sponsor financial literacy and education initiatives. These efforts cover a wide variety of topics, target a range of audiences, and include classroom curricula, print materials, Web sites, broadcast media, and individual counseling. Highlighted below are selected examples of initiatives taken in the federal, nonprofit, and private sectors that seek to reach, in particular, individuals with limited English proficiency. About 20 different federal agencies operate numerous financial literacy programs and initiatives, several of which are targeted in part or whole at individuals with limited proficiency in English. The federal government's multiagency Financial Literacy and Education Commission sponsors the My Money Web site (www.MyMoney.gov), which serves as a portal to more than 260 other federal financial education sites. The site has both English- and Spanish-language versions. The commission also sponsors a financial literacy telephone hotline that supports both English- and Spanish-speaking callers, as well as a financial literacy "tool kit" of publications available in English and Spanish. One of the most widely used federal financial literacy programs is the Federal Deposit Insurance Corporation's "Money Smart," a financial education curriculum designed to help individuals who are outside the financial mainstream develop financial skills and positive banking relationships. The instructor-led curriculum is offered in English, Spanish, Chinese, Hmong, Korean, Vietnamese and Russian, while the computer-based curriculum is available in English and Spanish. The Federal Trade Commission has developed more than 150 culturally appropriate educational publications in Spanish, according to an agency official, many of which cover financial topics, and its Spanish-language Web site received more than 1 million hits in fiscal year 2009. The Federal Trade Commission has also created Spanish- language videos on such topics as avoiding foreclosure rescue scams, and agency staff have provided interviews on financial issues to local and national Spanish-language media. A variety of community-based and national nonprofit organizations throughout the nation have financial literacy initiatives aimed at populations with limited proficiency in English. Many housing counseling agencies approved by the Department of Housing and Urban Development offer services in multiple languages. For example, the Minnesota Home Ownership Center has interpreters trained in homeownership issues and financial terminology and offers homebuyer-education classes in Spanish, Cambodian, Russian, and Hmong. Some community-based organizations also provide financial literacy information through their English as a Second Language programs, using resources such as the Money Smart curriculum, which includes such topics as the U.S. credit system and credit scores, and purchasing a home. Some agencies offer individual counseling. For example, two large nationwide providers of credit counseling and financial education can conduct telephone sessions in at least 15 languages directly and about 150 languages using a translation- services contractor. Many nonprofit agencies offer written publications in multiple languages intended to improve consumer financial literacy. For example, the National Coalition for Asian Pacific American Community Development publishes financial literacy resources in Chinese, Korean, Vietnamese, Hindi, Urdu, and Samoan. Similarly, Consumer Action posts to its Web site consumer financial information in several languages. Several financial institutions and other private sector entities have sponsored financial literacy initiatives aimed at consumers who speak languages other than English. For example, Freddie Mac's CreditSmart®️-- a financial education curriculum designed to help consumers build and maintain better credit and become homeowners--is available in Spanish through CreditSmart Espanol and in Chinese, Korean, and Vietnamese through CreditSmart Asian. The American Bankers Association provides a newsletter in Spanish called Money Talks that is tailored to varying age groups and offers personal finance booklets in Spanish on such topics as saving, credit, budgeting, checking accounts, and mortgages. The Credit Union National Association offers "El Poder es Tuyo," a Spanish-language personal-finance Web site that provides culturally relevant articles, videos, and worksheets specifically designed for Hispanics. In addition to the contact named above, Jason Bromberg (Assistant Director), Grant Mallie, Linda Rego, Rhonda Rose, Jennifer Schwartz, Andrew Stavisky, and Betsey Ward made key contributions to this report. Financial Literacy and Education Commission: Progress Made in Fostering Partnerships, but National Strategy Remains Largely Descriptive Rather Than Strategic. GAO-09-638T. Washington, D.C.: April 29, 2009. Financial Literacy and Education Commission: Further Progress Needed to Ensure an Effective National Strategy. GAO-07-100. Washington, D.C.: December 4, 2006. Credit Reporting Literacy: Consumers Understood the Basics but Could Benefit from Targeted Educational Efforts. GAO-05-223. Washington, D.C.: March 16, 2005. Highlights of a GAO Forum: The Federal Government's Role in Improving Financial Literacy. GAO-05-93SP. Washington, D.C.: November 15, 2004. Centers for Medicare and Medicaid Services: CMS Should Develop an Agencywide Policy for Translating Medicare Documents Into Languages Other Than English. GAO-09-752R. Washington, D.C.: July 30, 2009. Medicare: Callers Can Access 1-800-MEDICARE Services, but Responsibility within CMS for Limited English Proficiency Plan Unclear. GAO-09-104. Washington, D.C.: December 29, 2008. VA Health Care: Facilities Have Taken Action to Provide Language Access Services and Culturally Appropriate Care to a Diverse Veteran Population. GAO-08-535. Washington, D.C.: May 28, 2008. No Child Left Behind Act: Education's Data Improvement Efforts Could Strengthen the Basis for Distributing Title III Funds. GAO-07-140. Washington, D.C.: December 7, 2006. No Child Left Behind: Education Assistance Could Help States Better Measure Progress of Students with Limited English Proficiency. GAO-07-646T. Washington, D.C.: March 23, 2007. Child Care and Early Childhood Education: More Information Sharing and Program Review by HHS Could Enhance Access for Families with Limited English Proficiency. GAO-06-807. Washington, D.C.: August 17, 2006 (Spanish Summary: GAO-06-949; Chinese Summary: GAO-06-950; Korean Summary: GAO-06-951; Vietnamese Summary: GAO-06-952). No Child Left Behind Act: Assistance from Education Could Help States Better Measure Progress of Students with Limited English Proficiency. GAO-06-815. Washington, D.C.: July 26, 2006. Transportation Services: Better Dissemination and Oversight of DOT's Guidance Could Lead to Improved Access for Limited English-Proficient Populations. GAO-06-52. Washington, D.C.: November 2, 2005 (Spanish Summary: GAO-06-185; Chinese Summary: GAO-06-186; Vietnamese Summary: GAO-06-187; Korean Summary: GAO-06-188).

According to Census data, more than 12 million adults in the United States report they do not speak English well or at all. Proficiency in reading, writing, speaking, and understanding the English language appears to be linked to multiple dimensions of adult life in the United States, including financial literacy--the ability to make informed judgments and take effective actions regarding the current and future use and management of money. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 mandated GAO to examine the relationship between fluency in the English language and financial literacy. Responding to this mandate, this report examines the extent, if any, to which individuals with limited English proficiency are impeded in their financial literacy and conduct of financial affairs. To address this objective, GAO conducted a literature review of relevant studies, reports, and surveys, and conducted interviews at federal, nonprofit, and private entities that address financial literacy issues and serve people with limited English proficiency. GAO also conducted a series of focus groups with consumers and with staff at community and financial organizations. GAO makes no recommendations in this report. Staff at governmental, nongovernmental, and private organizations that work with non-English speaking populations consistently told us that, in their experience, a lack of proficiency in English can create significant barriers to financial literacy and to conducting everyday financial affairs. For example, service providers and consumers with limited English proficiency told us that because most financial documents are available only in English, individuals with limited English proficiency can face challenges completing account applications, understanding contracts, and resolving problems, such as erroneous bills. In addition, financial education materials--such as print material, Web sites, broadcast media, and classroom curricula--are not always available in languages other than English and, in some cases, Spanish. Further, information and documents related to financial products tend to be very complex and can use language confusing even to native English speakers. In some cases, written financial materials are provided in other languages, but the translation may not be clear if it is not written using colloquial or culturally appropriate language. Interpretation (oral translation) can also be of limited usefulness if the interpreter does not fully understand or is not able to explain the material, a problem exacerbated by the fact that adults with limited English proficiency often receive assistance from their minor children. Many factors other than language also influence the financial literacy of individuals with limited English proficiency. For example, immigrants may lack familiarity with the U.S. financial system and its products, which can differ greatly from those in their native countries. Cultural differences can also play a role in financial literacy because different populations have dissimilar norms, attitudes, and experiences related to managing money. For instance, in some cultures carrying debt is viewed negatively, which may deter immigrants from such cultures from taking loans to purchase homes or cars and building credit histories. In addition, some studies have reported a correlation between financial literacy and levels of income and education. As a result of these issues, some service providers and advocates suggested that efforts to improve the financial literacy of people with limited English proficiency go beyond translation and also address underlying cultural and socioeconomic factors. Evidence suggests that people with limited English proficiency are less likely than the U.S. population as a whole to have accounts at banks and other mainstream financial institutions. They are also more likely to use alternative financial services--such as payday lenders and check-cashing services--that often have unfavorable fees, terms, and conditions. Further, the Federal Trade Commission and immigrant advocacy organizations have noted that some populations with limited English language skills may be more susceptible to fraudulent and predatory practices. Several service providers we spoke with said that financial education can play an important role in helping consumers with limited English proficiency avoid abusive and predatory practices.

As a result of the District's financial crisis in 1994, the Congress passed the District of Columbia Financial Responsibility and Management Assistance Act of 1995 (the 1995 Act). The Congress established the Authority to perform the following functions, among others: eliminate budget deficits and cash shortages of the District through visionary financial planning, sound budgeting, accurate revenue forecasts, and careful spending, ensure the most efficient and effective delivery of services, including public safety services, by the District during a period of fiscal emergency, and conduct necessary investigations and studies to determine the fiscal status and operational efficiency of the District. In assuming these responsibilities, the Authority was to ensure that funds were available to meet the District's obligations to vendors and taxpayers in a timely manner. To accomplish this, the Authority was required by law to establish several escrow accounts separate from the District's General Fund so that monies could be separately maintained to fund District activities including water and sewer service, public schools, and the University of the District of Columbia. The Authority was established as an entity within the District of Columbia government, with five board members appointed by the President of the United States. The Authority receives a regular, annual appropriation from the general fund of the District of Columbia in fixed amounts. Other appropriations authorizing the use of (1) gifts, bequests, and other contributions and (2) interest earned on escrow accounts maintained by the Authority, are available for an indefinite period. The District of Columbia Management Reform Act of 1997 (Management Reform Act) expanded the Authority's responsibilities to include the development and implementation of management reform plans. The plans cover the major entities of the District and all departments of the District in the city-wide functions of Asset Management, Information Resource Management, Personnel, and Procurement. The Management Reform Act required that the Authority enter into contracts with consultants to develop plans for the major entities and four city-wide functions and establish management reform teams to implement each plan. These new responsibilities increased the amount of funds being spent by the Authority on behalf of the District. That act also authorized the Authority to spend interest earned on the escrow accounts maintained by the Authority as it considers appropriate to promote the economic stability and management efficiency of the District government. Currently for activities for which the Authority controls the funds provided on behalf of the District, the Authority pays District-related expenses in one of three ways. For contracts originated by the District, the Authority either reimburses the District's General Fund after District agencies pay vendors, or the Authority pays third parties directly based on District agencies' submission of a payment request and approved invoice. The third approach involves the Authority using its own contracting authority. For those, it approves the services rendered and pays third parties directly for goods and services provided to District agencies. Our objectives were to determine (1) whether the Authority's financial information was in the same amounts and consistently presented in the fiscal year 1996 and 1997 audited financial statements of the Authority and the District's CAFR, (2) why the District's internal control weakness concerning the Authority was not also included in the audit report on the Authority, (3) the Authority's use of the escrow accounts' interest income, (4) the Authority's purpose for the "Taxable Equipment Lease/Purchase Agreement," and (5) whether suggestions made to the Authority's management in our prior letter were implemented. To address these objectives, we reviewed the Authority's audited financial statements and management letters and the District's CAFR and Report on Internal Controls and Compliance for fiscal years 1997 and 1996. We also obtained detailed supporting schedules, related documentation, and explanations from Authority officials as we considered necessary. In addition, we obtained and reviewed the specific laws cited and legal interpretations made through discussions with Authority officials. To further support the information provided in the financial statements and management letters, we interviewed and received additional supporting documentation from the external independent auditors of the Authority and the District. We also interviewed the Authority's Executive Director, Chief Financial Officer, and General Counsel. We conducted our work from April 1998 through August 1998 in accordance with generally accepted government auditing standards. We requested comments from the Authority's Chairperson on a draft of this report. The Authority's Executive Director provided us with written comments, which are discussed in the "Authority's Comments and Our Evaluation" section and are reprinted in appendix II. The Authority's financial information as reported in its financial statements is consistent with the Authority's financial information presented in the District's CAFR. The fiscal years 1996 and 1997 financial statements of the Authority were included in the District's CAFR, as a component unit, as required by GASB, and both the Authority and the District presented the Authority's financial activities in accordance with GASB. As a result of the widely different annual revenue amounts for the Authority ($8.6 million for fiscal year 1997) and the District ($5.2 billion in fiscal year 1997), the Authority's account balances, which represent less than .2 percent of the District's revenue, are summarized in the District's CAFR instead of being reported in detail, as in the Authority's financial statements. For example, several account line items (Due from District-Management Reform, Other Receivables from the District, and Advances from the District) on the Authority's financial statements were combined, identified by a different name, and rounded to the nearest $1,000 when incorporated into one account (Interfund Account) in the District's CAFR. However, the total dollar amounts reported by both the Authority and the District were the same. In addition, because the Authority and the District are different reporting entities, there were appropriately some differences in their presentation and classification of accounts. For example, several account balances (Government Appropriation, Interest Transferred from Escrow Accounts, and Other Income) that the Authority presented as "revenue" were presented as Interfund Transfers-In, an "other financing source" in the District's CAFR. Further, the Sale of Fixed Asset amount was presented as "revenue" by the Authority and as an "other financing sources--proceed" in the District's CAFR. In the District's auditors' Reports on Internal Controls and Compliance for fiscal years 1996 and 1997, an internal control weakness was identified concerning controls over financial reporting involving the Authority's transactions that relate to the District. The material weakness related to a lack of communication between the District and the Authority when transactions involve funds that are held by the Authority on behalf of the District. No finding on this issue was reported by the Authority's auditors nor would such a finding be expected since this internal control weakness does not affect the Authority's financial operations. The District's auditors reported that the District's Office of Finance and Treasury did not have complete records of the District funds that are maintained by the Authority in escrow accounts and could not regularly reconcile its balances for those accounts with the Authority's recorded balances. The auditors also cited the following specific reasons for the above-reported internal control weakness. The Authority did not promptly notify or provide the necessary documentation to the District of the specific details regarding financial activity that it incurred on behalf of the District. The Authority issued the management reform contracts without promptly notifying the District of the financial activity to allow for the prompt recording of the related transactions. The District and the Authority had not developed procedures to promptly notify each other of amounts anticipated or actually received by the Authority on behalf of the District. The District's auditors recommended that the District and the Authority jointly develop procedures that would result in the Authority providing to the District the kind of monthly financial information needed for the District to perform a comprehensive reconciliation. They further stated that such information should include the monthly balances and the financial activity for each individual escrow account maintained by the Authority on behalf of the District. It was also recommended that the Authority and District develop procedures that provide for dual notification of activities involving donations and contracts administered by the Authority for the District. The Authority's auditors stated, and we agree, that this material weakness did not affect the Authority's internal controls related to preparation of its financial statements. Authority officials added their view that the problems cited in the District auditors' report resulted from an internal control weakness within the District agencies, and not within the Authority, for the following reasons. The Authority did not originally notify the District of the management reform contracts and their cost since the Authority originally intended to pay for those studies from its available funds. However, the documentation of the contract and costs to date were provided to the District agencies once a decision was made by the Authority to have the agencies reimburse the Authority for these costs. The U.S. Department of the Treasury or the District's Office of Treasury is responsible for notifying District agencies of cash receipts held on their behalf by the Authority for the issuance of general obligation bonds or receipt of the District's annual appropriation. District agencies should be responsible for recording expenditures when they approve amounts for payment, and prior to their submission to the Authority for payment from escrow accounts. The reasons cited for the Authority's disagreement with the District's auditors' findings are valid for transactions initiated and approved by the District. However, as described in the earlier "Background" section of this report, when transactions are initiated by the Authority, that data would not necessarily be concurrently available for the District. As a result, implementation of the District auditors' recommendations that the Authority provide monthly information to the District and that the two entities provide dual notification on activities involving Authority-administered contracts and donations is practical and necessary. Effective implementation of these recommendations would improve the District's controls over cash by enabling it to promptly report and reconcile all financial activity. Section 106(d) of the 1995 Act authorizes the Authority to expend any amounts derived from interest income on accounts held by the Authority on behalf of the District for such purposes as it considers appropriate to promote the economic stability and management efficiency of the District government. In fiscal years 1997 and 1996, the escrow accounts earned interest of $9.8 million and $5.5 million, respectively. The Authority used $5 million of the interest income during fiscal year 1997, and the escrow accounts contained $10.3 million in accumulated interest as of September 30, 1997 (see table 1). The Management Reform Act required the Authority to contract with consultants to perform preliminary studies and reviews of District agencies so that recommendations could be made on the nature of the reform required at each agency. Of the $2.1 million paid in fiscal year 1997, the largest portion, about $1.3 million, was used for an ongoing contract to conduct a comprehensive study and make recommendations on the Metropolitan Police Department's organization and operation. The remaining contractor payments of about $800,000 were for various operational reviews of the University of the District of Columbia, Public Schools, and other agencies. At September 30, 1997, the Authority held almost $1.8 million that had been transferred from interest earned on the Federal Payment Fund escrow account. The Authority initially intended to pay for management reform consulting expenses using the transferred amount. However, before the end of the fiscal year, the Authority decided to have the affected District agencies pay for the consulting expenses. Accordingly, it established an amount due back to the Federal Payment Fund escrow account and authorized the bank to return the almost $1.8 million to the escrow account. Authority officials stated that the amount was returned in October 1997. The Authority also paid $476,700 to cover the District's share of medicaid payments and used the remaining $734,471 to pay its actual operating expenses in excess of budgeted amounts. This included a $478,000 increase in personnel costs for fiscal year 1997 that resulted from (1) hiring additional employees, (2) giving pay raises totaling $120,000 to 24 employees, and (3) paying $24,500 for lump sum retroactive locality pay adjustments for fiscal years 1995 and 1996. On September 30, 1997, the Authority borrowed from a bank $300,000 secured by (1) a lien on personal property (furniture and equipment) acquired by the Authority during fiscal years 1996 and 1997 and (2) a pledge of a $300,000 certificate of deposit (CD) purchased from the bank.Under the agreement, title to the property, with a book value of $271,770, and the interest earned on the CD, vests in the bank should the Authority default on the repayment of the loan. In addition, in the event of default, the bank is given the right to the funds on deposit in the CD to satisfy the Authority's obligation. The District can pay off the debt at any time without fines or penalties for early prepayment. The agreement calls for the Authority to make 12 quarterly repayments of $25,000 totaling $300,000, from January 1, 1998, to October 1, 2000. The Authority is also required to pay $15,487 in interest during the first 4 quarters of the agreement's term to cover the first year's interest. Interest expenses for years 2 and 3 of the agreement will be determined in accordance with the terms of the agreement. It stipulates that the interest rate on the debt accrues at the rate of 50 basis points in excess of the interest earned on the CD pledged as security. The interest rate on the CD is subject to annual adjustments. Authority officials stated that the purpose of the agreement was to obtain needed financing by recovering the net cost of assets acquired with fiscal year 1997 and 1996 funds and spreading the cost over a 3-year period and to free-up budget capacity (budget authority). After looking at the economic benefit of the transaction and analyzing the Authority's cash on hand and other account balances as of September 30, 1997, and analyzing the transaction's future impact, we concluded that there was not an economic need for the Authority to enter into this transaction. Although the transaction resulted in an increase in the Authority's fiscal year 1997 surplus, it had an overall negative economic impact by creating a net additional cost of $3,488 over the term of the agreement (interest payments of $27,863 versus interest earned on the pledged certificate of deposit of $24,375). In addition, when the Authority entered into this agreement, it pledged $300,000 of existing cash to the bank (which placed the cash in a restricted account) in order to receive the same amount of funds, resulting in no increase in available cash, had an accumulated surplus of $444,982 at the beginning of fiscal year 1997, already had a $253,000 surplus for fiscal year 1997 from general operations, and had sufficient cash on hand to meet its current liabilities, had access to $10.3 million of escrow account interest as of September 30, 1997, which was available for District operations, and created the need to repay $303,488 over the term of the loan using future appropriations or escrow account interest. Repaying this debt would (1) save the Authority more than $1,100 in net interest to be paid over the next 2 years, (2) remove restrictions on the outstanding amount of $200,000 currently being held in a certificate of deposit, and (3) eliminate the need for further administration of the agreement. Our May 23, 1997, letter identified seven opportunities to improve the Authority's future financial statements. The Authority implemented all of our prior report's suggestions, except for the inclusion of an MD&A section as part of its audited financial statements (see appendix I). In our 1997 letter, we suggested to the Authority that, although it is not a current reporting requirement for state and local government entities, including a MD&A section could enhance the Authority's financial statements. Authority officials stated that they provide a separate annual report on their progress and accomplishments to the Congress, as required under Section 224 of the 1995 Act, and that audited financial statements under GASB are not required to address the Authority's performance and accomplishments. They suggested that including the same information in its financial statements is unnecessary. Federal agencies that prepare financial statements under the Chief Financial Officer Act of 1990 (the CFO Act) and publicly held private sector corporations regulated by the Securities and Exchange Commission (SEC) include as part of their financial statements an overview of the reporting entity, which is similar to an MD&A section. In addition, the Federal Accounting Standards Advisory Board (FASAB) and GASB have issued exposure drafts that will expand the use of MD&A. An MD&A section presents information based on the results of an analytical review of relevant financial and performance data of the programs, activities, and funds that make up the reporting entity. An MD&A section would enhance the Authority's financial statements since it is an important vehicle for (1) communicating managers' insights about the reporting entity, (2) increasing the understandability and usefulness of the financial statements, and (3) providing understandable and accessible information about the entity and its operations, successes, challenges, and future. As of September 30, 1997, the same financial activity for the Authority for fiscal years 1997 and 1996 was reported and presented properly in the Authority's financial statements and the District's CAFR. We agree with the District's auditors that if the District received from the Authority more prompt and detailed information regarding monthly balances and financial activity, improved controls over cash and improved communication between the two entities would result. We continue to believe that our prior suggestion that the Authority include an MD&A section in its audited financial statements is needed and would enhance its financial statements. The Authority has made the required payments on the "Taxable Equipment Lease/Purchase Agreement" through September 30, 1998. At this time, the transaction has 2 years to run and we see no economic benefit for the Authority in continuing with it. The Authority has the ability to pay off the loan by using some of the $10.3 million in interest income from escrow accounts. In commenting on a draft of the report, the Authority disagreed with sections in our report concerning the lack of communication between the Authority and the District when transactions involve funds that are held by the Authority on behalf of the District, the Authority's rights and economic benefits resulting from the agreement called "Taxable Equipment Lease/Purchase Agreement," and our suggestions to enhance the Authority's financial statements with an MD&A section. In addition, the Authority took exception to a previously issued GAO legal opinion that was referred to in a footnote to this report regarding the Authority's compliance with pay rate limits provided in the 1995 Act. The Authority stated that it disagreed with the District auditors' statement that the Authority did not notify the District in a timely manner of specific details regarding expenditures. The Authority's basis for disagreement is that the District incurs expenditures, and not the Authority. The Authority, however, does incur expenditures not only when it initiates payments made for transactions incurred by the District, but also for transactions it initiates on behalf of the District. As such, the District auditors' noted that for these types of transactions the District did not have complete records of its funds maintained by the Authority in escrow accounts and could not regularly reconcile its balances. The Authority also stated that it is a temporary entity and that it is appropriate to hold the District's Office of the CFO responsible for tracking and reconciling its revenues and expenditures, regardless of where funds may be held. Even though it is temporary in nature, until the Authority no longer exists it has a fiduciary responsibility to provide the necessary documentation in a timely manner to the District CFO to ensure that the District's records are adequately maintained, especially in those cases where it initiates payments on behalf of the District. The Authority took exception with our statement that the transaction provided in the "Taxable Equipment Lease/Purchase Agreement" between the Authority and a bank is in substance a secured loan. We believe our description of this transaction is accurate for several reasons. First, while the Authority stated that our view of the transaction failed to recognize that the equipment "was sold back to the bank," the Authority also stated that the bank "only has a lien against the equipment." If the Authority sold the equipment to the bank, thereby making the bank the equipment's owner, then the bank would not have needed to have a lien against equipment it owned when it leased the equipment to the Authority. Second, the Authority's statement that the equipment was sold to the bank is inconsistent with the agreement. Section 10 of the agreement states that title to the equipment is deemed to be with the Authority unless the Authority defaults on its obligation under the agreement. Section 21 of the agreement provides that the bank's security interest in the equipment ends and the Authority's title is free and clear of all encumbrances when the Authority satisfies its obligations under the agreement. These and other provisions of the agreement establish that the transaction was a secured loan. While the Authority states that our view of the transaction is contrary to the legal position of both the Authority and the bank's counsel, the Authority did not respond to our requests for the legal analysis of either its or the bank's counsel. During our review, the Authority staff advised us that the transaction and use of the proceeds was entered into pursuant to section 103(g) of the 1995 Act, authorizing the Executive Director to enter into such contracts as the Executive Director considers appropriate (subject to approval of the chair) to carry out the Authority's responsibilities under the act. The general grant of authority to contract does not authorize an entity to borrow and spend the proceeds. Without explicit authority to borrow--and we are not aware of any such authority in this case--the Authority's borrowing and use of the proceeds was an improper augmentation of its appropriation. In addition, the Authority stated that the transaction sets an example for the District government because it leveraged scarce operating revenues. However, the Authority had a $253,000 surplus for fiscal year 1997, a $444,982 accumulated surplus carried forward from prior years, and access to more than $10 million of interest earned on escrow accounts. Further, it was not leveraging resources since it had to pledge $300,000 of existing cash, which was placed into a restricted account, in order to receive the same amount. The Authority also stated that our analysis unfairly focused upon the economic benefit of the transaction. As discussed in our report, the transaction did not generate additional cash and resulted in a net cost to the District with no apparent benefit, financial or nonfinancial. Thus, entering into such a transaction without a sound reason, economic or otherwise, is not a good example for the District government to emulate. The Authority stated that the inclusion of an MD&A section in the financial statements is unnecessary, time consuming, and redundant. OMB and SEC have already recognized the usefulness of an MD&A section in the financial statements of federal entities and private sector companies, respectively. GASB also recognizes the importance of an MD&A section for state and local government entities as demonstrated in its exposure draft on "Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Government," dated January 31, 1997. Currently, the Authority prepares another report with the same types of information that can be used in an MD&A section. Thus, utilizing information already available would not be time consuming and, as stated in our report, would enhance the understandability and usefulness of the Authority's financial statements. Finally, the Authority took exception to our legal opinion (B-279095.2) issued on June 16, 1998 relating to its compliance with the rate of basic pay to senior executives. At the time we prepared our opinion, we were aware of the Authority's argument, which was included in attachments to its November 2, 1998 response commenting on a draft of this report, but we concluded that the language of section 102 of the 1995 Act does not permit the Authority's staff to be paid at rates that exceed the pay limitation. In addition, the Congress specifically stipulated in the Authority's fiscal year 1999 appropriation that funds provided to the Authority may not be used to pay "any compensation of the Executive Director or General Counsel of the Authority at a rate in excess of the maximum rate of compensation which may be paid to such individual during fiscal year 1999 under section 102 of as determined by the Comptroller General (as described in GAO legal opinion B-279095.2)." We have evaluated the Authority's technical suggestions and have incorporated them as appropriate. In addition, the Authority provided attachments to its response regarding it correspondence with congressional committees on the Authority's compliance with rate of basic pay. We have considered these attachments in our evaluation. However, these attachments are not included in the report. We are sending copies of this report to the Ranking Minority Member of your Subcommittee and the Chairmen and Ranking Minority Members of the Subcommittee of the District of Columbia, Senate Committee on Appropriations; Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia, Senate Committee on Governmental Affairs; and Subcommittee on the District of Columbia, House Committee on Government Reform and Oversight. We are also sending a copy to the Chairperson, District of Columbia Financial Responsibility and Management Assistance Authority. Copies will be made available to others upon request. Major contributors to this report are listed in appendix III. If you or your staff have any questions, please contact me at (202) 512-4476 or Hodge Herry, Assistant Director, at (202) 512-9469. Include a Management Discussion and Analysis (MD&A) section to enhance the annual report. Clearly label and describe (1) the Agency Funds' separate statement, (2) what the information represents, and (3) how it relates to the Authority's financial statements, in the notes to the financial statements. Define the actual, actual (budgetary basis), and budgeted reporting bases used in the FY 1996 Combined Statement of Revenues, Expenditures, and Changes in Fund Balance. Delete reference to Propriety Fund in Note 2 since none were reported. Revise Note 2 to refer to the Combined Statement of Revenues, Expenditures, and Changes in Fund Balance and discuss that no encumbrances were reported for fiscal year 1996. Include more detailed and useful information on the types of reimbursement due from the District in Note 3. Explain in Note 5 that fixed assets are reported on the Combined Balance Sheet at their net value and depreciation is not reported on the Statement of Revenues, Expenditures, and Changes in Fund Balance in accordance with governmental accounting standards. The following are GAO's comments on the letter from the Executive Director of the District of Columbia Financial Responsibility and Management Assistance Authority dated November 2, 1998. 1. We revised the report as appropriate. 2. Our report did not state that the Authority used $734,471 to give pay raises and lump sum retroactive pay adjustments. Our report properly states that these payments were part of the Authority's expenditures in excess of budgeted amounts. 3. Our report did not state that the use of interest earnings took place in fiscal year 1996. Our report properly states that the Authority was authorized to use interest income on all escrow accounts with the passage of the Management Reform Act and retroactively applied the interest earnings to its excess expenditures during fiscal year 1997. 4. The Authority stated that its role and function have increased from its inception without an increase to the Authority's appropriated budget. While it is true that the Authority's responsibilities have increased, the Congress also provided the Authority with additional sources of financing that could be used for the increased responsibility. In fiscal year 1997, the Congress, in the Management Reform Act, provided the Authority with access to the interest earned on all escrow accounts held on behalf of the District. 5. The Authority's statements that neither the CD nor the interest is pledged to the bank is inconsistent with provisions of the "Taxable Equipment Lease/Purchase Agreement" and related documents. Section 10 of the agreement states that the Authority's obligation under the agreement shall be secured by a Deposit Pledge Agreement under which the Authority will pledge to the bank a CD representing $300,000 on deposit with the bank. Section 2.1 of the Deposit Pledge Agreement provides that the Authority pledge a continuing lien and security interest in the (a) CD, (b) all money and funds on deposit pursuant to, or represented by, the CD, and (c) all rights for payment of the CD and all interest payable by reason of the CD. Finally, section 4.1 of the Deposit Pledge Agreement provides that the Authority's failure to pay the amount owed to the bank entitles the bank to the CD, related cash, and unpaid interest to satisfy the Authority's obligation to the bank. 6. The draft report provided to the Authority for formal comment on October 21, 1998, did not include any recommendations. 7. We revised the report to reflect the District's current functional realignment. Richard Cambosos, Senior Attorney 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 compared the audited financial statements and management letters of the District of Columbia Financial Responsibility and Management Assistance Authority for fiscal years (FY) 1996 and 1997 to the District's Comprehensive Annual Financial Report (CAFR) to determine: (1) whether there was agreement of amounts and consistency of presentation regarding the Authority's financial information; and (2) why the District's internal control weakness that relates to the Authority was not identified in the audit report on the Authority's financial statements. GAO also provided information on the: (1) Authority's use of interest income from escrow accounts established on behalf of the District; (2) Authority's purpose for the transaction entitled Taxable Equipment Lease/Purchase Agreement; and (3) status of the Authority's implementation of GAO's suggestions for its financial statements for fiscal years 1995 and 1996. GAO noted that: (1) the Authority's audited financial statements and the District's audited CAFR for fiscal years 1996 and 1997 revealed that the financial statements included the same amounts for Authority operations; (2) the presentation and categorization of the Authority's amounts were in accordance with the appropriate sections of the Government Accounting Standards Board accounting principles for both sets of financial statements; (3) in the District's auditors' report on internal controls and compliance for FY 1997, they identified a material weakness concerning financial reporting controls over transactions involving the Authority; (4) the District's auditors recommended that the Authority, along with the District, implement procedures to provide monthly balances and the related support for all financial activity each month on behalf of the District; (5) the Authority's auditors stated that this weakness did not affect the Authority's internal controls over financial reporting; (6) while Authority officials stated their belief that there was sufficient documentation available within the District to record financial activity on its books, the Authority's role in District operations and the District's dependence on the Authority for data on certain transactions and balances would necessitate effective communication of financial activity between the two entities; (7) since the Authority established the escrow accounts on behalf of the District, the accounts have earned interest income of $9.8 million and $5.5 million for fiscal years 1997 and 1996; (8) during FY 1997, $5 million was paid directly to vendors, transferred from an escrow account, or used to finance the Authority's operations; (9) the Authority entered into an agreement, entitled Taxable Equipment Lease/Purchase Agreement; (10) Authority officials stated that the purpose of the agreement was to obtain needed financing and to free-up budget capacity; (11) GAO identified seven opportunities for improving the Authority's future financial statements; (12) the Authority has implemented six of GAO's seven suggestions; (13) the one exception was the inclusion of a Management Discussion and Analysis (MD&A) section as part of its audited financial statements; and (14) with the concept of MD&A expanding across all governmental entities and presently a requirement in the federal government and for publicly-traded private sector corporations, GAO believes that including a MD&A section in the Authority's audited financial statements is needed and would enhance its financial statements.

EPA is required by the Clean Air Act to conduct reviews of the National Ambient Air Quality Standards (NAAQS) for the six criteria pollutants, including particulate matter, every 5 years to determine whether the current standards are sufficient to protect public health, with an adequate margin of safety. If EPA decides to revise the NAAQS, the agency proposes changes to the standards and estimates the costs and benefits expected from the revisions in an assessment called a regulatory impact analysis. In January 2006, EPA prepared a regulatory impact analysis for one such rule--particulate matter--that presented limited estimates of the costs and benefits expected to result from the proposed particulate matter rule. EPA developed the estimates by, for example, quantifying the changes in the number of deaths and illnesses in five urban areas that are likely to result from the proposed rule. The National Academies' 2002 report examined how EPA estimates the health benefits of its proposed air regulations and emphasized the need for EPA to account for uncertainties and maintain transparency in the course of conducting benefit analyses. Identifying and accounting for uncertainties in these analyses can help decision makers evaluate the likelihood that certain regulatory decisions will achieve the estimated benefits. Transparency is important because it enables the public and relevant decision makers to see clearly how EPA arrived at its estimates and conclusions. Many of the recommendations include qualifying language indicating that it is reasonable to expect that they can be applied in stages, over time; moreover, a number of the recommendations are interrelated and, in some cases, overlapping. Soon after the National Academies issued its report, EPA roughly approximated the time and resource requirements to respond to the recommendations, identifying those the agency could address within 2 or 3 years and those that would take longer. According to EPA officials, the agency focused primarily on the numerous recommendations related to analyzing uncertainty. As is discussed below, EPA applied some of these recommendations to the particulate matter analysis. EPA applied--either wholly or in part--approximately two-thirds of the Academies' recommendations in preparing its January 2006 particulate matter regulatory impact analysis and continues to address the recommendations through ongoing research and development. According to EPA, the agency intends to address some of the remaining recommendations in the final rule and has undertaken research and development to address others. The January 2006 regulatory impact analysis on particulate matter represents a snapshot of an ongoing EPA effort to respond to the National Academies' recommendations on developing estimates of health benefits for air pollution regulations. Specifically, the agency applied, at least in part, approximately two-thirds of the recommendations--8 were applied and 14 were partially applied--by taking steps toward conducting a more rigorous assessment of uncertainty by, for example, evaluating the different assumptions about the link between human exposure to particulate matter and health effects and discussing sources of uncertainty not included in the benefit estimates. According to EPA officials, the agency focused much of its time and resources on the recommendations related to uncertainty. In particular, one overarching recommendation suggests that EPA take steps toward conducting a formal, comprehensive uncertainty analysis--the systematic application of mathematical techniques, such as Monte Carlo simulation--and include the uncertainty analysis in the regulatory impact analysis to provide a "more realistic depiction of the overall uncertainty" in EPA's estimates of the benefits. Overall, the uncertainty recommendations call for EPA to determine (1) which sources of uncertainties have the greatest effect on benefit estimates and (2) the degree to which the uncertainties affect the estimates by specifying a range of estimates and the likelihood of attaining them. In response, EPA examined a key source of uncertainty--its assumption about the causal link between exposure to particulate matter and premature death--and presented a range of expected reductions in death rates. EPA based these ranges on expert opinion systematically gathered in a multiphased pilot project. The agency did not, however, incorporate these ranges into its benefit estimates as the National Academies had recommended. Moreover, the Academies recommended that EPA's benefit analysis reflect how the benefit estimates would vary in light of multiple uncertainties. In addition to the uncertainty underlying the causal link between exposure and premature death, other key uncertainties can influence the estimates. For example, there is uncertainty about the effects of the age and health status of people exposed to particulate matter, the varying composition of particulate matter, and the measurements of actual exposure to particulate matter. EPA's health benefit analysis, however, does not account for these key uncertainties by specifying a range of estimates and the likelihood of attaining them. For these reasons, EPA's responses reflect a partial application of the Academies' recommendation. In addition, the Academies recommended that EPA both continue to conduct sensitivity analyses on sources of uncertainty and expand these analyses. In the particulate matter regulatory impact analysis, EPA included a new sensitivity analysis regarding assumptions about thresholds, or levels below which those exposed to particulate matter are not at risk of experiencing harmful effects. EPA has assumed no threshold level exists--that is, any exposure poses potential health risks. Some experts have suggested that different thresholds may exist, and the National Academies recommended that EPA determine how changing its assumption--that no threshold exists--would influence the estimates. The sensitivity analysis EPA provided in the regulatory impact analysis examined how its estimates of expected health benefits would change assuming varying thresholds. In response to another recommendation by the National Academies, EPA identified some of the sources of uncertainty that are not reflected in its benefit estimates. For example, EPA's regulatory impact analysis disclosed that its benefit estimates do not reflect the uncertainty associated with future year projections of particulate matter emissions. EPA presented a qualitative description about emissions uncertainty, elaborating on technical reasons--such as the limited information about the effectiveness of particulate matter control programs--why the analysis likely underestimates future emissions levels. EPA did not apply the remaining 12 recommendations to the analysis for various reasons. Agency officials viewed most of these recommendations as relevant to its health benefit analyses and, citing the need for additional research and development, emphasized the agency's commitment to continue to respond to the recommendations. EPA has undertaken research and development to respond to some of these recommendations but, according to agency officials, did not apply them to the analysis because the agency had not made sufficient progress. For example, EPA is in the process of responding to a recommendation involving the relative toxicity of components of particulate matter, an emerging area of research that has the potential to influence EPA's regulatory decisions in the future. Hypothetically, the agency could refine national air quality standards to address the potentially varying health consequences associated with different components of particulate matter. The National Academies recommended that EPA strengthen its benefit analyses by evaluating a range of alternative assumptions regarding relative toxicity and incorporate these assumptions into sensitivity or uncertainty analyses as more data become available. EPA did not believe the state of scientific knowledge on relative toxicity was sufficiently developed at the time it prepared the draft regulatory impact analysis to include this kind of analysis. In a separate report issued in 2004, the National Academies noted that technical challenges have impeded research progress on relative toxicity but nonetheless identified this issue as a priority research topic. The Clean Air Scientific Advisory Committee also noted the need for more research and concluded in 2005 that not enough data are available to base the particulate matter standards on composition. The Office of Management and Budget, however, encouraged EPA in 2006 to conduct a sensitivity analysis on relative toxicity and referred the agency to a sensitivity analysis on relative toxicity funded by the European Commission. We found that EPA is sponsoring research on the relative toxicity of particulate matter components. For example, EPA is supporting long-term research on this issue through its intramural research program and is also funding research through its five Particulate Matter Research Centers and the Health Effects Institute. In addition, an EPA contractor has begun to investigate methods for conducting a formal analysis that would consider sources of uncertainty, including relative toxicity. To date, the contractor has created a model to assess whether and how much these sources of uncertainty may affect benefit estimates in one urban area. Agency officials told us, however, that this work was not sufficiently developed to include in the final particulate matter analysis, which it says will present benefits on a national scale. Another recommendation that EPA did not apply to the particulate matter analysis focused on assessing the uncertainty of particulate matter emissions. The National Academies recommended that EPA conduct a formal analysis to characterize the uncertainty of its emissions estimates, which serve as the basis for its benefit estimates. While the agency is investigating ways to assess or characterize this uncertainty, EPA did not conduct a formal uncertainty analysis for particulate matter emissions for the draft regulatory impact analysis because of data limitations. These limitations stem largely from the source of emissions data, the National Emissions Inventory--an amalgamation of data from a variety of entities, including state and local air agencies, tribes, and industry. According to EPA, these entities use different methods to collect data, which have different implications for how to characterize the uncertainty. EPA officials stated that the agency needs much more time to address this data limitation and to resolve other technical challenges of such an analysis. While the final particulate matter analysis will not include a formal assessment of uncertainty about emissions levels, EPA officials noted that the final analysis will demonstrate steps toward this recommendation by presenting emissions data according to the level emitted by the different kinds of sources, such as utilities, cars, and trucks. Finally, EPA did not apply a recommendation concerning the transparency of its benefit estimation process to the particulate matter analysis. Specifically, the National Academies recommended that EPA clearly summarize the key elements of the benefit analysis in an executive summary that includes a table that lists and briefly describes the regulatory options for which EPA estimated the benefits, the assumptions that had a substantial impact on the benefit estimates, and the health benefits evaluated. EPA did not, however, present a summary table as called for by the recommendation or summarize the benefits in the executive summary. EPA stated in the regulatory impact analysis that the agency decided not to present the benefit estimates in the executive summary because they were too uncertain. Agency officials told us that the agency could not resolve some significant data limitations before issuing the draft regulatory impact analysis in January 2006 but that EPA has resolved some of these data challenges. For example, EPA officials said they have obtained more robust data on anticipated strategies for reducing emissions, which will affect the estimates of benefits. The officials also said that EPA intends to include in the executive summary of the regulatory impact analysis supporting the final rule a summary table that describes key analytical information. While EPA officials said that the final regulatory impact analysis on particulate matter will reflect further responsiveness to the Academies' recommendations, continued commitment and dedication of resources will be needed if EPA is to fully implement the improvements recommended by the National Academies. In particular, the agency will need to ensure that it allocates resources to needed research on emerging issues, such as the relative toxicity of particulate matter components, and to assessing which sources of uncertainty have the greatest influence on benefit estimates. The uncertainty of the agency's estimates of health benefits in the draft regulatory impact analysis for particulate matter underscores the importance of uncertainty analysis that can enable decision makers and the public to better evaluate the basis for EPA's air regulations. While EPA officials said they expect to reduce the uncertainties associated with the health benefit estimates in the final particulate matter analysis, a robust uncertainty analysis of the remaining uncertainties will nonetheless be important for decision makers and the public to understand the likelihood of attaining the estimated health benefits. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Committee may have. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Christine Fishkin, Assistant Director; Kate Cardamone; Nancy Crothers; Cindy Gilbert; Tim Guinane; Karen Keegan; Jessica Lemke; and Meaghan K. Marshall. 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Scientific evidence links exposure to particulate matter--a widespread form of air pollution--to serious health problems, including asthma and premature death. Under the Clean Air Act, the Environmental Protection Agency (EPA) periodically reviews the appropriate air quality level at which to set national standards to protect the public against the health effects of six pollutants, including particulate matter. EPA proposed revisions to the particulate matter standards in January 2006 and issued a regulatory impact analysis of the revisions' expected costs and benefits. The estimated benefits of air pollution regulations have been controversial in the past, and a 2002 National Academies report to EPA made recommendations aimed at improving the estimates for particulate matter and other air pollution regulations. This testimony is based on GAO's July 2006 report Particulate Matter: EPA Has Started to Address the National Academies' Recommendations on Estimating Health Benefits, but More Progress Is Needed (GAO-06-780). GAO determined whether and how EPA applied the National Academies' recommendations in its estimates of the health benefits expected from the January 2006 proposed revisions to the particulate matter standards. While the National Academies' report generally supported EPA's approach to estimating the health benefits of its proposed air pollution regulations, it included 34 recommendations for improvements. EPA has begun to change the way it conducts and presents its analyses of health benefits in response to the National Academies' recommendations. For its particulate matter health benefit analysis, EPA applied, at least in part, about two-thirds of the Academies' recommendations. Specifically, EPA applied 8 and partially applied 14. For example, in response to the Academies' recommendations, EPA evaluated how benefits might change given alternative assumptions and discussed sources of uncertainty not included in the benefit estimates. Although EPA applied an alternative technique for evaluating one key uncertainty--the causal link between exposure to particulate matter and premature death--the health benefit analysis did not assess how the benefit estimates would vary in light of other key uncertainties, as the Academies had recommended. Consequently, EPA's response represents a partial application of the recommendation. Agency officials said that ongoing research and development efforts will allow EPA to gradually make more progress in applying this and other recommendations to future analyses. EPA did not apply the remaining 12 recommendations to the analysis, such as the recommendation to evaluate the impact of using the assumption that the components of particulate matter are equally toxic. EPA officials viewed most of these 12 recommendations as relevant to the health benefit analyses but noted that the agency was not ready to apply specific recommendations because of, among other things, the need to overcome technical challenges stemming from limitations in the state of available science. For example, EPA did not believe that the state of scientific knowledge on the relative toxicity of particulate matter components was sufficiently developed to include it in the January 2006 regulatory impact analysis. The agency is sponsoring research on this issue. We note that continued commitment and dedication of resources will be needed if EPA is to fully implement the improvements recommended by the National Academies. In particular, the agency will need to ensure that it allocates resources to needed research on emerging issues, such as the relative toxicity of particulate matter components, and to assessing which sources of uncertainty have the greatest influence on benefit estimates. While EPA officials said they expect to reduce the uncertainties associated with the health benefit estimates in the final particulate matter analysis, a robust uncertainty analysis of the remaining uncertainties will nonetheless be important for decision makers and the public to understand the likelihood of attaining the estimated health benefits.

The Post-Katrina Emergency Management Reform Act of 2006 (Post- Katrina Act) required that FEMA establish the national preparedness system to ensure that the nation has the ability to prepare for and respond to disasters of all types, whether natural or man-made, including terrorist attacks. The Community Preparedness Division is responsible for leading activities related to community preparedness, including management of the Citizen Corps program. According to fiscal year 2008 Homeland Security Grant Guidance, the program is to bring together community and government leaders, including first responders, nonprofit organizations, and other community stakeholders. Serving as a Citizen Corps council, government and nongovernment stakeholders are to collaborate in involving community members in emergency preparedness, planning, mitigation, response, and recovery. Councils and partner programs register online to be included in the national program registries. The Division also supports the efforts of non-DHS federal "partner programs," such as the Medical Reserve Corps, that promote preparedness and the use of volunteers to support first responders. The CERT program's mission is to educate and train people in basic disaster preparedness and response skills, such as fire safety, light search and rescue, and disaster medical operations, using a nationally developed, standardized training curriculum. Trained individuals can be recruited to participate on neighborhood, business, or government teams to assist first responders. The mission of the Fire Corps program is to increase the capacity of fire and emergency medical service departments through the use of volunteers in nonoperational roles and activities, including administrative, public outreach, fire safety, and emergency preparedness education. FEMA also is responsible for a related program, the Ready Campaign, which works in partnership with the Ad Council, an organization that creates public service messages, with the goals of raising public awareness regarding the need for emergency preparedness, motivating individuals to take steps toward preparedness, and ultimately increasing the level of national preparedness. The program makes preparedness information available to the public through its English and Spanish Web sites (www.ready.gov and www.listo.gov), through printed material that can be ordered from the program or via toll-free phone lines, and through public service announcements (PSA). The Ready Campaign message calls for individuals, families, and businesses to (1) get emergency supply kits, (2) make emergency plans, and (3) stay informed about emergencies and appropriate responses to those emergencies. FEMA faces challenges in measuring the performance of local community preparedness efforts because it lacks accurate information on those efforts. FEMA is also confronted with challenges in measuring performance for the Ready Campaign because the Ready Campaign is not positioned to control the placement of its preparedness messages or measure whether its message is changing the behavior of individuals. According to FEMA officials, FEMA promotes citizen preparedness and volunteerism by encouraging collaboration and the creation of community Citizen Corps, CERT, and Fire Corps programs. FEMA includes the number of Citizen Corps councils, CERTs, and Fire Corps established across the country as its principal performance measure. However, FEMA faces challenges ensuring that the information needed to measure the number of established, active units is accurate. In our past work we reported on the importance of ensuring that program data are of sufficient quality to document performance and support decision making. Although not a measure under the Government Performance Result Act, FEMA programs report the number of local units registered as a principal performance measure; however, our work showed that the number of active units reported may differ from the number that actually exist. For example, as of September 2009: Citizen Corps reported having 2,409 registered Citizen Corps councils nationwide that encompass jurisdictions where approximately 79 percent of the U.S. population resides. However, 12 of the 17 registered councils we contacted during our site visits were active and 5 were not. The CERT program reported having 3,354 registered CERTs. Of the 12 registered CERTs we visited, 11 were actively engaged in CERT activities, such as drills, exercises, and emergency preparedness outreach, or had been deployed to assist in an emergency or disaster situation, although 1 had members that had not been trained. One registered CERT was no longer active. State officials in two of the four states also said that the data on number of registered programs might not be accurate. One state official responsible for the Citizen Corps council and CERT programs in the state estimated that as little as 20 percent of the registered councils were active, and the state subsequently removed more than half of its 40 councils from the national Web site. Officials in the other state said that the national database is not accurate and they have begun to send e-mails to or call local councils to verify the accuracy of registrations in their state. These officials said that they plan to follow up with those councils that do not respond, but they were not yet certain what they planned to do if the councils were no longer active. These results raise questions about the accuracy of FEMA's data on the number of councils across the nation, and the accuracy of FEMA's measure that registered councils cover 79 percent of the population nationwide. Some change in the number of active local programs can be expected, based on factors including changes in government leadership, voluntary participation by civic leaders, and financial support. FEMA officials told us that the Homeland Security Grant Program guidance designates state officials as responsible for approving initial council and CERT registrations and ensure that the data are updated as needed. According to FEMA officials, however, in practice this may not occur. Community Preparedness Division officials said that they do not monitor whether states are regularly updating local unit registration information. FEMA officials said that FEMA plans to adopt a new online registration process for Citizen Corps councils and CERTs in 2010, which will likely result in some programs being removed from FEMA's registries. They said that FEMA expects to use the new registration process to collect more comprehensive data on membership and council activities. According to FEMA officials, updating initial registration information will continue to be the responsibility of state officials. The Citizen Corps Director noted that the Citizen Corps program does not have the ability to require all local units to update information, particularly councils or CERTS that receive no federal funding. According to the Fire Corps program Acting Director, a state advocacy program initiated in 2007 may help identify inactive programs as well as promote the Fire Corps program. As of September 2009, there were 53 advocates in 31 states. We will continue to assess this issue as part of our ongoing work. Currently, the Ready Campaign measures its performance based on measures such as materials distributed or PSAs shown. For example, according to a DHS official, in fiscal year 2008, the Ready Campaign had more than 99 million "hits" on its Web site, more than 12 million pieces of Ready Campaign literature requested or 43,660 calls to the toll-free call numbers. The Ready Campaign relies on these measures because it faces two different challenges determining whether its efforts are influencing individuals to be more prepared. First, the Ready Campaign is not positioned to control the when or where its preparedness message is viewed. Second, the Ready Campaign is not positioned to measure whether its message is changing the behavior of individuals. With regard to the Ready Campaign's ability to control the distribution of its message, our prior work has shown that agencies whose programs rely on others to deliver services face challenges in targeting and measuring results in meeting ultimate goals, and when this occurs, agencies can use intermediate measures to gauge program activities. However, according to FEMA's Acting Director for the Ready Campaign, funds are not available for the Ready Campaign to purchase radio and television time to air its PSAs; rather, the Ready Campaign relies on donations of various sources of media. As a result, the Ready Campaign does not control what, when, or where Ready Campaign materials are placed when the media is donated. For example, what PSA is shown and the slots (e.g., a specific channel at a specific time) that are donated by television, radio, and other media companies are not under the Ready Campaign's control, and these are not always prime viewing or listening spots. Based on Ad Council data, the Ready Campaign's PSAs in 2008 were aired about 5 percent or less of the time by English and Spanish television stations during prime time (8:00 pm to 10:59 p.m.), and about 25 percent of the PSAs were aired from 1:00 a.m. to 4:00 a.m. Similarly, about 47 percent of English radio and about 27 percent of Spanish radio spots were aired from midnight to 6:00 a.m. FEMA officials said that with the release of its September 2009 PSAs, they expect increased placement during hours where there are more viewers and listeners. Just as the Ready Campaign has no control over the time PSAs are aired, it does not control the type of media (e.g., radio and television) donated. Based on Ad Council data on the dollar value of media donated to show Ready Campaign materials (the value of the donated media is generally based on what it would cost the Ready Campaign if the media space were purchased), much of the value from donated media is based on space donated in the yellow pages. Figure 1 shows the value of various types of media donated to the Ready Campaign to distribute its message during 2008. The Ready Campaign also faces a challenge determining the extent to which it contributes to individuals taking action to become more prepared--the program's goal. Measuring the Ready Campaign's progress toward its goal is problematic because it can be difficult to isolate the specific effect of exposure to Ready Campaign materials on an individual's level of emergency preparedness. Research indicates that there may be a number of factors that are involved in an individual taking action to become prepared, such as his or her beliefs as to vulnerability to disaster, geographic location, or income. A basic question in establishing whether the Ready Campaign is changing behavior is, first, determining the extent to which the Ready Campaign's message has been received by the general population. The Ad Council conducts an annual survey to determine public awareness of the Ready Campaign, among other things. For example, in the Ad Council's 2008 survey: When asked if they had heard of a Web site called Ready.gov that provides information about steps to take to prepare in the event of a natural disaster or terrorist attack, 21 percent of those surveyed said that they were aware of the Ready.gov Web site. When asked a similar question about television, radio, and print PSAs, 37 percent of those surveyed said that they have seen or heard at least one Ready Campaign PSA. Another factor is isolating the Ready Campaign's message from other preparedness messages that individuals might have received. The Ad Council's 2008 survey found that 30 percent of those surveyed identified the American Red Cross as the primary source of emergency preparedness information; 11 percent identified the Ad Council. While the Ad Council survey may give a general indication as to the population's familiarity with the Ready Campaign, it does not provide a measure of preparedness actions taken based on the Ready Campaign's promotion, that is, a clear link from the program to achieving program goals. The Ad Council reported that those who were aware of Ready Campaign's advertising were significantly more likely to say that they had taken steps to prepare for disaster, but acknowledged that the Ready Campaign could not claim full credit for the differences. Further, as the 2009 Citizen Corps survey showed, the degree to which individuals are prepared may be less than indicated because preparedness drops substantially when more detailed questions about supplies are asked. We will continue to assess FEMA's efforts to measure the performance of the Ready Campaign as part of our ongoing work. While DHS's and FEMA's strategic plans have incorporated efforts to promote community preparedness, FEMA has not developed a strategy encompassing how Citizen Corps, its partner programs, and the Ready Campaign are to operate within the context of the national preparedness system. An objective in DHS's Strategic Plan for 2008-2013 to "Ensure Preparedness" envisions empowering Americans to take individual and community actions before and after disasters strike. Similarly, FEMA's Strategic Plan for 2008-2013 envisions a strategy to "Lead the Nation's efforts for greater personal and community responsibility for preparedness through public education and awareness, and community engagement and planning, including outreach to vulnerable populations." FEMA's Strategic Plan delegates to the agency's components the responsibility for developing their own strategic plans, which are to include goals, objectives, and strategies. FEMA's Strategic Plan states that the components' strategic plans are to focus on identifying outcomes and measuring performance. NPD has not clearly articulated goals for FEMA's community preparedness programs or a strategy to show how Citizen Corps, its partner programs, and the Ready Campaign are to achieve those goals within the context of the national preparedness system. In our past work, we reported that desirable characteristics of an effective national strategy include articulating the strategy's purpose and goals; followed by subordinate objectives and specific activities to achieve results; and defining organizational roles, responsibilities, and coordination, including a discussion of resources needed to reach strategy goals. In April 2009, we reported that NPD had not developed a strategic plan that defines program roles and responsibilities, integration and coordination processes, and goals and performance measures for its programs. We reported that instead of a strategic plan, NPD officials stated that they used a draft annual operating plan and Post-Katrina Act provisions to guide NPD's efforts. The draft operating plan identifies NPD goals and NPD subcomponents responsible for carrying out segments of the operating plan, including eight objectives identified for the Division under NPD's goal to "enhance the preparedness of individuals, families, and special needs populations through awareness planning and training." NPD's objectives for meeting this goal do not describe desired outcomes. For example, one of NPD's objectives for the Community Preparedness Division is to increase "the number of functions that CERTs will be able to perform effectively during emergency response," but the plan does not describe how many and what type of functions CERTs currently perform, what additional functions they could perform, and what it means to be effective. NPD's draft operating plan also does not include other key elements of an effective national strategy, such as how it will measure progress in meeting its goals and objectives; the roles and responsibilities of those who will be implementing specific programs within the Community Preparedness Division, such as Citizen Corps or Fire Corps; or potential costs and types of resources and investments needed to meet goals and objectives needed to implement civilian preparedness programs. As a result, NPD is unable to provide a picture of priorities or how adjustments might be made in view of resource constraints. In our April 2009 report we recommended that NPD take a more strategic approach to implementing the national preparedness system to include the development of a strategic plan that contains such key elements as goals, objectives, and how progress in achieving them will be measured. DHS concurred with our recommendation and, in commenting on our report, stated that it reported making progress in this area and is continuing to work to fully implement the recommendation. NPD officials stated in September 2009 that DHS, FEMA, and NPD, in coordination with national security staff, were discussing Homeland Security Presidential Directive 8 (National Preparedness), including the development of a preparedness strategy and an implementation strategy. They said that community and individual preparedness were key elements of those discussions. However, NPD officials did not state when the strategy will be completed; thus, it is not clear to what extent it will integrate Citizen Corps, its partner programs, and the Ready Campaign. NPD officials stated that work is under way on revising the target capabilities, which are to include specific outcomes, measures, and resources. NPD officials said that the draft for public comment is expected to be issued in fiscal year 2010. The Ready Campaign is also working to enhance its strategic direction. According to the FEMA Director of External Affairs, the Ready Campaign's strategy is being revised to reflect the transition of the program from DHS's Office of Public Affairs to FEMA's Office of External Affairs, and the new FEMA Director's approach to preparedness. Program officials said that the Ready Campaign will have increased access to staff and resources and is to be guided by a FEMA-wide strategic plan for external communications. As of September 2009 the plan was still being developed and no date has been set for completion. We will continue to monitor this issue as well FEMA's effort to develop a strategy encompassing how Citizen Corps and its partner programs are to operate within the context of the national preparedness system. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subommittee may have. For further information about this testimony, please contact William O. Jenkins, Jr., Director, Homeland Security and Justice Issues, at (202) 512- 8777 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Major contributors to this testimony included John Mortin, Assistant Director, and Monica Kelly, Analyst-in-Charge. Carla Brown, Qahira El'Amin, Lara Kaskie, Amanda Miller, Cristina Ruggiero- Mendoza, and Janet Temko made significant contributions to the work. Department of Homeland Security support for local community preparedness activities is provided through homeland security grants, specifically the Citizen Corps grant program, but community preparedness activities are also eligible for support under other homeland security grants. Citizen Corps grants are awarded to states based on a formula of 0.75 percent of the total amount available to each state (including the District of Columbia and the Commonwealth of Puerto Rico) and 0.25 percent of the total amount available for each U.S. territory, with the balance of funding being distributed on a population basis. For other DHS homeland security grants, a state prepares a request for funding, which can include support for the state's community preparedness efforts, as allowed under the guidance for a particular grant. For example, the 2009 Homeland Security Grant Guidance lists "Conducting public education and outreach campaigns, including promoting individual, family and business emergency preparedness" as an allowable cost for state homeland security grants. Grant funding can be used to support Citizen Corps, Citizen Corps partner programs, or other state community preparedness priorities. The Federal Emergency Management Agency's (FEMA) grant reporting database does not categorize grants in a way that allows identification of the amount of funding going to a particular community preparedness program. Table 1 summarizes the approximately $269 million in DHS grants that were identified by grantees as supporting community preparedness projects from fiscal years 2004 through 2008. The amount is an approximation because of limitations in identifying grants for such projects. Our selection of projects for inclusion relied on grantees identifying their projects under one of three predefined project types that FEMA officials said are relevant for community preparedness or were projects funded with a Citizen Corps program grant. Not all grantees may have used these descriptions. We worked with grant officials to identify the most appropriate grant selection criteria.

By preparing their families and property before an event, individuals can reduce a disaster's impact on them and their need for first responder assistance, particularly in the first 72 hours following a disaster. By law, the Federal Emergency Management Agency (FEMA), located in the Department of Homeland Security (DHS), is to develop a national preparedness system (NPS)--FEMA includes community preparedness programs as part of the NPS. FEMA's budget to operate these programs made up less than one half of 1 percent of its $7.9 billion budget for fiscal year 2009. These programs include the Citizen Corps program and its partner programs, such as Fire Corps, and rely on volunteers to coordinate efforts and assist first responders in local communities. DHS's Ready Campaign promotes preparedness through mass media. This testimony provides preliminary observations on (1) challenges FEMA faces in measuring the performance of Citizen Corps, its partner programs, and the Ready Campaign and (2) actions FEMA has taken to develop a strategy to encompass how Citizen Corps, its partner programs, and the Ready Campaign operate within the context of the NPS. This testimony is based on work conducted from February 2008 to October 2009. GAO analyzed documents, such as FEMA's strategic plan, and compared reported performance data with observations from 12 site visits, selected primarily based on the frequency of natural disasters. The results are not projectable, but provide local insights. FEMA faces challenges measuring performance for Citizen Corps, partner programs, and the Ready Campaign because it does not have a process to verify that data for its principal performance measure--the registered number of established volunteer organizations across the country--are accurate and the Ready Campaign is not positioned to control the distribution of its message or measure whether its message is changing individuals' behavior. FEMA faces challenges ensuring that the information needed to measure the number of established, active volunteer units is accurate. For example, officials representing 17 councils GAO contacted during its site visits stated that 12 were active and 5 were not. FEMA officials said that the new online registration process FEMA plans to adopt in 2010 will result in some programs being removed from FEMA's registries. They said that FEMA expects to use the new process to collect more comprehensive data on membership and council activities. FEMA counts requests for literature, Web site hits, and the number of television or radio announcements made to gauge performance for the Ready Campaign, but FEMA does not control when its message is viewed because it relies on donated media, such as air time for television and radio announcements. Because changes in behavior can result from a variety of factors, including other campaigns, it is difficult to measure the campaign's effect on changes in individuals' behavior. FEMA's challenges measuring the performance of community preparedness programs is compounded by the fact that it has not developed a strategy to encompass how Citizen Corps, its partner programs, and the Ready Campaign are to operate within the context of the NPS. In April 2009, GAO reported that FEMA's National Preparedness Directorate (NPD), which is responsible for community preparedness, had not developed a strategic plan. GAO reported that instead of a strategic plan, NPD officials stated that they used a draft annual operating plan and Post-Katrina Act provisions to guide NPD's efforts. However, the plan's objectives do not include key elements of a strategy, such as how NPD will measure its progress meeting goals and objectives or the potential costs and types of resources and investments needed. GAO recommended that NPD develop a strategic plan to implement the NPS that contains these key elements. FEMA concurred with GAO's recommendation and told GAO that it is taking actions to strengthen strategic planning. FEMA officials stated that they are reviewing implementation plans and policy documents, such as the National Preparedness Guidelines, and that community preparedness is a key element being considered in this process. FEMA has not set a date for completion of the National Preparedness System strategy, and the extent to which Citizen Corps, its partner programs, or the Ready Campaign will be included in the final strategy is not clear. GAO will continue to assess FEMA's efforts related to community preparedness programs as part of its ongoing work. FEMA provided technical comments on a draft of this testimony, which GAO incorporated as appropriate.

During World War I, at a portion of American University and in other areas that became the Spring Valley neighborhood in Washington, D.C., the U.S. Army operated a large research facility to develop and test chemical weapons and explosives. After World War I, the majority of the site was returned to private ownership and was developed for residential and other uses. The site now includes, in addition to American University, about 1,200 private residences, Sibley Hospital, 27 embassy properties, and several commercial properties. In 1993, buried ordnance was discovered in Spring Valley, leading to its designation by the Department of Defense (Defense) as a FUDS currently comprising 661 acres. FUDS are properties that were formerly owned, leased, possessed, or operated by Defense or its components, and are now owned by private parties or other governmental entities. These properties, located throughout the United States and its territories, may contain hazardous, toxic, and radioactive wastes; unexploded ordnance; and/or unsafe buildings. Such hazards can contribute to deaths and serious illness or pose a threat to the environment. According to the U.S. Army, Spring Valley is the only FUDS where chemical agents were tested in what became a well-established residential neighborhood at the heart of a large metropolitan area. To fund the environmental restoration program, the Superfund Amendments and Reauthorization Act of 1986 (SARA) established the Defense Environmental Restoration Account. During the 5 most recent fiscal years (1997-2001), annual program funding for FUDS cleanups has decreased from about $255.9 million to about $231 million, with program funding estimated to decrease further to about $212.1 million by fiscal year 2003. By the end of fiscal year 2001, the Corps had identified 4,649 potential cleanup projects on 2,825 properties requiring environmental response actions. Through fiscal year 2001 (the latest figure available), the Corps had spent about $53.4 million on cleanup activities at Spring Valley. The principal government entities involved at the Spring Valley site are carrying out their roles and responsibilities under the Defense Environmental Restoration Program (environmental restoration program). The program was established by SARA, which amended the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). Under the environmental restoration program, Defense is authorized to identify, investigate, and clean up environmental contamination at FUDS. Defense is required to consult with EPA in carrying out the environmental restoration program; EPA, in turn, has established written guidance under CERCLA for its activities at FUDS. Defense is also required to carry out activities under the environmental restoration program consistent with a statutory provision that addresses, among other things, participation by the affected states--in this case, the District of Columbia. Under the Corps' program guidance, the District of Columbia has a role in defining the cleanup levels at the Spring Valley site. According to a District of Columbia Department of Health official, the department assesses the human health risks associated with any exposure to remaining hazards at Spring Valley. In carrying out their roles, these government entities have, over time, formed an active partnership to make important cleanup decisions. Under the partnership approach, each entity participates in the cleanup at Spring Valley. The Corps, with extensive experience in ordnance removal, is carrying out the physical cleanup. Other activities include the following: Identification of hazards: Defense consults with EPA and the District of Columbia on cleanup decisions at specified points in the environmental restoration process. EPA has provided assistance in identifying possible buried hazards by using photographic interpretation of aerial maps and providing technical expertise with regard to the presence of hazards in soil, water, and air. Assessing human health risks: According to the District of Columbia's Department of Health, the department assesses the human health risks associated with any exposure to remaining hazards at Spring Valley. In addition, the District of Columbia, together with the Agency for Toxic Substances and Disease Registry (ATSDR), has been investigating whether residents have actually been exposed to arsenic in the soil. Selecting a cleanup level: The entities are currently finalizing decisions on a cleanup level for arsenic that will determine how much contamination can be left in the soil throughout the site without endangering human health and the environment. While the entities have not agreed on all cleanup decisions, officials of all three entities state that the partnership has been working effectively in the recent past. Continued progress at the site will depend, in part, on the effectiveness of this partnership over the duration of the cleanup. Although the U.S. Army twice concluded that it had not found any evidence of large-scale burials of hazards remaining at Spring Valley, an accidental discovery of buried ordnance and subsequent investigations have led to the discovery of additional munitions and chemical contamination. In March 1986, American University was preparing to begin the largest construction project in its history. At the request of American University, the U.S. Army reviewed historical documents and available aerial photographs of the site taken during the World War I era to determine whether chemical munitions might have been buried on campus. Based on the results of its review, in October 1986, the U.S. Army concluded that no further action was needed. However, in January 1993, a utility contractor accidentally uncovered buried ordnance at another location in the Spring Valley site. The U.S. Army immediately responded and, by February 1993, had removed 141 pieces of ordnance, 43 of which were suspected chemical munitions (but most were destroyed before being tested). Immediately following this removal, the Corps began to investigate the site. To focus its investigation, the Corps identified 53 locations with the greatest potential for hazards. During the investigation, the Corps conducted subsurface (geophysical) soil surveys with metal detectors to identify buried ordnance and analyzed soil samples to identify chemical contamination. The Corps' soil surveys led the Corps to identify and remove one piece of ordnance containing a suspected chemical agent, 10 expended pieces of ordnance, an empty bomb nose cone, and several fragments of ordnance scrap. Concurrently with the Corps' investigation, another piece of ordnance was found by a builder during construction activities, and two pieces of ordnance were anonymously left for the Corps to find. Based on the results of soil sampling and the ensuing risk assessment, the Corps concluded that no remedial action was needed. Following this investigation, in June 1995, the U.S. Army determined that no further action was required at the Spring Valley site, except for an area that contained concrete shell pits, or bunkers, referred to as the Spaulding/Captain Rankin Area, which was then still under investigation. Subsequent sampling and a risk assessment indicated that no remedial action was necessary, and in June 1996, the Corps recommended that no further action be taken at this area as well. In 1997, the District of Columbia raised a number of concerns about how the Corps had completed its investigation. In response, the Corps reviewed its work at the site and concluded that it had incorrectly located one of the potentially hazardous locations it had previously investigated, which should have been situated on a property owned by the Republic of Korea (South Korea) on Glenbrook Road. In February 1998, the Corps surveyed the soil on the South Korean property and identified two potential burial pits. By March 2000, the Corps had completed the removal of 288 pieces of ordnance, 14 of which were chemical munitions; 175 glass bottles, 77 of which contained various chemicals, including mustard and lewisite; and 39 cylinders and 9 metal drums. Subsequent soil sampling conducted by EPA led the Corps to remove arsenic-contaminated soil from these properties. By May 2001, the Corps had removed about 4,560 cubic yards of arsenic-contaminated soil from the South Korean property and the adjacent property. As of April 2002, the Corps had not yet removed contaminated soil from the third property, which is the American University President's residence. After the discovery of hazards on the Glenbrook Road properties, in January 2000, at the request of the District of Columbia, the Corps expanded its arsenic investigation to include about 60 nearby residences and the southern portion of the American University campus. Sampling at these locations indicated that the Corps needed to remove arsenic- contaminated soil from the American University Child Development Center and other locations on the American University campus, and 11 residential properties. As of April 2002, the Corps had removed about 1,063 cubic yards of contaminated soil from American University. At a public meeting in February 2001, community members urged testing the entire Spring Valley neighborhood for arsenic. The Corps began to test all 1,483 properties within the Spring Valley site for arsenic in May 2001. As of April 2002, the Corps had identified about 160 properties that will require some degree of cleanup, with 7 identified for priority removals of arsenic-contaminated soil because they present relatively higher risks of exposure. Recently, the District of Columbia's Department of Health has urged the Corps to consider including nine additional properties on the list. In addition, the Corps has sampled for additional chemicals at selected locations as a result of information it has about what type of research activities might have occurred at the locations in the past. The results of the sampling are currently under review, but preliminary results have not identified any additional chemicals of concern, according to the Corps. In May 2001, at the urging of the District of Columbia and EPA, the Corps began to investigate an additional burial pit on the property line between the South Korean property and the adjoining residence on Glenbrook Road. The Corps is continuing to investigate the burial pit, and as of January 2002, had found 379 pieces of ordnance, 11 of which contained the chemical warfare agents mustard and lewisite; fragments of another 8 pieces of ordnance; 60 glass bottles and 3 cylinders, 24 of which contained mustard, lewisite, and acids; and 5 metal drums that showed signs of leakage. Concurrently with the efforts to expand the arsenic investigation, the Corps is planning to expand its efforts to survey properties for buried ordnance. The Corps plans to begin excavating two properties on Sedgwick Street where surveys indicate the presence of buried metallic objects that could possibly be pieces of ordnance. In addition, the Corps, in conjunction with EPA and the District of Columbia, is developing a list of properties to be geophysically surveyed for potential buried ordnance. Site-specific information, such as the results of a review performed by EPA's Environmental Photographic Interpretation Center, will be factored into determining priorities for surveying these additional sites. As of April 2002, the Corps had estimated that a total of 200 properties would be surveyed for ordnance. The government entities recognize that the extent to which hazards remain may never be known with certainty because of the technical limitations associated with sampling and geophysically surveying soil. At Spring Valley, cleanup decisions depend on the immediacy of the safety and human health risks presented. Throughout the cleanup of the site, identification and removal of buried ordnance have been and continue to be the government entities' top priorities in terms of human health concerns and cleanup decisions. The partners have agreed to remove buried ordnance as soon as possible after its discovery. Accordingly, since early in the Spring Valley cleanup effort, removal of buried ordnance has taken priority over other tasks. The partners also attempt to set priorities for cleaning up properties containing elevated levels of chemicals or metals in soil on the basis of the risk the hazards pose. Although many chemical agents were tested at Spring Valley during World War I, of those contaminants now present at elevated levels, arsenic is deemed to pose the greatest risk to human health and therefore is the contaminant of most concern to the partners. During its remedial investigation of the site from 1993 to 1995, the Corps used EPA's criteria to assess the health risks associated with these hazards to determine whether further sampling or soil removal was necessary. This assessment found no elevated health risk requiring remedial action. Arsenic was not identified as a contaminant of potential concern for the risk assessment, since, according to the Corps, the sampling results of the arsenic level in the soil were not significantly different from naturally occurring levels. EPA noted that it was involved in the oversight of the cleanup and did not object to the decision made at the time. However, since early 1999, with the additional discovery of buried ordnance and elevated levels of arsenic-contaminated soil at the South Korean property, the arsenic levels in the soil have become the primary focus of soil cleanup efforts. Arsenic exposure at certain doses in drinking water has been generally linked to cancers and other adverse health conditions. Based on scientific studies, the District of Columbia has identified lung cancer, bladder cancer, and skin cancer as effects associated with the long-term ingestion of arsenic. However, the precise extent to which arsenic is present and residents are exposed through ingestion, inhalation, or external contact at Spring Valley is unknown, and recent and ongoing efforts are directed at providing this information. Soil sampling: Through soil sampling, the partners have attempted to detect levels of arsenic in the soil to assist in ascertaining health risks and to set priorities for cleanup. Recent sampling results have registered elevated levels of arsenic in the soil at certain residences. Consequently, the District of Columbia's Department of Health has requested that additional properties be added to the priority removal list. Exposure testing: After the Corps confirmed elevated arsenic soil levels at American University's Child Development Center, at the request of the District of Columbia, ATSDR conducted an exposure study to determine the extent of arsenic exposure in children and employees at the site. After testing hair samples, ATSDR concluded that the children and employees had had no significant exposure to arsenic. At the request of the District of Columbia, ATSDR is conducting another exposure study (biomonitoring), in which it is studying the level of arsenic present in biological samples from residents on Spring Valley properties with the highest levels of arsenic in the soil. The individual results from the biological samples collected during the exposure investigation were mailed to the residents and were reviewed and discussed by the Mayor's Scientific Advisory Panel. During the Panel's recent meeting, several members noted that this study was a small sample screening investigation, not a full scientific human research project or epidemiological study. The Panel discussed the possibility of ATSDR's continuing a screening investigation during the summer months. Descriptive epidemiological studies: The District of Columbia has also conducted descriptive epidemiological studies in an attempt to assess the arsenic-related health effects in Spring Valley compared with two control groups as well as with the nationwide incidence and mortality rates for certain cancers. The studies examined bladder, skin, lung, liver, and kidney cancers. However, the number of cases of liver and kidney cancers at Spring Valley was too small to conduct a meaningful statistical analysis. Of bladder, skin, and lung cancers, however, the District of Columbia observed no excesses of cancer incidence and mortality in Spring Valley. Residents have raised concerns about the extent of the population studied and completeness of data used for the exposure tests and epidemiological studies. For example, some residents have voiced concerns that the full suite of hazards--not just arsenic--present at Spring Valley, even at trace levels, has not been factored into exposure and epidemiological studies. The District of Columbia and the Corps have indicated that mustard agent was found in containers in the pit discovered at Glenbrook Road in May 2001. The District of Columbia's Department of Health does not plan to study exposure to mustard agent, however, because it did not identify a pathway of exposure to mustard agent that could produce a dose resulting in adverse human health effects. The District of Columbia's Department of Health has told Spring Valley residents that, if necessary, it will expand the investigation to hazards other than arsenic, if the hazard is found at levels of concern in Spring Valley. Under the environmental restoration program, the Secretary of Defense is required to report annually to the Congress on the progress the department has made in carrying out environmental restoration activities at military installations and FUDS. From fiscal years 1997 through 2001 (the most recent report available), the total estimated cost to clean up Spring Valley reported by Defense increased by about six-fold, from about $21 million to about $124.1 million. In response to our request, the U.S. Army provided us with a more up-to-date estimate. As of April 2002, the Corps had slightly revised its estimated cost to about $125.1 million, as shown in figure 1. Costs have increased principally because the Corps needed to increase the scope of the remaining cleanup, as more information about the site became known. For example, from fiscal year 2000 to fiscal year 2001, the Corps doubled its estimate of the cost to complete the cleanup to include the cost of expanding the scope of planned investigation activities. In fiscal year 2000, the Corps estimated that completing the cleanup would cost about $35.8 million. In fiscal year 2001, the Corps raised its estimate to about $72.9 million to include the cost of sampling the entire Spring Valley site for arsenic-contaminated soil, geophysically surveying selected properties for buried ordnance, and completing additional work needed to remove buried hazards at one location. As of April 2002, the Corps slightly lowered its fiscal year 2001 estimate to about $71.7 million, as the preliminary results of the sitewide soil sampling yielded additional information about the extent of arsenic contamination. The Corps' latest estimate of the cost to complete the cleanup depends on assumptions the Corps has made about how many properties will require the removal of arsenic-contaminated soil and how many properties will need to be surveyed and excavated to remove possible buried hazards. For example, as of April 2002, the Corps estimated that, in addition to the ordnance and soil removal activities taking place at the South Korean property and two adjacent properties, arsenic-contaminated soil will need to be removed from another 161 properties and 202 properties will need to be excavated for possible buried ordnance. Despite the large increases in the scope and cost of the remaining cleanup work, in April 2002, the Corps shortened its estimate of the time to complete the cleanup by 5 years, projecting completion in fiscal year 2007. Prior to fiscal year 2000, Defense's annual reports to the Congress did not provide any estimate of when the Corps planned to complete cleanup activities at Spring Valley. In Defense's fiscal year 2000 annual report to the Congress, the Corps estimated that it would complete such activities by the end of fiscal year 2012. The Corps plans to meet the shortened time frame by applying considerably more funding to the site in the near term. However, we question whether the Corps will be able to achieve its planned completion even if there are no further changes to the scope of work. As part of its April 2002 revised estimate, the Corps acknowledged that meeting the schedule would depend on the FUDS budget and the U.S. Army's ability to apply the specified funding to the Spring Valley site. In order to continue to meet these needs, the U.S. Army may have to reprogram funds from possible use at other sites nationwide in each of the remaining years of the cleanup. Furthermore, in fiscal year 2002, the Corps planned to allocate to Spring Valley about 8 percent of the national budget for FUDS--which has declined in recent years--and about 86 percent of the FUDS budget for the Baltimore District, which includes funding for FUDS in six states and the District of Columbia. According to the U.S. Army, the provision of funds for the Spring Valley cleanup is already adversely affecting the availability of funding and progress at other sites. As more information becomes available about the hazards at the site, the Corps will develop a clearer sense of how reliable its assumptions are on the extent of the hazards present and the cost of removing them. The Corps' experience with excavating buried hazards at two Glenbrook Road properties illustrates the difficulty of estimating the cost of removing buried hazards. In fiscal year 2002, the Corps determined that completing the removal would cost about $6 million more than anticipated at the end of fiscal year 2001. Furthermore, the Corps assumed that arsenic would remain the focus of its efforts to reduce the risks of exposure to contaminated soil, and based its cost estimate on the work needed to meet a proposed cleanup level for arsenic; as of April 2002, the partners had not finalized this level. As part of its expanded soil sampling efforts, the Corps could identify the presence of yet other chemicals and expand the scope of soil removal. Until more complete information is known about the actual types and extent of the hazards present throughout the site and the actual cost of removing them, the reliability of the Corps' estimate of the cost and schedule to complete the cleanup remains uncertain. We found data on 58 properties in the District of Columbia where hazards resulting from federal activities have been found, using Defense data as of March 2002, EPA data as of April 2002, and District of Columbia data as of January 2002. These properties included 8 active Defense installations and 30 FUDS. For an active Defense installation, the host military branch of the installation is responsible for the cleanup, while the Corps is responsible for the cleanup of all FUDS. We also found six properties involving other federal agencies, including the Department of Agriculture and the National Park Service. Hazards at these sites include, among others, ordnance and explosive waste; hazardous, toxic, and radioactive waste; polychlorinated biphenyls (PCB); petroleum by-products; solvents; and heavy metals contamination. Finally, we found data on 30 federal properties (including 16 of the properties already identified) in the District of Columbia on which remediation of leaking underground storage tanks was in process, as of January 2002. Hazards at these sites include, among others, diesel fuel, gasoline, heating oil, kerosene, and waste oil. - - - - - In conclusion, Madam Chairwoman, a number of interdependent uncertainties continue to affect the progress of the Spring Valley cleanup. Until some of the existing uncertainties are resolved, the government entities will not be able to provide the community with definitive answers on any remaining health risks or the cost and duration of the cleanup. This concludes my prepared statement. I will be happy to respond to any questions from you or other Members of the Subcommittee.

During World War I, the U.S. Army operated a large research facility to develop and test chemical weapons and explosives in the area that became the Spring Valley neighborhood in Washington, D.C. Buried ordnance, discovered there in 1993, led to the designation by the Department of Defense (DOD) of 61 acres as a formerly used defense site. Through fiscal year 2001, DOD had spent over $50 million to identify and remove hazards at the site. The government entities involved have identified and removed a large number of hazards, but the number remaining is unknown. The health risks influencing cleanup activities at Spring Valley are the possibility of injury or death from exploding or leaking ordnance and containers of chemical warfare agents and potential long-term health problems from exposure to arsenic-contaminated soil. As of April 2002, the U.S. Army estimated that the remaining cleanup activities would cost $7.1 million and take 5 years, but these estimates are unreliable. This testimony summarized a June report (See GAO-02-556).

Productivity is defined as the efficiency with which inputs are used to produce outputs. It is measured as the ratio of outputs to inputs. Productivity and cost are inversely related--as productivity increases, average costs decrease. Consequently, information about productivity can inform budget debates as a factor that explains the level or changes in the cost of carrying out different types of activities. Improvements in productivity either allow more of an activity to be carried out at the same cost or the same level of activity to be carried out at a lower cost. IRS currently relies on output-to-input ratios such as cases closed per FTE to measure productivity and productivity indexes. A productivity change is measured as an index which compares productivity in a given year to productivity in a base year. Measuring productivity trends requires choosing both output and input measures, and the methods for calculating productivity indexes. In the past we have reported on declining enforcement trends, finding in 2002 that there were large and pervasive declines in six of eight major compliance and collection programs we reviewed. In addition to reporting these declines, we reported on the large and growing gap between collection workload and collection work completed and the resultant increase in the number of cases where IRS has deferred collection action on delinquent accounts. In 2003, we reported on the declining percentage of individual income tax returns that IRS was able to examine or audit each year, with this rate falling from 0.92 percent to 0.57 percent between 1993 and 2002. Since 2000, the audit rate has increased slightly but not returned to previous levels. IRS conducts two types of audits: field exams that involve complex tax issues and usually face-to-face contact with the taxpayer, and, correspondence exams that cover simpler issues and are done through the mail. We also reported on enforcement productivity measured by cases closed per FTE employee, finding that IRS's telephone and field collection productivity declined by about 25 percent from 1996 through 2001 and productivity in IRS's three exam programs--individual, corporate, and other audit--declined by 31 to 48 percent. In January 2004 we reported on the extent to which IRS's Small Business and Self-Employed (SB/SE) division followed steps consistent with both GAO guidance and the experience of private sector and government organizations when planning its enforcement process improvement projects. We reported on how the use of a framework would increase the likelihood that projects target the right processes for improvement and lead to the most fruitful improvements. In that report, we also reported that more complete productivity data--input and output measures adjusted for the complexity and quality of cases worked--would give SB/SE managers a more informed basis for decisions on how to identify processes that need improvement, improve processes, and assess the success of process improvement efforts. This report elaborates on that recommendation, providing more information about the challenges of obtaining complete productivity data. Improving productivity by changing processes is a strategy SB/SE is using to address these declining trends. However, the data available to SB/SE managers to assess the productivity of their enforcement activities, identify processes that need improvement, and assess the success of their process improvement efforts are only partially adjusted for complexity and quality of cases worked. This problem of adjusting for quality and complexity is not unique to SB/SE process improvement projects--the data available to process improvement project managers are the same data used throughout SB/SE to measure productivity and otherwise manage enforcement operations. Because IRS provides services, such as providing information to taxpayers and enforcing the tax laws, that are intangible and complex, measuring output--and therefore productivity--is challenging. Like other providers of intangible and complex services, IRS has a choice of measuring activities or the results of its services. Generally, information about results is preferred, but measuring results is often difficult. In the absence of direct measures of results, activities that are closely related to the results of the service can be used as proxies. Measuring productivity in services is difficult. Unlike manufacturing, which lends itself to objective measurement because output can be measured in terms of units produced, services, which involve changes in the condition of people receiving the service, often have intangible characteristics. Thus, the output of an assembly line is easier to measure than the output of a teacher, doctor, or lawyer. Services may also be complex bundles of individual services, making it difficult to specify the different elements of the service. For example, financial services provide a range of individual services, such as financial advice, accounts management and processing, and facilitating financial transactions. IRS provides a service. IRS's mission, to help taxpayers understand and meet their tax responsibilities and to apply the tax law with integrity and fairness, requires IRS to provide a variety of services ranging from collecting taxes to taxpayer education. IRS, like other service providers, could measure output in terms of its results--its impact on taxpayers--or in terms of activities. The results of IRS's service are the impacts on the condition or behavior of taxpayers. These taxpayer conditions or behaviors include their compliance with the tax laws, their compliance burden (the time and money cost of complying with tax laws), and their perception of how fairly taxpayers are treated. IRS's activities are what IRS does to achieve those results. These activities include phone calls answered, notices sent to taxpayers, and exams conducted. Generally, information about results is preferred, but measuring such results is often difficult. In the case of the public sector, this preference is reflected in GPRA, which requires that federal agencies measure performance, whenever possible, in terms of results or outcomes for people receiving the agencies' services. However, results such as compliance and fairness have intangible characteristics that are difficult to measure. In addition, results are produced in complicated and interrelated ways. For example, a transaction or activity may affect a number of results: IRS's exams may affect taxpayers' compliance, compliance burden, and perceptions of the fairness of the tax system. In addition, a result may be influenced by a number of transactions or activities: A taxpayer's compliance may be influenced by all IRS exams (through their effect on the probability of an exam) as well as by other IRS activities such as taxpayer assistance services. IRS's activities are easier to measure than results but still present challenges. Activities are easier to measure because they are often service transactions such as exams, levies issued, or calls answered that can be easily counted. However, unlike measures of results, more informative measurement of activities requires that they be adjusted for quality and complexity, as we noted in our report on IRS's enforcement and improvement projects. A productivity measure based on activities such as cases closed per FTE may be misleading if such adjustments are not made. For example, an increase in exam cases closed per FTE would not indicate an increase in true productivity if the increase occurred because FTEs were shifted to less complex cases or the examiner allowed the quality of the case review to decline to close cases more quickly. Activities-based productivity measures can provide IRS with useful information on the efficiency of IRS operations. Measuring output, and therefore productivity, in terms of activities provides IRS with measures of how efficiently it is using resources to perform specific functions or transactions. However, activities do not constitute--and should not be mistaken for--measures of IRS's productivity in terms of ultimate results. While the productivity measures we have examined are based on activities, IRS has efforts under way to measure results such as compliance and compliance burden. Recently, we reported on IRS's National Research Program (NRP) to measure voluntary compliance and efforts to measure compliance burden. As we mentioned previously, measuring these results is difficult. For some results, such as compliance, measurement is also costly and intrusive because taxpayers must be contacted and questioned in detail. Despite these difficulties, IRS can improve its productivity measurement by continuing its efforts to get measures of results. These efforts would give Congress and the general public a better idea of what is being achieved by the resources invested in IRS. In the absence of direct measures of results, activities that are closely related to the results of the service are used as proxies. The value of these proxies depends on the extent to which they are correlated with results. By carefully choosing these measures, IRS may gain some information about the effect of its activities on ultimate results. Because activities may affect a number of results and a single result may be affected by a number of activities, a single activity likely will not be a sufficient proxy for the results of the service. Therefore, a variety of activities would likely be necessary as proxies for the results of the service. Both types of output measures, those that reflect the results of IRS's service and those that use activities to measure internal efficiency, should be accurate and consistent over time. In addition, both output measures should be reliably linked to inputs. Linking the results of IRS's service to inputs may be difficult because of outside factors that may also affect measured results. For example, an increase in compliance could result both from IRS actions such as exams and from changes in tax laws. Another challenge is that IRS currently has difficulties linking inputs to activities, as we note in a previous report, where we reported IRS's lack of a cost accounting system. In particular, IRS only recently implemented a cost accounting system, and has not yet determined the full range of its cost information needs. Table 1 summarizes some of the key differences between activities and results measures. Table 1 also indicates some general criteria that apply to both types of measures. Because inputs are more easily measured and identifiable than outputs, measuring them is more straightforward. IRS, as a government agency, may be able more often to use labor costs or hours as a single input in its productivity measures because it relies heavily on labor. However, it may be particularly important for IRS to use a multifactor measure that includes capital along with labor during periods of modernization that involve increased or high levels of capital investment. As with outputs, inputs should be measured accurately and consistently over time. Measuring inputs consistently over time may require adjusting for changes in the quality of the labor, which has been done using proxies such as education level or years of experience. Also, as mentioned previously, inputs should be reliably linked to outputs. The appropriate method for calculating productivity depends on the purpose for which the productivity measure is being calculated. The alternative methods that can be used for calculating productivity range from computing single ratios--exams closed per FTE--to using complex statistical methods to form composite indexes that combine multiple indicators of outputs and inputs. While single ratios may be adequate for certain purposes, the composite indexes based on statistical methods may be more useful because they provide information about the sources of productivity change. Comparing the ratios of outputs to inputs at different points in time defines a productivity index that measures the percentage increase or decrease in productivity over time. The ratios that form the index may be single, comparing a single output to a single input or composite, where multiple outputs and inputs are compared. The single ratios may be useful for evaluating the efficiency of a single noncomplex activity. Composite indexes can measure the productivity of more complicated activities, controlling for complexity and quality. Composite indexes can also be used to measure productivity of resources across an entire organization, where many different activities are being performed. One method of producing composite indexes is to use weights to combine such disparate activities as telephone calls answered and exams closed. One common weighting method, used by the Bureau of Labor Statistics (BLS), is a labor weight. Weighting outputs by their share of labor in a baseline period controls for how resources are allocated between different types of outputs. If the productivity of two activities is unchanged but resources are reallocated between the activities, the composite measure of productivity would change unless these weights are employed. For example, if IRS reallocates exam resources so that it does more simple exams and fewer complex exams, the number of total exams might increase. Consequently, a single productivity ratio comparing total exams to inputs would show an increase. Labor weighting deals with this issue. The weights allow any gains from resource reallocation to be distinguished from gains in the productivity of the underlying activities. When types of activities can be distinguished by their quality of complexity, labor weighting can also be used to control for quality and complexity differences when resources are shifted between types of outputs. More complicated statistical methods can be used for calculating composite indexes that allow for greater flexibility in how weights are chosen to combine different outputs and for a wider range of output measures that include both qualitative and quantitative outputs. Data Envelopment Analysis (DEA), which has been widely used to measure the productivity of private industries and public sector services, is an example of such methods DEA estimates an efficiency score for each producing unit, such as the firms in an industry or the schools in a school district, or for IRS, the separately managed areas and territories composing its business units. DEA estimates the relative efficiency of each producing unit by identifying those units with the best practice--those making the most efficient use of inputs, under current technology, to produce outputs--and measuring how far other units are from this best practice combination of inputs used to produce outputs. DEA estimates provide managers with information on how efficient they are relative to other units and the costs of making individual units more efficient. These efficiency scores are used to form a composite productivity index called a Malmquist index. An advantage of the Malmquist index is that IRS managers can restrict the weights to adjust for managerial or congressional preferences to investigate the effect on productivity of a shift, for example, from an organization that emphasizes enforcement to one that emphasizes service. IRS can also include many different types of outputs and inputs, control for complexity and quality, and isolate the effects of certain historical changes, such as the IRS Restructuring and Reform Act of 1998 (RRA98). Another advantage of the Malmquist index is that productivity changes can be separated into their components, such as efficiency and technology changes. In this context, efficiency can be measured holding technology constant, and technology can be measured holding efficiency constant. Holding technology constant, IRS might improve productivity by improving the management of its existing resources. On the other hand, technology changes might improve productivity even if the management of resources has not changed. Thus, the productivity change of a given IRS unit is determined by both changes in its efficiency relative to the current best- practice IRS units and changes in the best practices or technology. Currently available IRS data can be used to produce productivity indexes that control for complexity and quality. The examples that follow focus on productivity indexes that use exams closed as outputs and FTEs as inputs. The data on examinations cover individual returns across IRS and IRS's LMSB division. For both individuals and LMSB, the complexity and quality of exams can vary over time. For example, the proportion of exams that are correspondence versus field, business versus nonbusiness, and EIC versus non-EIC can vary over time. As already discussed, failing to take account of such variation can give a misleading picture of productivity change. While these examples do not encompass all the methods, data, and adjustments that may be used, they illustrate the benefits of the additional analysis that IRS can perform using current data. In addition, as we pointed out in our 2004 report, IRS can improve its productivity measurement by investing in better data, taking into account the costs and benefits of doing so. These better data include measures of complexity, improved measures of quality, and additional measures of output. Figures 1 through 4 illustrate, using currently available data between fiscal years 1997 and 2004, the difference between weighted indexes that make an adjustment for complexity and unweighted indexes that make no adjustments. In the illustrations, a labor-weighted composite index, which can control for complexity, is contrasted with a single unweighted index to show how the simpler method may be misleading. (See app. I for a fuller description of the labor-weighted index.) In each case, complexity is proxied by type of exam. Although the data were limited (for example, the measure of complexity was crude), the illustrations show that making the adjustments that are possible provides a different picture of productivity than would otherwise be available. The advantage of weighted indexes is that they allow changes in the mix of exams to be separated from changes in the productivity of performing those exams. In the examples that follow, an unweighted measure could be picking up two effects. One effect is the change in the number of exams that an auditor can complete if the complexity or quality of the exam changes. The second effect is the change in the number of exams an auditor can complete if the time an auditor requires to complete an exam changes, holding the quality and complexity of exams constant. By isolating the latter effect, the weighted index more closely measures productivity, or the efficiency with which the auditor is working the exams. For individual exams, the comparison of productivity indexes shows that the unweighted index understates the decline in productivity. As figure 1 shows, between fiscal years 1997 and 2001, the unweighted productivity index declined by 32 percent while the weighted index declined by 53 percent. The difference is due largely to the increase in EIC exams during the period. Over the period between fiscal years 1997 and 2001, exams were declining. However, the mix of exams was changing, with increases in the number of EIC exams. EIC exams are disproportionately correspondence exams, and IRS can do these exams faster than field exams. IRS shifted to "easier" exams, and that shift caused the unweighted index to give an incomplete picture of productivity. The shift masked the larger productivity decline shown by the weighted index. Figure 2 provides additional evidence to support the conclusion that the shift to more EIC exams is the reason for the difference in productivity shown in figure 1. Between fiscal years 1997 and 2001, the weighted and unweighted indexes track each other very closely when the EIC exams are removed. Both show a decline in productivity of about 50 percent over this period. The available data were not sufficient to control for other factors that may have influenced exam productivity. For example, RRA98 imposed additional requirements on IRS's auditors, such as certifications that they had verified that past taxes were due. Figure 3 compares unweighted and weighted productivity indexes for exams done in LMSB division. As figure 3 shows, between fiscal years 2002 and 2004, the unweighted productivity index increased by 4 percent, while the weighted index increased by 16 percent. This difference appears largely due to the individual exams and small corporate exams done in LMSB. Over the period, total exams were declining but the mix of exams was changing. LMSB was shifting away from less labor-intensive individual returns and small corporation returns to more complex business industry and coordinated industry return exams. This shift caused the unweighted index to give an incomplete picture of productivity. Here, the shift masked the larger productivity increase as shown by the weighted index. Figure 4 provides additional evidence to support the conclusion that the shift away from individual and small corporate exams is the reason for the difference in productivity shown in figure 3. Between fiscal years 2002 and 2004, when individual and corporate exams are excluded, the two indexes track more closely, with the unweighted index increasing by 15 percent and the weighted index by 17 percent. There is evidence that adjusting for quality would show that LMSB's productivity increased more than is apparent in figures 3 and 4 for the years 2002 to 2004. Average quality scores available for selected types of LMSB exams show quality increasing over the 2-year period. Adjusting for this increase in quality, in addition to adjusting for complexity, would show a productivity increase for these types of exams of 28 percent over the period. While labor-weighted and other more sophisticated productivity indexes can provide a more complete picture of productivity changes, they do not identify the causes of the changes. These productivity indexes would be the starting point for any analysis to determine the causes of productivity changes. Another example of the advantages of weighted productivity indexes is provided by IRS. As noted earlier, IRS has developed a weighted submission processing productivity measure. The measure adjusts for differences in the complexity of processing various types of tax returns. In an internal analysis, IRS showed how productivity comparisons over time and across the 10 processing centers depended on whether or not the measure was adjusted for complexity. For example, the ranking of the processing centers in terms of productivity changed when the measure was adjusted for the complexity of the returns being processed. The more sophisticated methods for measuring productivity can provide IRS and Congress with better information about IRS's performance. By controlling for complexity and quality, IRS managers would have more complete information about the true productivity of activities, such as exams, that can differ in these dimensions. In addition, the weighted measures can be used to measure productivity for the organization, where many different activities are being performed. More complete information about the productivity of IRS resources should be useful to both IRS managers and Congress. More complete productivity measures would provide better information about the effectiveness of IRS resources, IRS's budget needs, and IRS's efforts to improve efficiency. Although there are examples, such as the submission processing productivity measures, of IRS using weighted measures of productivity, IRS officials said they generally use single ratios as measures of productivity. That is consistent with our 2004 report on IRS's enforcement improvement projects, where we reported on SB/SE's lack of productivity measures that adjust for complexity and quality. While there would be start-up costs associated with any new methodology, the long-term costs to IRS for developing more sophisticated measures of productivity may be modest. The examples so far in this section demonstrate the feasibility of developing weighted productivity indexes using existing data. Relying on existing data avoids the cost of having to collect new data. The fact that IRS already has some experience implementing weighted productivity measures could reduce the cost of introducing more such measures. As we stated previously, IRS could also improve its productivity measurement by getting better data on quality and complexity. These improved data could be integrated with the methods for calculating productivity illustrated in this report to further improve IRS's productivity measurement. However, as we acknowledged in our prior report, collecting additional data on quality and complexity may require long-term planning and an investment of additional resources. Any such investment, we noted, must take account of the costs and benefits of acquiring the data. Using more sophisticated methods, such as those summarized in this report, for tracking productivity could produce a much richer picture of how IRS manages its resources. This is important not only because of the size of IRS--it will spend about $11 billion in 2005 and employ about 100,000 FTEs--but also because we are entering an era of tight budgets. A more sophisticated understanding of the level of productivity at IRS and the reasons for productivity change would better position IRS managers to make decisions about how to effectively manage their resources. Such information would also better enable Congress and the public to assess the performance of IRS. As we illustrate, more can be done to measure IRS's productivity using current data. However, another advantage of using more sophisticated methods to track productivity is that the methods will highlight the value of better data. Better information about the quality and complexity of IRS's activities would enable the methods illustrated in this report to provide even richer information about IRS's overall productivity. We recommend that the Commissioner of Internal Revenue put in place a plan for introducing wider use of alternative methods of measuring productivity, such as those illustrated in this report, taking account of the costs of implementing the new methods. The Commissioner of Internal Revenue provided written comments on a draft for this report in a June 23, 2005, letter. The Commissioner agreed with our recommendation to work on introducing wider use of alternative measure of productivity. Although expressing some caution, he has asked his Deputy Commissioner for Services and Enforcement to work with IRS's Research, Analysis, and Statistics office to assess the possible use of alternative methods of measuring productivity. The Commissioner recognized that a richer understanding of organizational performance is crucial for effective program delivery. As agreed with your office, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to interested congressional committees, the Secetary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. We will also make copies available to others on request. If you or your staff have any questions, please contact me at (202) 512-9110. I can also be reached by e-mail at [email protected]. Key contributors to this assignment were Kevin Daly, Assistant Director, and Jennifer Gravelle. Methods for calculating productivity range from computing single ratios to using statistical methods. In its simplest form, a productivity index is the change in the productivity ratio over time relative to a chosen year. However, this type of productivity index allows for only a single output and a single input. To account for more than one output, the outputs must be combined to produce a productivity index. One method is to weight the outputs by their share of inputs used in the chosen base year. In a case where only labor input is used, following this method provides a labor-weighted output index, which, when divided by the input index, produces the labor-weighted productivity index. The use of the share of labor used in each output effectively controls for the allocation of labor across the outputs over time. For example, if productivity in producing two outputs remained fixed over time, a single productivity index may show changes in productivity if resources are reallocated to produce more of one of the outputs. The Bureau of Labor Statistics (BLS) has also used labor-weighted indexes. BLS published, under the Federal Productivity Measurement Program, data on labor productivity in the federal government for more than two decades (1967-94). Due to budgetary constraints, the program is now terminated. BLS's measures used the "final outputs" of a federal program, which correspond generally to what we have called intermediate outputs in this report, as opposed to the outcomes or results of the program. BLS used labor weights because of their availability and their close link to cost weights. In particular, as with the labor weights in our illustrations, BLS used base year labor weights and updated the weights every 5 years. It relied only on labor and labor compensation, and acknowledges that the indexes did not reflect changes in the quality of labor. BLS measured productivity for a number of federal programs, ranging from social and information services to corrections. However, BLS did not produce productivity measures for IRS. In addition to weighted productivity indexes, there are a number of composite productivity indexes designed to include all the inputs and outputs involved in production. This group of indexes is called Total Factor Productivity (TFP) indexes. They are called total because they include all the inputs and outputs, as opposed to Partial Factor Productivity indexes, which relate only one input to one output. Many of the main TFP indexes, including Tornqvist, Fisher, Divisia, and Paache, require reliable estimates of input and output prices, data not available for industries in the public sector. Therefore we use the Malmquist index, which does not require that data. Malmquist indexes are TFP indexes based on changes in the distance from the production frontier, or distance functions. These distance functions are estimated using Data Envelopment Analysis (DEA). Productivity change is represented by the ratio of two different period distance functions. The Malmquist index is the geometric average of these productivity changes (evaluated at the two different periods). This index can be further decomposed into efficiency and technology changes. From the decomposition of the Malmquist index, productivity change can be shown to equal the efficiency change times the technology change. (xt+1,yt+1)/D(x,y)]*[Dt+1(xt+1,yt+1)/ Dt+1(x,y)]}^1/2, where x, xt+1 denote the vector of inputs at time t and t+1, and y, and yt+1 denote the vector of outputs in time t and t+1 and D and Dt+1 are distance functions relative to the technology in time t and t+1. (x,y)]*[Dt+1(xt+1,yt+1)/ Dt+1(x,y)]}^1/2 = [Dt+1(xt+1, yt+1)/ D(x,y)]*{[ D(xt+1,yt+1)/ Dt+1(xt+1,yt+1)]*[D(x,y)/ Dt+1(x,y)]}^1/2=E*T, the efficiency change, E, times the technology change, T. fraction in the first, indicates a movement away from one over time and thus declining productivity. Thus, a productivity change less than one indicates declining productivity and therefore an efficiency change less than one also indicates declining efficiency. Alternatively, if the efficiency change was one, then the productivity change equals the technology change. Following previous analysis, a productivity change less than one indicates declining productivity. Therefore, a technology change less than one indicates an inward shift of the production frontier. If the technology change is less than one, it must be that the distance function in the first period is less than the distance function in the next period. Thus, the distance in the first period is farther away from one than is the distance in the next period, and the distance from the frontier decreased from the first period to the second period. Since the output and input bundles did not change, the frontier must shift in to produce the decrease in distance. The Internal Revenue Service (IRS) can follow this method to generate indexes for the areas and territories and then focus on the average for an estimate of overall IRS productivity. ,y)= [max { ph | (x, phy) T}]-1 and ph* = (D(x,y))-1, with ph* >1 and D(x,y)< 1, where ph denotes the value to scale output. therefore, inefficient relative to firms with a scalar value of one. Thus, output distance functions are less than one. IRS can use this method, treating territories and areas as firms. The weights used in the linear program are designed to make each firm look its best; they represent best case scenarios. While DEA is a nonparametric method, there is also a parametric method available called stochastic frontier analysis. Stochastic frontier analysis (regression) uses a regression model to estimate cost or production efficiency. After running the regression of performance and input data, the frontier is found by decomposing the residuals into a stochastic (statistical noise) part and a systematic portion attributed to some form of inefficiency. Stochastic frontier analysis thus requires specifying the distributional form of the errors and the functional form of the cost (or production) function. Its merits include a specific treatment of noise. While DEA's use of nonparametric methods eliminates the need to specify functional forms, one drawback is a susceptibility to outliers.

In the past, the Internal Revenue Service (IRS) has experienced declines in enforcement productivity as measured by cases closed per Full Time Equivalent. Increasing enforcement productivity through a variety of enforcement improvement projects is one strategy being pursued by IRS. Evaluating the benefits of different projects requires good measures of productivity. In addition, IRS's ability to correctly measure its productivity has important budget implications. GAO was asked to illustrate available methods to better measure productivity at IRS. Specifically, our objectives were to (1) describe challenges that IRS faces when measuring productivity, (2) describe alternative methods that IRS can use to improve its productivity measures, and (3) assess the feasibility of using these alternative methods by illustrating their use with existing IRS data. Measuring IRS's productivity, the efficiency with which inputs are used to produce outputs, is challenging. IRS's output could be measured in terms of impact on taxpayers or the activities it performs. IRS's impacts on taxpayers, such as compliance and perceptions of fairness, are intangible and costly to measure. IRS's activities, such as exams or audits conducted, are easier to count but must be adjusted for complexity and quality. An increase in exams closed per employee would not indicate an increase in productivity if IRS had shifted to less complex exams or if quality declined. IRS can improve its productivity measures by using a variety of methods for calculating productivity that adjust for complexity and quality. These methods range from ratios using a single output and input to methods that combine multiple outputs and inputs into composite indexes. Which method is appropriate depends on the purpose for which the productivity measure is being calculated. For example, a single ratio may be useful for examining the productivity of a single simple activity, while composite indexes can be used to measure the productivity of resources across an entire organization, where many different activities are being performed. Two examples show that existing data, even though they have limitations, can be used to produce a more complete picture of productivity. For individual exams, composite indexes controlling for exam complexity show a larger productivity decline than the single ratio method. On the other hand, for exams performed in the Large and Mid-Size Business (LSMB) division, the single ratio understates the productivity increase shown, after again controlling for complexity. By using alternative methods for measuring productivity, managers would be better able to isolate sources of productivity change and manage resources more effectively. More complete productivity measures would provide better information about IRS effectiveness, budget needs, and efforts to improve efficiency.

USDA's CBAs provide services such as farm loans and conservation assistance along with rural and economic development help. Under the E- File Act, these agencies were required to establish an electronic filing and retrieval system enabling farmers and other agricultural producers to access departmental forms, such as farm loan applications, via the Internet by December 18, 2000. Along with the December 18 deadline for establishing the forms-retrieval system, the Secretary of Agriculture was also to report to Congress by that date on progress made in implementing the act. The law further mandated that by June 20, 2002, agricultural producers be able to file paperwork electronically with USDA if they choose to do so. RMA administers the federal crop insurance program, which helps protect producers against losses due to drought, flooding, and other unavoidable causes. By December 1, 2000, it was to submit to Congress a plan for enabling producers to obtain forms and information, such as crop insurance applications and production and yield reports, over the Internet. Implementation of the plan is to be completed by December 1, 2001. In addition to addressing the mandates of the Freedom to E-File Act, USDA is--like other agencies--preparing to implement plans in accordance with the GPEA. To develop and implement USDA's e-file capabilities, on August 30, 2000, the Secretary of Agriculture issued a memorandum to the undersecretaries of the affected agencies and assigned them and mission area leaders with collective responsibility. The Secretary's memorandum also required that one shared plan be developed and implemented to meet E-File Act requirements. The Secretary gave the Office of Chief Information Officer (OCIO) the role of coordinating and facilitating e-file implementation planning and required that the plan be submitted to OCIO no later than September 30, 2000. In response to the Secretary's directive, the undersecretaries transmitted a "Mission Area Report on Freedom to E-File Legislation" to OCIO on October 17, 2000. While providing general information, it lacked specifics on activities and milestones, dependencies among USDA activities, and needed resources. It also did not assign a senior-level official with overall accountability for managing and ensuring the implementing disparate e-file activities. To address their e-file requirements, the CBAs had two separate interagency teams working together to meet the act's December 18, 2000, deadline--one consolidating and developing electronic forms and the other building a technical infrastructure for expanding Internet use. For example, the CBAs purchased an on-line common forms software tool for creating electronic forms, selected forms to post on the Web, and designed and begun implementing a common Internet Web site. At the time of our November briefing, the CBAs still needed to obtain OMB approval for each electronic form, complete testing of the Web page, train county-based field staff in the new e-file procedures, publicize the department's e-file services, and notify the public on how to use them. The CBAs progress in meeting the E-File Act's December 18 deadline was discussed in a report to Congress signed by the Secretary of Agriculture on December 22, 2000. Our review found that, by the December 18 deadline, the CBAs had successfully established a common Internet Web site, obtained OMB approval for 52 FSA and NRCS forms, and placed them on the Internet. However, none of the 100-plus RD forms that the CBAs expected to have deployed on the Web site by the deadline were available. According to USDA documentation, OMB had not approved these forms because some forms appeared to be for the department's internal use, did not have clear and user-friendly instructions, or did not include forms instructions that conformed to the format standard established by OMB and the agencies. As of December 31, 2000, RD had not resubmitted any of its forms for OMB review. A marketing brochure, being developed by the CBAs to promote public awareness of the e-file effort, was still in production at the end of December 2000, and the CBAs had decided not to issue any press releases publicizing the new e-file Web site. In addition, because the CBAs decided that training needs for service center employees were minimal at this phase of the project, informational directives on the new program were provided to employees in lieu of giving them training. Fully meeting all remaining e-file mandates to successfully establish effective and secure electronic filing capabilities by June 2002 poses far more complex and difficult tasks for USDA, such as reengineering business processes and establishing reliable and secure methods of transmitting and storing all electronic records. Moreover, since the E-File Act requires USDA to continue providing services through non electronic means as well, the department will also face increased workload demands supporting dual service delivery functions--one electronic and one paper-based. At the end of our review in December 2000, USDA did not have a detailed plan for how it would implement these actions and had not identified how much funding or what staff resources would be required to carry out them out. In response to the E-File Act, RMA began work on the required December 1, 2000, plan for allowing agricultural producers the option of obtaining, over the Internet from approved insurance providers, all forms and other information, and filing all paperwork required for participation electronically. RMA's initial efforts focused on establishing and distributing guidelines and policies for crop insurance providers to follow in meeting their e-file responsibilities. By the time of our November briefing, RMA had issued its final e-file guidelines. RMA met the December 1, 2000, deadline for submitting a plan to Congress. This plan outlines the process the agency will use to ensure that insurance providers comply with the act's e-file requirements. Specifically, insurance providers must follow RMA's issued guidelines and submit a completed e-business plan to RMA for approval no later than April 1, 2001. RMA said it expects full implementation, as the act requires, by December 1, 2001. USDA has made progress and has partially met initial E-File Act deadlines for providing agricultural producers with access to forms via the Internet and submitting required reports on initial e-file activities and plans to Congress. However, implementing full e-filing capabilities for all its farm service customers by the deadlines set by the act poses a far more complex and difficult challenge. A component critical to the success of any such initiative is the necessary authority and responsibility to manage it across different departmental entities, yet no single official has been so designated. Also, a comprehensive implementation plan--one that addresses both GPEA, the Freedom to E-File Act requirements, and OMB's implementation guidelines--is critical to help the department achieve a more consistent approach in its entire e-government transformation. To ensure that USDA fully meets its E-File Act mandates, we recommend that the Secretary of Agriculture assign a senior-level official with overall responsibility, authority, and accountability for managing and carrying out implementation for both CBAs and RMA E-File Act requirements; direct the assigned official to work with RD and OMB to expedite resubmission and approval of all appropriate RD forms and ensure that these forms are made available over the Internet as soon as possible; and direct the assigned official, in cooperation with the undersecretaries for Farm and Foreign Agricultural Service, Natural Resources and Environment, and Rural Development, and the OCIO, to develop and document a comprehensive plan for implementing all E-File Act requirements. In developing the department's comprehensive plan, we further recommend that the Secretary of Agriculture direct the assigned senior official to document and track all critical activities and milestones, dependencies among major activities, and resources needed to complete these efforts. In addition, the plan should clearly describe all project tasks, their priorities, and time frames and milestones for their completion; assign task responsibilities to staff and show critical dependencies identify required staff/budget resources for completing the plan; and document contingency actions planned to address unforeseen work delays or problems. We also recommend that the Secretary direct the assigned senior official to include both e-file and GPEA requirements in the department's comprehensive plan to help better coordinate actions across USDA agencies and apply a consistent approach for addressing all mandated requirements and deadlines during USDA's e-file government transformation. Finally, we recommend that the Secretary hold the senior official accountable for carrying out the comprehensive plan and require that this official provide quarterly reports to the Secretary describing the results of USDA's efforts to implement each of these actions and all e-file requirements. On November 8, 2000, we provided a copy of our briefing materials, which were used in preparing this report, to USDA's CIO, deputy CIO, and officials representing USDA's CBAs and RMA. These officials generally agreed with our briefing. They stated that providing more focused leadership and having a comprehensive implementation plan for the e-file effort would increase the department's overall chances of success with fully implementing the Freedom to E-File Act. In its December 22, 2000, progress report to Congress, and consistent with our recommendations, USDA said that it plans to begin an effort to develop comprehensive project plans for enhanced services that meet the 2-year requirements of the Freedom to E-File Act and GPEA in January 2001. On February 13, 2001, USDA's Acting CIO provided written comments on a draft of this report. USDA's comments are summarized below and reproduced in appendix II. USDA said that it fully supports the spirit and intent, as well as the legal mandates, of the e-file act. USDA agreed that it had problems meeting the act's initial December 18, 2000, deadline for deploying electronic forms on the Internet and that significant challenges remain to fully implement the act. USDA also stated that successful implementation of the act will require continued funding, along with understanding and support of the USDA's programs or "owners" of the business being transformed. USDA agreed with our recommendation for making RD forms available on the Internet as soon as possible. The department also agreed that comprehensive plans must be developed for implementing the Freedom to E-File Act and GPEA to help better coordinate across agencies and apply a consistent approach for addressing USDA's e-transformation. However, the department stopped short of describing the extent to which its comprehensive plan will include all the detailed steps we recommended or what the department's time frame is for completing it. Moreover, it was unclear from USDA's response whether the department planned to implement our recommendation for assigning a senior-level official with overall e-file responsibility, authority, and accountability for managing and carrying out implementation of the E-File Act requirements. With respect to our last recommendation for providing the Secretary quarterly reports on implementation results, USDA stated that OCIO will continue to ensure that the Secretary is fully informed on the department's progress in meeting the E-File Act requirements. However, the department did not specify when and how progress will be reported to the Secretary nor did it describe how accountability for results will be ensured. We continue to believe that having a senior-level official vested with sufficient accountability and authority is important to the success of USDA's e-file implementation efforts. As requested, our objective was to review measures being taken by the department to implement the provisions of the Freedom to E-File Act. In carrying out our work, we obtained and reviewed USDA and contractor documents and discussed actions planned or under way with department officials handling implementation of the act and assessed progress made. On November 15, 2000, we briefed your staff on the results of our review up to that point. Our work on the briefing was performed from August through October 2000. We performed follow-up work to update USDA's progress implementing the act through December 31, 2000. The results of all of our work are summarized in this report. We conducted our review at USDA headquarters in Washington, D.C., and at key agency offices involved in e- file activities in Fort Collins, Colorado, and Kansas City, Missouri. Our work was done in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from its date. At that time, we will send copies to Representative Eva Clayton, Ranking Minority Member, Subcommittee on Department Operations, Oversight, Nutrition, and Forestry, House Committee on Agriculture; Senator Richard Lugar, Chairman, and Senator Tom Harkin, Ranking Member, Senate Committee on Agriculture, Nutrition, and Forestry; Representative Larry Combest, Chairman, and Representative Charles Stenholm, Ranking Minority Member, House Committee on Agriculture; Representative Tom Davis, Chairman, Representative Jo Ann Davis, Vice Chairwoman, and Representative Jim Turner, Ranking Minority Member, Subcommittee on Technology and Procurement Policy, House Committee on Government Reform; and Representative Stephen Horn, Chairman, Representative Ron Lewis, Vice Chairman, and Representative Janice Schakowski, Ranking Minority Member, Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform. We will also send copies to the Honorable Ann M. Veneman, Secretary of Agriculture; the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. Should you have any questions on matters discussed in this report, please contact me at (202) 512-6257 or Stephen A. Schwartz, Senior Assistant Director, at (202) 512-6213. We can also be reached by e-mail at [email protected] and [email protected], respectively. Conservation Service (NRCS), and Rural Development (RD) mission area--hereafter referred to collectively as County- based Agencies (CBAs), and the Risk Management Agency (RMA) to establish an electronic filing and retrieval system enabling farmers and others to file paperwork electronically. Provides separate requirements for the CBAs and RMA. an Internet-based system enabling agricultural producers to access all forms and shall submit to Congress a report that describes the progress made. Not later than June 20, 2002, the system shall be expanded to enable producers to access and file all forms and, at the option of the Secretary, selected records and information. Congress a plan to allow agricultural producers the option of obtaining, over the Internet from approved insurance providers, all forms and other information and filing all paperwork required for participation electronically. Not later than December 1, 2001, RMA should complete implementation of the plan. *RMA administers the federal crop insurance program, under which insurance policies are sold and serviced by private companies to help protect agricultural producers against crop losses due to drought, flooding, and other unavoidable causes. 105-277, October 28, 1998)* requires that by 2003, federal agencies provide the public, where practicable, the option of submitting, maintaining, or disclosing information--such as employment records, tax forms, and loan applications-- electronically, instead of on paper. On the basis of guidance issued by the Office of Management and Budget (OMB), agencies are preparing plans for implementing GPEA, including the use of electronic signatures. *P.L. No. 105-277, Div.C, tit XVII. E-File Act, the Secretary issued a memorandum to the undersecretaries for the affected agencies, requiring that one shared plan be developed and implemented to meet E- File Act requirements and the plan be submitted to Office of Chief Information Officer (OCIO) no later than September 30, 2000. Secretary assigned the undersecretaries and mission area leaders with collective responsibility for developing and implementing e-file activities and gave OCIO the role of coordinating/facilitating e-file implementation planning. In response to the Secretary's memorandum, the undersecretaries approved and transmitted the "Mission Area Report on Freedom to E-File Legislation" to the CIO on October 17, 2000. The report, which included two separate sections covering the CBAs and RMA, provides general information on USDA activities to address e-file requirements. establish and define all major activities and milestones, dependencies among activities, and resources necessary to complete them or assign a senior-level official with overall responsibility and accountability for managing and implementing all the separate e-file activities. purchased an on-line common forms software tool for selected a total of 219 forms (57 from FSA, 6 from NRCS, and 156 from RD) to post on the Web (USDA believes customers can complete these on their own with assistance only from form completion instructions), coordinated with OMB to develop a user-friendly format and are working to obtain OMB approval for each new electronic form, and designed and is implementing a common Internet Web site that can utilize a single Internet address to provide user access with common search and retrieval functions for all available forms. to be done to meet the December 18 deadline. For example, CBAs still need to obtain final OMB approval for each of the contractor testing of the Web page design, which is not addressed in the October 17 report, was scheduled to be completed December 15, the last workday before the deadline, and some key technical staff who were implementing web farm hardware, software, and security had other full-time duties and had no replacements should they be assigned elsewhere. plans still needed to be established to train county-based field office staff in the new e-filing procedures and in providing customer assistance and publicizing USDA's new e-file services and notifying the public on how to use them still needed to be done. USDA officials working on these activities believe that these tasks can be accomplished by the December 18 deadline. establishing full e-government services across a broad range of USDA building in solutions that also address GPEA and OMB requirements. reengineering numerous existing programs and systems, using multiple electronic submission processes to accommodate various categories of agency customers, designing and investing in technology to securely connect service center agencies to customers and to USDA's national network, developing software to move and utilize data collected from customers to appropriate serving locations, and training employees in new roles, responsibilities, and technologies. workload increases. E-File Act requires USDA to continue providing services in the traditional way to customers who choose not to use the Internet. CBAs must therefore support dual service delivery functions--one electronic and one paper-based. identified how much funding and staff resources will be needed to fully implement the act. The E-File Act provides that the Secretary is to reserve, from applicable accounts of the CBAs, not more than $3 million for fiscal year 2001 and $2 million for each subsequent fiscal year. Decisions on use of these accounts and funding are still pending. planning on how USDA will carry out the tasks needed to meet the June 20, 2002, deadline for implementing full electronic filing capabilities will not begin until January 2001. In response to the E-File Act, RMA is working on a December 1, 2000, plan for allowing agricultural producers the option of obtaining, over the Internet from approved insurance providers, all forms and other information and filing all paperwork required for participation electronically. *These were issued in final on November 1, 2000. the location and type of data made available where paperwork can be filed and responsibilities of the applicable parties. RMA said it approved plans from two participating insurance providers on September 26, 2000, enabling them to market and service federal crop insurance programs over the Internet. File Act, and the CBAs' and RMA's October 17 report, done in response to the Secretary's request for a shared e-file plan, generally discusses their actions. However, several steps essential to the overall success of USDA's e-file initiative remain to be done. Specifically, USDA has not assigned a senior-level official with overall responsibility, authority, and accountability for managing and implementing all the separate activities to ensure that critical tasks are completed on time and within budget and that all federal mandates are met. USDA has also not yet developed and documented a comprehensive e-file implementation plan. Having such a plan is important to define the milestones for all major activities, dependencies and critical tasks among these activities, and resources required to complete them; help identify priorities as to which activities must be completed first and where milestone and resource shifts may be made to ensure that the most critical activities are completed on time, within budget, and, more important, are successful; and address OMB and GPEA requirements by coordinating actions across mission areas and applying a more consistent approach during USDA's e-government transformation. To ensure that USDA fully meets its E-File Act mandates, the assign a senior-level official with overall responsibility, authority, and accountability for managing and carrying out implementation of all E-File Act requirements and direct that the assigned senior-level official, in cooperation with the undersecretaries for Farm and Foreign Agricultural Service, Natural Resources and Environment, and Rural Development, and the CIO, develop and document a comprehensive plan for implementing all E-File Act requirements. describe all project tasks, their priority, and time frames and milestones for their completion; assign task responsibilities to staff and show critical dependencies identify required staff/budget resources for completing the plan; and document contingency actions planned to address unforeseen work delays or problems. In addition, the comprehensive plan should cover both e-file and GPEA requirements to help better coordinate actions across USDA agencies and apply a consistent approach for addressing all mandated requirements and deadlines during USDA's e- government transformation. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. 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The Department of Agriculture (USDA) has made progress in implementing the Freedom to E-File Act and has partially met the act's initial deadlines for providing agricultural producers with access to forms via the Internet and submitting required reports on initial e-file activities and plans to Congress. However, implementing full e-filing capabilities for all its farm service customers by the deadlines set by the act poses a far more complex and difficult challenge. Critical to the success of any such initiative is the necessary authority and responsibility to manage it across different departmental entities. Yet no single official has been so designated. Also, a comprehensive implementation plan--one that addresses both the Government Paperwork Elimination Act (GPEA), the Freedom to E-File Act requirements, and Office of Management and Budget's (OMB) implementation guidelines--is critical to help USDA achieve a more consistent approach in its entire e-government transformation.

VA provides health care services to various veteran populations-- including an aging veteran population and a growing number of younger veterans returning from the military operations in Afghanistan and Iraq. VA operates 152 hospitals, 133 nursing homes, 824 community-based outpatient clinics, and other facilities to provide care to veterans. In general, veterans must enroll in VA health care to receive VA's medical benefits package--a set of services that includes a full range of hospital and outpatient services, prescription drugs, and long-term care services provided in veterans' own homes and in other locations in the community. VA also provides some services that are not part of its medical benefits package, such as long-term care provided in nursing homes. To meet the expected demand for health care services, VA develops a budget estimate each year of the resources needed to provide these services. This budget estimate includes the total cost of providing health care services, including direct patient costs as well as costs associated with management, administration, and maintenance of facilities. VA develops most of its budget estimate using the EHCPM. The EHCPM's estimates are based on three basic components: the projected number of veterans who will be enrolled in VA health care, the projected quantity of health care services enrollees are expected to use, and the projected unit cost of providing these services. The EHCPM makes these projections 3 or 4 years into the future for budget purposes based on data from the most recent fiscal year. For example, in 2010, VA used data from fiscal year 2009 to develop its health care budget estimate for the fiscal year 2012 request and advance appropriations request for 2013. VA uses other methods to estimate needed resources for long-term care, other services, and health-care-related initiatives proposed by the Secretary of VA or the President. As previously reported, these methods estimate needed resources based on factors that may include historical data on costs and the amount of care provided, VA's policy goals for health care services such as long-term care, and predictions of the number of users. For example, VA's projections for long-term care for fiscal year 2012 were based on fiscal year 2010 data on the amount of care provided and the unit cost of providing a day of this care. Typically, VA's Veterans Health Administration (VHA) starts to develop a health care budget estimate approximately 10 months before the President submits the budget to Congress in February. The budget estimate changes during the 10-month budget formulation process in part due to successively higher levels of review in VA and OMB before the President's budget request is submitted to Congress. For example, the successively higher levels of review resulting in the fiscal year 2012 President's budget request are described in table 1. The Secretary of VA considers the health care budget estimate developed by VHA when assessing resource requirements among competing interests within VA, and OMB considers overall resource needs and competing priorities of other agencies when deciding the level of funding requested for VA's health care services. OMB issues decisions, known as passback, to VA and other agencies on the funding and policy proposals to be included in the President's budget request. VA has an opportunity to appeal the passback decisions before OMB finalizes the President's budget request, which is submitted to Congress in February. Concurrently, VA prepares a congressional budget justification that provides details supporting the policy and funding decisions in the President's budget request. Each year, Congress provides funding for VA health care through the appropriations process. For example, Congress provided new appropriations of about $48.0 billion for fiscal year 2011 and advance appropriations of $50.6 billion for fiscal year 2012 for VA health care. In addition to new appropriations that VA may receive from Congress as a result of the annual appropriations process, funding may also be available from unobligated balances from multiyear appropriations, which remain available for a fixed period of time in excess of 1 fiscal year. For example, VA's fiscal year 2011 appropriations provided for some amounts to be available for 2 fiscal years. These funds may be carried over from fiscal year 2011 to fiscal year 2012 if they are not obligated by the end of fiscal year 2011. VA and OMB consider anticipated unobligated balances when formulating the President's budget request. VA has statutory authority to collect amounts from patients, private insurance companies, and other government entities to be obligated for health care services. VA collects first-party payments from veterans, such as copayments for outpatient medications, and third-party payments from veterans' private health insurers for deposit into the Medical Care Collections Fund (MCCF). Amounts in the MCCF are available without fiscal year limitation for VA health care and expenses of certain activities related to collections subject to provisions of appropriations acts. VA also receives reimbursements from services it provides to other government entities, such as the Department of Defense (DOD), or to private or nonprofit entities. For example, in 2006, we reported that VA received reimbursements from other entities by selling laundry services. These amounts also contribute to decisions on funding in the President's budget request. Congress provides funding for VA health care through three appropriations accounts: Medical Services, which funds health care services provided to eligible veterans and beneficiaries in VA's medical centers, outpatient clinic facilities, contract hospitals, state homes, and outpatient programs on a fee basis; Medical Support and Compliance, which funds the management and administration of the VA health care system, including financial management, human resources, and logistics; and Medical Facilities, which funds the operation and maintenance of the VA health care system's capital infrastructure, such as costs associated with nonrecurring maintenance, utilities, facility repair, laundry services, and grounds keeping. Funding was appropriated for fiscal year 2012 for the three accounts in the following proportions: Medical Services at 78 percent, Medical Support and Compliance at 11 percent, and Medical Facilities at 11 percent. VA identified several changes that were made to its budget estimate to help develop the President's budget request for VA for fiscal years 2012 and 2013. In one change, VA identified that the resources identified in its budget justification for non-recurring maintenance (NRM) were lower than the amount estimated using the EHCPM by $904 million for fiscal year 2012 and $1.27 billion for fiscal year 2013. Funds for NRM are used to repair and improve VA health care facilities and come from the Medical Facilities appropriations account. The President's budget request reflected resource levels of $869 million for NRM for fiscal year 2012 and $600 million for fiscal year 2013. OMB staff said that amounts identified for NRM in VA's congressional budget justification were lower than estimated amounts due to a policy decision to fund other initiatives and to hold down the overall budget request for VA health care without affecting the quality and timeliness of VA's health care services. VA officials said NRM amounts that were identified for fiscal years 2012 and 2013 should be sufficient to maintain VA health care facilities in their current conditions. In recent years, VA's spending on NRM has been greater than the amounts identified in VA's budget justifications and reflected in the President's budget requests (see table 2). The higher spending is consistent with VA's authority to increase or decrease the amounts VA allocates from the Medical Facilities account for NRM and with congressional committee report language. While VA's NRM spending has exceeded amounts identified in VA's budget justifications over the last several years, VA's projection of the NRM backlog for health care facilities--which reflects the total amount needed to address facility deficiencies--has increased to nearly $10 billion. Changes also were made to EHCPM estimates for health care equipment. For equipment purchases, VA identified that the resource request in its budget justification was $15 million lower than the amount estimated using the EHCPM for fiscal year 2012 and $410 million lower than the amount estimated using the EHCPM for fiscal year 2013. The President's budget reflected a request of $1.034 billion for fiscal year 2012 and $700 million for fiscal year 2013 to purchase health care equipment. OMB staff said amounts identified for equipment were lower than estimated amounts due to a policy decision to fund other initiatives and to hold down the overall budget request for VA health care without affecting the quality and timeliness of VA's health care services. In addition, estimates of resource needs for employee salaries were reduced due to the enactment of a law requiring the elimination of across- the-board pay raises for federal employees in 2011 and 2012. This 2-year pay raise freeze led to a reduction of $713 million for fiscal year 2012 and $815 million for fiscal year 2013 from VA's health care budget estimate. The amount of the reduction was calculated separately from the EHCPM because the EHCPM does not have an explicit assumption for pay increases. VA officials said that OMB staff calculated the impact on the President's budget request for VA health care for fiscal year 2013. The lower salary base that resulted from the pay freeze in 2011 and 2012 also would reduce the overall salary level for fiscal year 2013. According to VA's budget justification, VA's health care budget estimate was further reduced by $1.2 billion for fiscal year 2012 and by $1.3 billion for fiscal year 2013 to reflect expected savings from what VA identified as six operational improvements. Expected savings from these operational improvements are a result of planned changes in the way VA manages its health care system to lower costs. The operational improvements for fiscal years 2012 and 2013 from VA's budget justification are the following: Acquisitions. The operational improvements with the largest amount of estimated cost savings are VA's proposed changes to its purchasing and contracting strategies for which VA estimates a savings of $355 million a year for fiscal years 2012 and 2013. For example, VA has proposed savings by increasing competition for contracts that were formerly awarded on a sole-source basis. Changing rates. VA proposed to purchase dialysis treatments and other care from civilian providers at Medicare rates instead of current community rates. VA estimates a savings of $315 million for fiscal year 2012 and $362 for fiscal year 2013 as a result of this rate change. Fee care. VA proposed initiatives to generate savings from health care services that VA pays contractors to provide. VA estimates a savings of $200 million a year for fiscal years 2012 and 2013 from reductions in its payments for fee-based care. Realigning clinical staff and resources. VA proposed to realign clinical staff and resources to achieve savings by using less costly health care providers. Specifically, VA plans to use selected non- physician providers instead of certain types of physicians, use selected licensed practical nurses instead of certain types of registered nurses, and more appropriately align required clinical skills with patient care needs. VA estimates a savings of $151 million a year for fiscal years 2012 and 2013 from clinical staff and resource realignment. Medical and administrative support. VA proposed to employ resources more efficiently in various medical care, administrative, and support activities at each medical center and in other VA locations. For example, a VA official said that VA could examine job vacancies for medical and administrative support to see whether vacant positions need to be filled. VA estimates a savings of $150 million a year for fiscal years 2012 and 2013 for this operational improvement. VA real property. VA proposed initiatives to repurpose its vacant or underutilized buildings, demolish or abandon other vacant or underutilized buildings, decrease energy costs, change procurement practices for building supplies and equipment, and change building- service contracts. VA estimates a savings of $66 million a year for fiscal years 2012 and 2013 from real property initiatives. In the past, VA has proposed management efficiencies to achieve savings in order to reduce the amount of funding needed to provide health care services. However, in a 2006 report, we reported that VA lacked a methodology for its assumptions about savings estimates it had detailed for fiscal years 2003 through 2006, and we concluded that VA may need to take actions to stay within its level of available resources if VA fell short of its savings goals. According to VA officials, VA is planning to develop a system to monitor the operational improvements to determine whether they were generating the intended savings. VA's health care budget estimate was increased overall by about $1.4 billion for fiscal year 2012 and $1.3 billion for fiscal year 2013 to support health-care-related initiatives proposed by the administration, according to VA officials. Some of the proposed initiatives can be implemented within VA's existing authority, while other initiatives would require a change in law. VA officials estimated that the majority of initiatives would increase resource needs for new health care services or expanded existing services. Four initiatives which make up over 80 percent of the total amount for initiatives in the President's budget request are: Homeless veterans programs. VA officials estimated that this initiative, which supports the agency's goal to end homelessness among veterans, would increase VA's resource needs by $460 million for fiscal year 2012 as well as for fiscal year 2013. This would allow VA to expand existing programs and develop new ones to prevent veterans from becoming homeless and help those veterans who are currently homeless, programs such as assisting veterans with acquiring safe housing, receiving needed health care services, and locating employment opportunities. Opening new health care facilities. This initiative would provide VA with the resources to purchase equipment and supplies and complete other activities that are necessary to open new VA health care facilities and begin providing health care services to veterans. VA officials estimated that this initiative would increase VA's resource needs by $344 million for fiscal year 2012 as well as for fiscal year 2013. Additional services for caregivers. This initiative would give VA the resources to expand services to caregivers of the most severely wounded veterans returning from Afghanistan and Iraq, as required by the Caregivers and Veterans Omnibus Health Services Act of 2010. For example, this initiative would provide caregivers a monthly stipend and eligibility to receive VA health care benefits. To provide these additional services to caregivers, VA officials estimated that the agency's resource needs would increase by $208 million for fiscal year 2012 and $248 million for fiscal year 2013. Benefits for veterans exposed to Agent Orange. This initiative would provide VA with the resources to implement activities required by the Agent Orange Act of 1991 that directs the Secretary of VA to extend health care benefits to veterans with certain conditions, such as some types of leukemia, who were known to be exposed to Agent Orange and to issue regulations establishing presumptions of service connection for diseases that the Secretary finds to be associated with exposure to an herbicide agent. VA officials estimated that to provide these additional benefits, its resource needs would increase by $171 million for fiscal year 2012 and $191 million for fiscal year 2013. VA officials estimated a small number of initiatives in the President's budget request would decrease VA's spending needs. These initiatives propose ways for VA to reduce costs. For example, the Medicare ambulatory rates initiative proposes that Congress amend current law to allow VA to reimburse vendors for certain types of transportation, such as ambulances, at the local prevailing Medicare ambulance rate in the absence of a contract. VA expects that by paying transportation vendors the Medicare rate over their current billing rate--which VA reported may be up to three to four times the Medicare rate--VA's resource needs related to certain types of transportation would decrease by about $17 million for fiscal year 2012 as well as for fiscal year 2013. VA's overall estimate for long-term care and other services was reduced, according to VA officials and OMB staff, to reflect more current data that became available during the 10-month budget formulation process. To meet OMB's timeline for preparing the President's budget request, VA initially produced estimates for long-term care and CHAMPVA services in May 2010. These estimates were based on a mix of available data representing the actual amount of care provided and unit costs for these services to-date and projections for these services for the remainder of the 2010 fiscal year. VA had to project data because only partial-year data were available in May. Between May and November 2010, VA provided OMB with periodic updates of the most current data available. OMB staff, with input from VA officials, finalized the estimate for the President's budget request using this information, which according to VA officials and OMB staff, resulted in a lower estimate overall for long-term care and other services than the estimate VA produced in May 2010. VA, however, did not provide us with the amount of the decrease in the estimate. According to VA officials, VA's health care budget estimate was increased by $420 million for fiscal year 2012 and by $434 million for fiscal year 2013 to account for the costs of providing health care to non-veterans, including active duty service members and other DOD beneficiaries under sharing agreements, and certain VA employees who are not enrolled as veterans. Since VA's estimates from the EHCPM are based on the cost of treating veterans, the agency developed the estimates for providing health care to non-veterans separately. VA's estimate from the EHCPM was also increased by $220 million for fiscal year 2012 to reflect enhancements for rural health care for veterans, according to VA officials. Congress directed VA to spend $250 million on enhancements for rural health care in fiscal year 2009, and VA made a policy decision to continue spending this amount on enhancements for rural health care in subsequent years, according to VA officials. However, VA was not able to spend the entire $250 million in fiscal year 2009 and spent only $30 million. Since VA used data from fiscal year 2009 in the EHCPM to develop its health care budget estimate for fiscal year 2012, VA's estimate projected $30 million in spending for enhancements for rural health care for that fiscal year. As a result, VA's estimate was increased by about $220 million to reflect the agency's planned $250 million spending for this policy change. The President's request for appropriations for VA health care for fiscal years 2012 and 2013 relied on anticipated funding from several sources. Of the $54.9 billion requested by the President for fiscal year 2012 to fund VA's health care services, $50.9 billion was requested in new appropriations. This request was an increase of 5.5 percent from the amount requested for fiscal year 2011--the lowest requested percent increase in recent years. The request assumes the availability of about $4.0 billion from collections, unobligated balances of mulitiyear appropriations, and reimbursements. Similarly, of the $56.7 billion requested by the President for fiscal year 2013, $52.5 billion was requested in new appropriations--an increase of 3.3 percent from the fiscal year 2012 request. About $4.1 billion was expected to be available from other funding sources. (See table 3.) VA estimates the amount of funding from these other sources as part of its congressional budget justification supporting the President's request. As table 3 shows, the President's budget request assumes that VA will collect about $3.1 billion for fiscal year 2012 and $3.3 billion for fiscal year 2013. These funds are from health insurers of veterans who receive VA care for nonservice-connected conditions, as well as from other sources, such as veterans' copayments. VA has the authority to retain these collections in the MCCF and may use them without fiscal year limitation for providing VA medical care and services and for paying departmental expenses associated with the collections program. According to VA officials, VA reduced its $3.7 billion estimate for collections included in the fiscal year 2012 advance appropriations request by approximately $600 million for the fiscal year 2012 President's budget request. VA officials said that because of the depressed economy, fewer enrollees have comprehensive health insurance that VA can bill for third party payments for services that VA provides. In addition, even if enrollees do have health insurance that VA can bill, insurance companies are increasingly reducing payment amounts to levels stipulated in the insurers' own policies. Finally, because the enrollee population is aging, the percentage of enrollees who are Medicare beneficiaries is rising. As a result, VA is increasingly limited to billing enrollees' Medicare Supplement Insurance policies, because fewer enrollees have full health insurance policies that VA can bill. The President's budget request also assumes that VA will have unobligated balances left from fiscal years 2011 and 2012 totaling $1.1 billion to obligate in fiscal years 2012 and 2013. Specifically, VA proposes to carry over $600 million of the funds left from fiscal year 2011 to obligate in fiscal year 2012 and to carry over $500 million of the funds left from fiscal year 2012 to obligate in fiscal year 2013. VA assumes that Congress will provide some multiyear funding and thus, VA will be able to carry over any unobligated balances from one fiscal year to the next fiscal year. The fiscal year 2011 full-year continuing resolution provided that $1.2 billion would be available for 2 fiscal years, so VA has the ability to use unobligated balances in fiscal year 2012, including the $600 million proposed, if that amount remains available. If the fiscal year 2012 appropriations also provide funding that is available for 2 fiscal years, VA would be able to carry over the $500 million in unobligated balances, if available, from fiscal year 2012 into fiscal year 2013 as proposed. The President's budget request also assumes that VA will receive $343 million and $358 million in reimbursements for fiscal years 2012 and 2013, respectively, from services it provides to other government entities as well as prior year recoveries. For example, VA receives reimbursements for medical services it provides under sharing agreements with DOD, including to TRICARE beneficiaries. VA estimates that prior year recoveries will be approximately $3 million for each of the fiscal years 2012 and 2013. Of the $54.9 billion in total resources requested by the President for fiscal year 2012, $953 million represents contingency funding to be available under certain circumstances for health care services, supplies, and materials. This contingency funding would only be made available to VA through the Medical Services appropriations account if the Director of OMB concurs with the Secretary of VA's determination that economic conditions warrant the additional funds. The Secretary's determination would reflect an examination of national unemployment rates, the quantity of VA health care services enrollees use, and the amount of spending for VA's health care services. According to staff at OMB, any unused contingency funds would expire at the end of the fiscal year and could not be used to fund VA health care services in future years. OMB determined that the contingency funding request for fiscal year 2012 would be the amount projected by the EHCPM with some adjustment for OMB's economic assumptions. This amount was calculated by estimating the potential impact of a recent downturn in the economy on veterans' use of VA health care. VA conducted an analysis of unemployment rates and their effect on enrollees' use of VA's health care services. VA showed that enrollees under age 65 who lost their jobs, and therefore their access to employer-sponsored health insurance, relied more heavily on VA health care services. For the first time since developing the model, VA incorporated unemployment rates into estimates developed using the EHCPM to estimate the effect of the economic downturn on VA's needed resources. The President's fiscal year 2012 budget request did not include contingency funding for fiscal year 2013 advance appropriations because OMB was uncertain if the increased costs VA anticipated as a result of the economic downturn would materialize. OMB staff said they planned to monitor VA's fiscal year 2011 performance and would request contingency funding for fiscal year 2013 if needed, as part of the President's fiscal year 2013 budget request. Budgeting for VA health care, by its very nature, is complex because assumptions and imperfect information are used to project the likely demand and cost of the health care services VA expects to provide. The complexity is compounded because most of VA's projections anticipate events 3 to 4 years into the future. To address these challenges, VA uses an iterative, multilevel process to mitigate various levels of uncertainty not only about program needs, but also about presidential policies, congressional actions, and future economic conditions that may affect funding needs in the year for which the request is made. VA's continuing review of estimates in this iterative process does attempt to address some of these uncertainties, and as a result, VA's estimates may change to better inform the President's budget request. Essential to the usefulness of these estimates, as our prior work has shown, is obtaining sufficient data, making accurate calculations, and making realistic assumptions. However, the uncertainty inherent in budgeting always remains. The President's request for VA health care services for fiscal years 2012 and 2013 was based, in part, on reductions in VA's estimates for certain activities that were made using the EHCPM or other methods. The changes in VA's estimates reflected a decline in expected spending for these activities compared to what VA officials said would have been the case if the management and provision of health care services had continued unchanged. For example, VA estimated that various operational improvements would substantially reduce the costs for carrying out some activities, such as contracting and purchasing, in fiscal years 2012 and 2013. As a result of these anticipated changes, VA estimated that it would achieve savings that could be used for other purposes. However, in 2006, we reported on a prior round of VA's planned management efficiency savings and found that VA lacked a methodology for its assumptions about savings estimates. If the estimated savings for fiscal years 2012 and 2013 do not materialize and VA receives appropriations in the amount requested by the President, VA may have to make difficult tradeoffs to manage within the resources provided. We provided a draft of this report to the Secretary of VA and the Director of OMB for comment. VA had no comments on this report. OMB provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Veterans Affairs, the Director of the Office of Management and Budget, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Randall B. Williamson at (202) 512-7114 or at [email protected], or Denise M. Fantone at (202) 512-6806 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I. In addition to the contacts named above, James C. Musselwhite and Melissa Wolf, Assistant Directors; Rashmi Agarwal; Matthew Byer; Jennifer DeYoung; Amber G. Edwards; Krister Friday; Lauren Grossman; Tom Moscovitch; Lisa Motley; Leah Probst; and Steve Robblee made key contributions to this report. Veterans' Health Care: VA Uses a Projection Model to Develop Most of Its Health Care Budget Estimate to Inform the President's Budget Request. GAO-11-205. Washington, D.C.: January 31, 2011. VA Health Care: Spending for and Provision of Prosthetic Items. GAO-10-935. Washington, D.C.: September 30, 2010. VA Health Care: Reporting of Spending and Workload for Mental Health Services Could Be Improved. GAO-10-570. Washington, D.C.: May 28, 2010. Continuing Resolutions: Uncertainty Limited Management Options and Increased Workload in Selected Agencies. GAO-09-879. Washington, D.C.: September 24, 2009. VA Health Care: Challenges in Budget Formulation and Issues Surrounding the Proposal for Advance Appropriations. GAO-09-664T. Washington, D.C.: April 29, 2009. VA Health Care: Challenges in Budget Formulation and Execution. GAO-09-459T. Washington, D.C.: March 12, 2009. VA Health Care: Long-Term Care Strategic Planning and Budgeting Need Improvement. GAO-09-145. Washington, D.C.: January 23, 2009. VA Health Care: Budget Formulation and Reporting on Budget Execution Need Improvement. GAO-06-958. Washington, D.C.: September 20, 2006. VA Health Care: Preliminary Findings on the Department of Veterans Affairs Health Care Budget Formulation for Fiscal Years 2005 and 2006. GAO-06-430R. Washington, D.C.: February 6, 2006. Veterans Affairs: Limited Support for Reported Health Care Management Efficiency Savings. GAO-06-359R. Washington, D.C.: February 1, 2006. VA Long-Term Care: Trends and Planning Challenges in Providing Nursing Home Care to Veterans. GAO-06-333T. Washington, D.C.: January 9, 2006. VA Long-Term Care: More Accurate Measure of Home-Based Primary Care Workload Is Needed. GAO-04-913. Washington, D.C.: September 8, 2004.

The Veterans Health Care Budget Reform and Transparency Act of 2009 requires GAO to report whether the amounts for the Department of Veterans Affairs' (VA) health care services in the President's budget request are consistent with VA's budget estimates as projected by the Enrollee Health Care Projection Model (EHCPM) and other methodologies. Based on the information VA provided, this report describes (1) the key changes VA identified that were made to its budget estimate to develop the President's budget request for fiscal years 2012 and 2013 and (2) how various sources of funding for VA health care and other factors informed the President's budget request for fiscal years 2012 and 2013. GAO reviewed documents describing VA's estimates projected by the EHCPM and changes made to VA's budget estimate that affect all services, including estimates developed using other methodologies. GAO also reviewed the President's budget request, VA's congressional budget justification, and interviewed VA officials and staff from the Office of Management and Budget (OMB). VA officials identified changes made to its estimate of the resources needed to provide health care services to reflect policy decisions, savings from operational improvements, resource needs for initiatives, and other items to help develop the President's budget request for fiscal years 2012 and 2013. For example, VA's estimate for non-recurring maintenance to repair health care facilities was reduced by $904 million for fiscal year 2012 and $1.27 billion for fiscal year 2013, due to a policy decision to fund other initiatives and hold down the overall budget request for VA health care. VA's estimates were further reduced by $1.2 billion for fiscal year 2012 and $1.3 billion for fiscal year 2013 due to expected savings from operational improvements, such as proposed changes to purchasing and contracting. Other changes had a mixed impact on VA's budget estimate, according to VA officials; some of these changes increased the overall budget estimate, while other changes decreased the overall estimate. The President's request for appropriations for VA health care for fiscal years 2012 and 2013 relied on anticipated funding from various sources. Specifically, of the $54.9 billion in total resources requested for fiscal year 2012, $50.9 billion was requested in new appropriations. This request assumes the availability of $4.0 billion from collections, unobligated balances of multiyear appropriations, and reimbursements VA receives for services provided to other government entities. Of the $56.7 billion in total resources requested for fiscal year 2013, $52.5 billion was requested in new appropriations, and $4.1 billion was anticipated from other funding sources. The President's request for fiscal year 2012 also included a request for about $953 million in contingency funding to provide additional resources should a recent economic downturn result in increased use of VA health care. Contingency funding was not included in the advance appropriations request for fiscal year 2013. Budgeting for VA health care is inherently complex because it is based on assumptions and imperfect information used to project the likely demand and cost of the health care services VA expects to provide. The iterative and multilevel review of the budget estimates can address some of these uncertainties as new information becomes available about program needs, presidential policies, congressional actions, and future economic conditions. As a result, VA's estimates may change to better inform the President's budget request. The President's request for VA health care services for fiscal years 2012 and 2013 was based, in part, on reductions to VA's estimates of the resources required for certain activities and operational improvements. However, in 2006, GAO reported on a prior round of VA's planned management efficiency savings and found that VA lacked a methodology for its assumptions about savings estimates. If the estimated savings for fiscal years 2012 and 2013 do not materialize and VA receives appropriations in the amount requested by the President, VA may have to make difficult trade-offs to manage within the resources provided. GAO is not making recommendations in this report. GAO provided a draft of this report to the Secretary of VA and the Director of OMB for comment. VA had no comments on this report. OMB provided technical comments, which GAO incorporated as appropriate.

Since the 1960s, geostationary and polar-orbiting environmental satellites have been used by the United States to provide meteorological data for weather observation, research, and forecasting. NOAA's National Environmental Satellite Data and Information Service (NESDIS) is responsible for managing the civilian geostationary and polar-orbiting satellite systems as two separate programs, called GOES and the Polar Operational Environmental Satellites, respectively. Unlike polar-orbiting satellites, which constantly circle the earth in a relatively low polar orbit, geostationary satellites can maintain a constant view of the earth from a high orbit of about 22,300 miles in space. NOAA operates GOES as a two-satellite system that is primarily focused on the United States (see fig. 1). These satellites are uniquely positioned to provide timely environmental data to meteorologists and their audiences on the earth's atmosphere, its surface, cloud cover, and the space environment. They also observe the development of hazardous weather, such as hurricanes and severe thunderstorms, and track their movement and intensity to reduce or avoid major losses of property and life. Furthermore, the satellites' ability to provide broad, continuously updated coverage of atmospheric conditions over land and oceans is important to NOAA's weather forecasting operations. To provide continuous satellite coverage, NOAA acquires several satellites at a time as part of a series and launches new satellites every few years (see table 1). Three satellites--GOES-11, GOES-12, and GOES-13--are currently in orbit. Both GOES-11 and GOES-12 are operational satellites, while GOES-13 is in an on-orbit storage mode. It is a backup for the other two satellites should they experience any degradation in service. The others in the series, GOES-O and GOES-P, are planned for launch over the next few years. NOAA is also planning a future generation of satellites, known as the GOES-R series, which are planned for launch beginning in 2012. Each of the operational geostationary satellites continuously transmits raw environmental data to NOAA ground stations. The data are processed at these ground stations and transmitted back to the satellite for broadcast to primary weather services both in the United States and around the world, including the global research community. Raw and processed data are also distributed to users via ground stations through other communication channels, such as dedicated private communication lines and the Internet. Figure 2 depicts a generic data relay pattern from the geostationary satellites to the ground stations and commercial terminals. NOAA is planning for the GOES-R program to improve on the technology of prior GOES series, in terms of both system and instrument improvements. The system improvements are expected to fulfill more demanding user requirements and to provide more rapid information updates. Table 2 highlights key system-related improvements GOES-R is expected to make to the geostationary satellite program. The instruments on the GOES-R series are expected to increase the clarity and precision of the observed environmental data. NOAA plans to acquire five different types of instruments. The program office considered two of the instruments--the Advanced Baseline Imager and the Hyperspectral Environmental Suite--to be most critical because they would provide data for key weather products. Table 3 summarizes the originally planned instruments and their expected capabilities. The program management structure for the GOES-R program differs from past GOES programs. Prior to the GOES-R series, NOAA was responsible for program funding, procurement of the ground elements, and on-orbit operation of the satellites, while NASA was responsible for the procurement of the spacecraft, instruments, and launch services. NOAA officials stated that this approach limited the agency's insight and management involvement in the procurement of major elements of the system. Alternatively, under the GOES-R management structure, NOAA has responsibility for the procurement and operation of the overall system--including spacecraft, instruments, and launch services. NASA is responsible for the procurement of the individual instruments until they are transferred to the overall GOES-R system contractor for completion and integration onto the spacecraft. Additionally, to take advantage of NASA's acquisition experience and technical expertise, NOAA located the GOES-R program office at NASA's Goddard Space Flight Center. It also designated key program management positions to be filled with NASA personnel. These positions include the deputy system program director role for advanced instrument and technology infusion, the project manager for the flight portion of the system, and the deputy project manager for the ground and operations portion of the system. NOAA officials explained that they changed the management structure for the GOES-R program in order to streamline oversight and fiduciary responsibilities, but that they still plan to rely on NASA's expertise in space system acquisitions. Satellite programs are often technically complex and risky undertakings, and as a result, they often experience technical problems, cost overruns, and schedule delays. We and others have reported on a historical pattern of repeated missteps in the procurement of major satellite systems, including the National Polar-orbiting Operational Environmental Satellite System (NPOESS), the GOES I-M series, the Space Based Infrared System High Program (SBIRS-High), and the Advanced Extremely High Frequency Satellite System (AEHF). Table 4 lists key problems experienced with these programs. At the time of our review, NOAA was nearing the end of the preliminary design phase on its GOES-R program and planned to award a contract for the system's development in August 2007. However, because of concerns with potential cost growth, NOAA's plans for the GOES-R procurement are changing. To date, NOAA has issued contracts for the preliminary design of the overall GOES-R system to three vendors and expects to award a contract to one of these vendors to develop the system. In addition, to reduce the risks associated with developing new instruments, NASA has issued contracts for the early development of two instruments and for the preliminary designs of three other instruments. The agency plans to award these contracts and then turn them over to the contractor responsible for the overall GOES-R program. However, this approach is under review and NOAA may wait until the instruments are fully developed before turning them over to the system contractor. Table 5 provides a summary of the status of contracts for the GOES-R program. According to program documentation provided to the Office of Management and Budget in 2005, the official life cycle cost estimate for GOES-R was approximately $6.2 billion (see table 6). However, program officials reported that this estimate was over 2 years old and under review. At the time of our review, NOAA was planning to launch the first GOES-R series satellite in September 2012. The development of the schedule for launching the satellites was driven by a requirement that the satellites be available to back up the last remaining GOES satellites (GOES-O and GOES-P) should anything go wrong during the planned launches of these satellites. Table 7 provides a summary of the planned launch schedule for the originally planned GOES-R series. However, NOAA's plans for the GOES-R procurement are changing because of concerns with potential cost growth. Given its experiences with cost growth on the NPOESS acquisition, NOAA asked program officials to recalculate the total cost of the estimated $6.2 billion GOES-R program. In May 2006, program officials estimated that the life cycle cost could reach $11.4 billion. The agency then requested that the program identify options for reducing the scope of requirements for the satellite series. Program officials reported that there were over 10 viable options under consideration, including options for removing one or more of the planned instruments. The program office also reevaluated its planned acquisition schedule based on the potential program options. Specifically, program officials stated that if there was a decision to make a major change in system requirements, they would likely extend the preliminary design phase, delay the decision to proceed into the development and production phase, and delay the contract award date. At the time of our review, NOAA officials estimated that a decision on the future scope and direction of the program could be made by the end of September 2006. In mid-September 2006, NOAA officials reported that a decision on the future scope and direction of GOES-R had been made--and involved a reduction in the number of satellites and in planned program capabilities, a revised life cycle cost estimate, and the delay of key programmatic milestones. Specifically, NOAA reduced the minimum number of satellites to two. In addition, plans for developing the Hyperspectral Environmental Suite--which was once considered a critical instrument by the agency--were cancelled. Instead, the program office is exploring options that will ensure continuity of sounding data currently provided by the current GOES series. NOAA officials reported that the cost of the restructured program is not known, but some anticipate it will be close to the original program estimate of $6.2 billion. The contract award for the GOES-R system has been pushed out to May 2008. Finally, the planned launch date of the first satellite in the GOES-R series has been delayed until December 2014. NOAA has taken steps to apply lessons learned from problems encountered on other satellite programs to the GOES-R procurement. Key lessons include (1) establishing realistic cost and schedule estimates, (2) ensuring sufficient technical readiness of the system's components prior to key decisions, (3) providing sufficient management at government and contractor levels, and (4) performing adequate senior executive oversight to ensure mission success. NOAA has established plans designed to mitigate the problems faced in past acquisitions; however, many activities remain to fully address these lessons. Until it completes these activities, NOAA faces an increased risk that the GOES-R program will repeat the increased cost, schedule delays, and performance shortfalls that have plagued past procurements. We and others have reported that space system acquisitions are strongly biased to produce unrealistically low cost and schedule estimates in the acquisition process. Our past work on military space acquisitions has indicated that during program formulation, the competition to win funding is intense and has led program sponsors to minimize their program cost estimates. NOAA programs face similar unrealistic estimates. For example, the total development cost of the GOES I-M acquisition was over three times greater than planned, escalating from $640 million to $2 billion. Additionally, the delivery of the first satellite was delayed by 5 years. NOAA has several efforts under way to improve the reliability of its cost and schedule estimates for the GOES-R program. NOAA's Chief Financial Officer has contracted with a cost-estimating firm to complete an independent cost estimate, while the GOES-R program office has hired a support contractor to assist with its internal program cost estimating. The program office is re-assessing its estimates based on preliminary information from the three vendors contracted to develop preliminary designs for the overall GOES-R system. Once the program office and independent cost estimates are completed, program officials intend to compare them and to develop a revised programmatic cost estimate that will be used in its decision on whether to proceed into system development and production. In addition, NOAA has planned for an independent review team--consisting of former senior industry and government space acquisition experts--to provide an assessment of the program office and independent cost estimates for this decision milestone. To improve its schedule reliability, the program office is currently conducting a schedule risk analysis in order to estimate the amount of adequate reserve funds and schedule margin needed to deal with unexpected problems and setbacks. Finally, the NOAA Observing System Council submitted a prioritized list of GOES-R system requirements to the Commerce Undersecretary for approval. This list is expected to allow the program office to act quickly in deleting lower priority requirements in the event of severe technical challenges or shifting funding streams. While NOAA acknowledges the need to establish realistic cost and schedule estimates, several hurdles remain. As discussed earlier, the agency was considering--during the time of our review--reducing the requirements for the GOES-R program to mitigate the increased cost estimates for the program. Prior to this decision, the agency's efforts to establish realistic cost estimates could not be fully effective in addressing this lesson. In addition, NOAA suspended the work being performed by its independent cost estimator. Now that the program scope and direction is being further defined, it will be important for the agency to restart this work. Further, the agency has not yet developed a process to evaluate and reconcile the independent and program office cost estimates once final program decisions are made. Without this process, the agency may lack the objectivity necessary to counter the optimism of program sponsors and is more likely to move forward with an unreliable estimate. Until it completes this activity, NOAA faces an increased risk that the GOES-R program will repeat the cost increases and schedule delays that have plagued past procurements. Space programs often experience unforeseen technical problems in the development of critical components as a result of having insufficient knowledge of the components and their supporting technologies prior to key decision points. One key decision point is when an agency decides on whether the component is sufficiently ready to proceed from a preliminary study phase into a development phase; this decision point results in the award of the development contract. Another key decision point occurs during the development phase when an agency decides whether the component is ready to proceed from design into production (also called the critical design review). Without sufficient technical readiness at these milestones, agencies could proceed into development contracts on components that are not well understood and enter into the production phase of development with technologies that are not yet mature. In 1997, NOAA began preliminary studies on technologies that could be used on the GOES-R instruments. These studies target existing technologies and assessed how they could be expanded for GOES-R. The program office is also conducting detailed trade-off studies on the integrated system to improve its ability to make decisions that balance performance, affordability, risk, and schedule. For instance, the program office is analyzing the potential architectures for the GOES-R constellation of satellites--the quantity and configuration of satellites, including how the instruments will be distributed over these satellites. These studies are expected to allow for a more mature definition of the system specifications. NOAA has also developed plans to have an independent review team assess project status on an annual basis once the overall system contract has been awarded. In particular, this team will review technical, programmatic, and management areas; identify any outstanding risks; and recommend corrective actions. This measure is designed to ensure that sufficient technical readiness has been reached prior to the critical design review milestone. The program office's ongoing studies and plans are expected to provide greater insight into the technical requirements for key system components and to mitigate the risk of unforeseen problems in later acquisition phases. However, the progress currently being made on a key instrument currently under development--the Advanced Baseline Imager--has experienced technical problems and could be an indication of more problems to come in the future. These problems relate to, among other things, the design complexity of the instrument's detectors and electronics. As a result, the contractor is experiencing negative cost and schedule performance trends. As of May 2006, the contractor incurred a total cost overrun of almost $6 million with the instrument's development only 28 percent complete. In addition, from June 2005 to May 2006, it was unable to complete approximately $3.3 million worth of work. Unless risk mitigation actions are aggressively pursued to reverse these trends, we project the cost overrun at completion to be about $23 million. While NOAA expects to make a decision on whether to move the instrument into production (a milestone called the critical design review) in January 2007, the contractor's current performance raises questions as to whether the instrument designs will be sufficiently mature by that time. Further, the agency does not have a process to validate the level of technical maturity achieved on this instrument or to determine whether the contractor has implemented sound management and process engineering to ensure that the appropriate level of technical readiness can be achieved prior to the decision milestone. Until it does so, NOAA risks making a poor decision based on inaccurate or insufficient information--which could lead to unforeseen technical problems in the development of this instrument. In the past, we have reported on poor performance in the management of satellite acquisitions. The key drivers of poor management included inadequate systems engineering and earned value management capabilities, unsuitable allocation of contract award fees, inadequate levels of management reserve, and inefficient decision-making and reporting structure within the program office. NOAA has taken numerous steps to restructure its management approach on the GOES-R procurement in an effort to improve performance and to avoid past mistakes. These steps include: The program office revised its staffing profile to provide for government staff to be located on-site at prime contractor and key subcontractor locations. The program office plans to increase the number of resident systems engineers from 31 to 54 to provide adequate government oversight of the contractor's system engineering, including verification and validation of engineering designs at key decision points (such as the critical design review milestone). The program office has better defined the role and responsibilities of the program scientist, the individual who is expected to maintain an independent voice with regard to scientific matters and advise the program manager on related technical issues and risks. The program office also intends to add three resident specialists in earned value management to monitor contractor cost and schedule performance. NOAA has work under way to develop the GOES-R contract award fee structure and the award fee review board that is consistent with our recent findings, the Commerce Inspector General's findings, and other best practices, such as designating a non-program executive as the fee-determining official to ensure objectivity in the allocation of award fees. NOAA and NASA have implemented a more integrated management approach that is designed to draw on NASA's expertise in satellite acquisitions and increase NOAA's involvement on all major components of the acquisition. The program office reported that it intended to establish a management reserve of 25 percent consistent with the recommendations of the Defense Science Board Report on Acquisition of National Security Space Programs. While these steps should provide more robust government oversight and independent analysis capabilities, more work remains to be done to fully address this lesson. Specifically, the program office has not determined the appropriate level of resources it needs to adequately track and oversee the program and the planned addition of three earned value management specialists may not be enough as acquisition activities increase. By contrast, after its recent problems and in response to the independent review team findings, NPOESS program officials plan to add 10 program staff dedicated to earned value, cost, and schedule analysis. An insufficient level of established capabilities in earned value management places the GOES-R program office at risk of making poor decisions based on inaccurate and potentially misleading information. Finally, while NOAA officials believe that assuming sole responsibility for the acquisition of GOES-R will improve their ability to manage the program effectively, this change also elevates NOAA's risk for mission success. Specifically, NOAA is taking on its first major system acquisition and an increased risk due to its lack of experience. Until it fully addresses the lesson of ensuring an appropriate level of resources to oversee its contractor, NOAA faces an increased risk that the GOES-R program will repeat the management and contractor performance shortfalls that have plagued past procurements. We and others have reported on NOAA's significant deficiencies in its senior executive oversight of NPOESS. The lack of timely decisions and regular involvement of senior executive management was a critical factor in the program's rapid cost and schedule growth. NOAA formed its program management council in response to the lack of adequate senior executive oversight on NPOESS. In particular, this council is expected to provide regular reviews and assessments of selected NOAA programs and projects--the first of which is the GOES-R program. The council is headed by the NOAA Deputy Undersecretary and includes senior officials from Commerce and NASA. The council is expected to hold meetings to discuss GOES-R program status on a monthly basis and to approve the program's entry into subsequent acquisition phases at key decision milestones--including contract award and critical design reviews, among others. Since its establishment in January 2006, the council has met regularly and has established a mechanism for tracking action items to closure. The establishment of the NOAA Program Management Council is a positive action that should support the agency's senior-level governance of the GOES-R program. In moving forward, it is important that this council continue to meet on a regular basis and exercise diligence in questioning the data presented to it and making difficult decisions. In particular, it will be essential that the results of all preliminary studies and independent assessments on technical maturity of the system and its components be reviewed by this council so that an informed decision can be made about the level of technical complexity it is taking on when proceeding past these key decision milestones. In light of the recent uncertainty regarding the future scope and cost of the GOES-R program, the council's governance will be critical in making those difficult decisions in a timely manner. To improve NOAA's ability to effectively manage the GOES-R procurement, in our accompanying report, we recommended that the Secretary direct its NOAA Program Management Council to take the following three actions: Once the scope of the program has been finalized, establish a process for objectively evaluating and reconciling the government and independent life cycle cost estimates. Perform a comprehensive review of the Advanced Baseline Imager, using system engineering experts, to determine the level of technical maturity achieved on the instrument, to assess whether the contractor has implemented sound management and process engineering, and to assert that the technology is sufficiently mature before moving the instrument into production. Seek assistance from an independent review team to determine the appropriate level of resources needed at the program office to adequately track and oversee the contractor's earned value management. Among other things, the program office should be able to perform a comprehensive integrated baseline review after system development contract award, provide surveillance of contractor earned value management systems, and perform project scheduling analyses and cost estimates. In written comments, Commerce agreed with our recommendations and provided information on its plans to implement our recommendations. In particular, Commerce intends to establish a process for evaluating and reconciling the various cost estimates and to analyze this process and the results with an independent review team comprised of recognized satellite acquisition experts. The agency is also planning to have this independent review team provide assessments of the Advanced Baseline Imager's technical maturity and the adequacy of the program management's staffing plans. In summary, the procurement of the next series of geostationary environmental satellites--called the GOES-R series--is at a critical juncture. Recent concerns about the potential for cost growth on the GOES-R procurement have led the agency to reduce the scope of requirements for the satellite series. According to NOAA officials, the current plans call for acquiring 2 satellites and moving away from a technically complex new instrument in favor of existing technologies. While reducing the technical complexity of the system prior to contract award and defining an affordable program are sound business practices, it will be important for NOAA to balance these actions with the agencies' long term need for improving geostationary satellites over time. While NOAA is positioning itself to improve the acquisition of this system by incorporating the lessons learned from other satellite procurements including the need to establish realistic cost estimates, ensure sufficient government and contractor management, and obtain effective executive oversight, further steps remain to fully address selected lessons and thereby mitigate program risks. Specifically, NOAA has not yet developed a process to evaluate and reconcile the independent and government cost estimates. In addition, NOAA has not yet determined how it will ensure that a sufficient level of technical maturity will be achieved in time for an upcoming decision milestone or determined the appropriate level of resources it needs to adequately track and oversee the program using earned value management. Moreover, problems that are frequently experienced on major satellite acquisitions, including insufficient technical maturity, overly aggressive schedules, inadequate systems engineering capabilities, and insufficient management reserve will need to be closely monitored throughout this critical acquisition's life cycle. To NOAA's credit, it has begun to develop plans for implementing our recommendations. These plans include, among other things, establishing a process to evaluate and reconcile the various cost estimates and obtaining assessments from an independent review team on the technical maturity of a key instrument in development and the adequacy of the program management's staffing plans. However, until it addresses these lessons, NOAA faces an increased risk that the GOES-R program will repeat the increased cost, schedule delays, and performance shortfalls that have plagued past procurements. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or members of the committee may have at this time. If you have any questions on matters discussed in this testimony, please contact me at (202) 512-9286 or by e-mail at [email protected]. Other key contributors to this testimony include Carol Cha, Neil Doherty, Nancy Glover, Kush Malhotra, Colleen Phillips, and Karen Richey. 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 National Oceanic and Atmospheric Administration (NOAA) plans to procure the next generation of geostationary operational environmental satellites, called the Geostationary Operational Environmental Satellites-R series (GOES-R). This new series is considered critical to the United States' ability to maintain the continuity of data required for weather forecasting through the year 2028. GAO was asked to summarize and update its report previously issued to the Subcommittee on Environment, Technology, and Standards--Geostationary Operational Environmental Satellites: Steps Remain in Incorporating Lessons Learned from Other Satellite Programs, GAO-06-993 (Washington, D.C.: Sept. 6, 2006). This report (1) determines the status of and plans for the GOES-R series procurement, and (2) identifies and evaluates the actions that the program management team is taking to ensure that past problems experienced in procuring other satellite programs are not repeated. At the time of our review, NOAA was nearing the end of the preliminary design phase of its GOES-R system--which was estimated to cost $6.2 billion and scheduled to have the first satellite ready for launch in 2012. It expected to award a contract in August 2007 to develop this system. However, recent analyses of the GOES-R program cost--which in May 2006 the program office estimated could reach $11.4 billion--have led the agency to consider reducing the scope of requirements for the satellite series. Since our report was issued, NOAA officials told GAO that the agency has made a decision to reduce the scope of the program to a minimum of two satellites and to reduce the complexity of the program by canceling a technically complex instrument. NOAA has taken steps to implement lessons learned from past satellite programs, but more remains to be done. Prior satellite programs--including a prior GOES series, a polar-orbiting environmental satellite series, and various military satellite programs--often experienced technical challenges, cost overruns, and schedule delays. Key lessons from these programs include the need to (1) establish realistic cost and schedule estimates, (2) ensure sufficient technical readiness of the system's components prior to key decisions, (3) provide sufficient management at government and contractor levels, and (4) perform adequate senior executive oversight to ensure mission success. NOAA has established plans to address these lessons by conducting independent cost estimates, performing preliminary studies of key technologies, placing resident government offices at key contractor locations, and establishing a senior executive oversight committee. However, many steps remain to fully address these lessons. Until it completes these activities, NOAA faces an increased risk that the GOES-R program will repeat the increased cost, schedule delays, and performance shortfalls that have plagued past procurements.

We identified 11 new areas in which we found evidence of fragmentation, overlap, or duplication and present 19 actions to executive branch agencies and Congress to address these issues. As described in table 1, these areas span a wide range of federal functions or missions. We consider programs or activities to be fragmented when more than one federal agency (or more than one organization within an agency) is involved in the same broad area of national need, which may result in inefficiencies in how the government delivers services. We identified fragmentation in multiple programs we reviewed. For example, the Department of Defense (DOD) does not have a consolidated agency-wide strategy to contract for health care professionals, resulting in a contracting approach that is largely fragmented. Although some of the military departments have attempted to consolidate their health care staffing requirements through joint-use contracts, such contracts only accounted for approximately 8 percent of the $1.14 billion in obligations for health care professionals in fiscal year 2011. Moreover, in May 2013, we identified several instances in which numerous task orders were awarded by a single military department for the same type of health care professional in the same area or facility. For example, we identified 24 separate task orders for contracted medical assistants at the same military treatment facility. By not consolidating its requirements, this facility missed the opportunity to achieve potential cost savings and other efficiencies. To reduce fragmentation and achieve greater efficiencies, DOD should develop a consolidated agency-wide strategy to contract for health care professionals. Fragmentation can also be a harbinger for overlap or duplication. Overlap occurs when multiple agencies or programs have similar goals, engage in similar activities or strategies to achieve them, or target similar beneficiaries. We found overlap among federal programs or initiatives in a variety of areas, such as overlapping benefits between the Disability Insurance and Unemployment Insurance programs. In July 2012, we reported that 117,000 individuals received concurrent cash benefit payments in fiscal year 2010 from the Disability Insurance and Unemployment Insurance programs totaling more than $850 million because current law does not preclude the receipt of overlapping benefits. Individuals may be eligible for benefit payments from both Disability Insurance and Unemployment Insurance due to differences in the eligibility requirements; however, in such cases, the federal government is replacing a portion of lost earnings not once, but twice. The President's fiscal year 2015 budget submission proposes to eliminate these overlapping benefits, and during the 113th Congress, bills have been introduced in both the House of Representatives and the Senate containing language to reduce Disability Insurance payments to individuals for the months they collect Unemployment Insurance benefits. According to the Congressional Budget Office (CBO), this action could save $1.2 billion over 10 years in the Social Security Disability Insurance program. Congress should consider passing legislation to offset Disability Insurance benefit payments for any Unemployment Insurance benefit payments received in the same period. In other areas of our work, we found evidence of duplication, which occurs when two or more agencies or programs are engaged in the same activities or provide the same services to the same beneficiaries. Examples of duplicative, or potentially duplicative, federal efforts include DOD's use of dedicated satellite control operations. We reported in April 2013 that DOD has increasingly deployed dedicated satellite control operations networks as opposed to shared networks that support multiple kinds of satellites. For example, at one Air Force base in 2013, eight separate control centers operated 10 satellite programs. Dedicated networks can offer some benefits to programs, but they can also be more costly to maintain and have led to a fragmented, and potentially duplicative, approach that requires more infrastructure and personnel to manage when compared with shared networks. While opportunities exist to improve DOD satellite control operations, we identified certain barriers that hinder DOD's ability to increase the use of shared networks, such as the inability to quantify all spending on satellite ground control operations and the absence of DOD-wide guidance or a plan that supports the implementation of alternative methods for performing satellite control operations. These barriers also have hindered DOD's ability to achieve optimal satellite control systems that would result in cost savings in this area. To address the duplication and inefficiencies that arise from dedicated satellite control operations networks, DOD should take actions to improve its ability to identify and then assess the appropriateness of a shared versus dedicated satellite control system. In addition to areas of fragmentation, overlap, and duplication, our 2014 report identified 15 new areas where opportunities exist either to reduce the cost of government operations or to enhance revenue collections for the Treasury and suggest 45 actions that the executive branch and Congress can take to address these issues. These opportunities for executive branch or congressional action exist in a wide range of federal government missions (see table 2). For example, to achieve cost savings, Congress may wish to consider rescinding all or part of the remaining credit subsidy appropriations to the Advanced Technology Vehicles Manufacturing (ATVM) loan program, unless the Department of Energy (DOE) can demonstrate sufficient demand for new ATVM loans and viable applications. We reported in March 2013 that DOE last issued a loan under this program in March 2011 and was not actively considering any applications for the remaining $4.2 billion in credit subsidy appropriations under the ATVM loan program. Also, most applicants and manufacturers we had spoken to indicated that the costs of participating outweigh the benefits to their companies and that problems with other DOE programs have tarnished the ATVM loan program, which may have led to a deficit of applicants. Since our March 2013 report, DOE has received one application seeking approximately $200 million. DOE recently stated that it has begun new outreach efforts to potential applicants that will increase awareness and interest in the program and lead to additional applications in 2014. However, DOE has not further demonstrated a demand for ATVM loans, such as new applications that meet all the program eligibility requirements and involve amounts sufficient to justify retaining the remaining credit subsidy appropriations, nor has it explained how it plans to address challenges cited by previous applicants including a burdensome review process. Determining whether program funds will be used is important, particularly in a constrained fiscal environment, as unused appropriations could be rescinded or directed toward other government priorities. We also identified multiple opportunities for the government to increase revenue collections. In particular, the federal government could increase tax revenue collections by hundreds of millions of dollars over a 5-year period by denying certain privileges or payments to individuals with delinquent federal tax debt. For example, Congress could enable or require the Secretary of State to screen and prevent individuals who owe federal taxes from receiving passports. We found that in fiscal year 2008, passports were issued to about 16 million individuals; of these, over 1 percent collectively owed over $5.8 billion in unpaid federal taxes as of September 30, 2008. According to a 2012 CBO estimate, the federal government can save about $500 million over a 5-year period on the revocation or denial of passports in case of certain federal tax delinquencies. In addition to the new actions identified for this year's annual report, we have continued to monitor the progress that executive branch agencies and Congress have made in addressing the issues we identified in our last three annual reports. We evaluated progress by determining an overall assessment rating for each area and an individual assessment rating for each action within an area. We found that the executive branch agencies and Congress have generally made progress in addressing the 162 areas we previously identified. As of March 6, 2014, the date we completed our audit work, 19 percent of these areas were addressed, 62 percent were partially addressed, and 15 percent were not addressed (see fig.1). Within these areas, we presented about 380 actions that the executive branch agencies and Congress could take to address the issues identified. As of March 6, 2014, 32 percent of these actions were addressed, 44 percent were partially addressed and 19 percent were not addressed. Congress and executive branch agencies have made progress toward addressing our identified actions, as shown in figure 2. In particular, an additional 58 actions have been assessed as addressed over the past year. These addressed actions include 19 actions identified in 2011, 21 actions identified in 2012, and 18 actions identified in 2013. The following examples illustrate the progress that has been made over the past year: Farm program payments: In our 2011 annual report, we stated that Congress could save up to $5 billion annually by reducing or eliminating direct payments. Direct payments are fixed annual payments to farmers based on a farm's history of crop production. Farmers received them regardless of whether they grew crops and even in years of record income. The Agricultural Act of 2014 eliminated direct payments and should save approximately $4.9 billion annually from fiscal year 2015 through fiscal year 2023, according to CBO. Passenger aviation security fees: In our 2012 annual report, we presented options for adjusting the Transportation Security Administration's (TSA) passenger security fee--a uniform fee on passengers of U.S. and foreign air carriers originating at airports in the United States--to offset billions of dollars in civil aviation security costs. The Bipartisan Budget Act of 2013, enacted on December 26, 2013, modifies the passenger security fee from its current per enplanement structure ($2.50 per enplanement with a maximum one- way-trip fee of $5.00) to a structure that increases the passenger security fee to a flat $5.60 per one-way trip, effective July 1, 2014. Pursuant to the act, collections under this modified fee structure will contribute to deficit reduction as well as to offsetting TSA's aviation security costs. Specifically, the act identifies $12.6 billion in fee collections that, over a 10-year period beginning in fiscal year 2014 and continuing through fiscal year 2023, will contribute to deficit reduction. Fees collected beyond those identified for deficit reduction are available, consistent with existing law, to offset TSA's aviation security costs. According to the House of Representatives and Senate Committees on the Budget, and notwithstanding amounts dedicated for deficit reduction, collections under the modified fee structure will offset about 43 percent of aviation security costs, compared with the approximately 30 percent currently offset under the existing fee structure. Combat uniforms: In our 2013 annual report, we noted that DOD employed a fragmented approach for acquiring combat uniforms and could improve efficiency, better protect servicemembers, and realize cost savings through increased collaboration among the military services. Over the past year, DOD and Congress addressed all three actions that we identified. In September 2013, DOD developed and issued guidance on joint criteria that will help to ensure that future service-specific uniforms will provide equivalent levels of performance and protection. In December 2013, a provision in the National Defense Authorization Act for Fiscal Year 2014 established as policy that the Secretary of Defense shall eliminate the development and fielding of service-specific combat and camouflage utility uniforms in order to adopt and field common uniforms for specific environments to be used by all members of the armed forces. Subject to certain exceptions, the provision also prohibits the military departments from adopting new pattern designs or uniform fabrics unless they will be adopted by all services or the uniform is already in use by another service. We estimate that executive branch and congressional efforts to address these and other actions from fiscal year 2011 through fiscal year 2013 have resulted in over $10 billion in realized cost savings to date, and projections of these efforts have estimated that billions of dollars more in savings will accrue over the next 10 years. Although Congress and executive branch agencies have made notable progress toward addressing the actions we have identified, further steps are needed to fully address the remaining actions, as shown in table 3. More specifically, over 60 percent of actions directed to Congress and executive branch agencies identified in 2011, 2012, and 2013 remain partially addressed or not addressed. Sustaining momentum and making significant progress on our suggested actions for reducing, eliminating, or better managing fragmentation, overlap, or duplication or achieving other potential financial benefits cannot occur without demonstrated commitment by executive branch leaders and continued oversight by Congress. A number of the issues that we have identified are complex, and implementing many of the actions will take time and sustained leadership. As our work has shown, committed leadership is needed to overcome the many barriers to working across agency boundaries, such as agencies' concerns about protecting jurisdiction over missions and control over resources or incompatible procedures, processes, data, and computer systems. Without increased or renewed leadership focus, agencies may miss opportunities to improve the efficiency and effectiveness of their programs and save taxpayers' dollars. As we have previously reported, addressing the issues identified in our annual reports could lead to tens of billions of dollars of savings. Table 4 highlights selected opportunities that could result in cost savings or enhanced revenues. Even with sustained leadership, addressing fragmentation, overlap, and duplication within the federal government is challenging because it may require agencies and Congress to re-examine within and across various mission areas the fundamental structure, operation, funding, and performance of a number of long-standing federal programs or activities with entrenched constituencies. As we have previously reported, these challenges are compounded by a lack of good data. In particular, we have found that the lack of a comprehensive list of federal programs and reliable budget information makes it difficult to identify, assess, and address potential fragmentation, overlap, and duplication. Currently, no comprehensive list of federal programs exists, nor is there a common definition for what constitutes a federal program. We have also reported instances where agencies could not isolate budgetary information for some programs because the data were aggregated at higher levels. For example, in 2012 we reported that agencies were not able to provide complete and reliable federal funding information on many of the 94 nonfederal sector green building initiatives. According to agency officials, many of the initiatives are part of broader programs, and the agencies do not track green building funds separately from the funds for other activities. Without knowing the scope of programs or the full cost of implementing them, it is difficult for executive branch agencies or Congress to gauge the magnitude of the federal commitment to a particular area of activity or the extent to which associated federal programs are effectively and efficiently achieving shared goals. Moreover, the lack of reliable, detailed budget information makes it difficult to estimate the cost savings that could be achieved should Congress or agencies take certain actions to address identified fragmentation, overlap, and duplication. Absent this information, Congress and agencies cannot make fully informed decisions on how federal resources should be allocated and the potential budget trade-offs. In addition, we have called attention to the need for improved and regular performance information. The regular collection and review of performance information, both within and among federal agencies, could help executive branch agencies and Congress determine whether the return on federal investment is adequate and make informed decisions about future resource allocations. However, as we previously noted, our annual reports on fragmentation, overlap, and duplication highlight several instances in which executive branch agencies do not collect necessary performance data. Effective implementation of the framework originally put into place by the Government Performance and Results Act of 1993 (GPRA) and significantly enhanced by the GPRA Modernization Act of 2010 (GPRAMA) could help clarify desired outcomes, address program performance spanning multiple organizations, and facilitate future actions to reduce, eliminate, or better manage fragmentation, overlap, and duplication. In particular, GPRAMA establishes a framework aimed at taking a more crosscutting and integrated approach to focusing on results and improving government performance. The crosscutting approach required by the act will provide a much needed basis for more fully integrating a wide array of federal activities as well as a cohesive perspective on the long-term goals of the federal government that is focused on priority policy areas. It could also be a valuable tool for re- examining existing programs government-wide and for considering proposals for new programs. However, the usefulness of these requirements hinges on the effective implementation of the act's provisions. In our June 2013 review of initial implementation, we reported that the executive branch needed to more fully implement GPRAMA to address pressing governance challenges, such as addressing fragmentation, overlap, and duplication. Moreover, our ongoing work continues to find opportunities to improve implementation of the act. For example, GPRAMA requires the Office of Management and Budget (OMB) to develop an inventory of federal programs. OMB directed 24 large federal agencies to develop and publish inventories of their programs in May 2013. However, our preliminary review of these initial inventories identified concerns about the usefulness of the information being developed and the extent to which it might be able to assist executive branch and congressional efforts to identify and address fragmentation, overlap, and duplication. For example, OMB's guidance for developing the inventories provided agencies with flexibility to define their programs by such factors as outcomes, customers, products/services, organizational structure, and budget structure. As a result, agencies took various approaches to define their programs. Many used their budget structure while others used different approaches, such as identifying programs by related outcomes or customer focus. The variation in definitions across agencies limits comparability among similar programs. Proposed legislation could help address some of the data limitations we have identified. For example, the proposed Digital Accountability and Transparency Act is intended to improve the accountability and transparency of federal spending data (1) by establishing government- wide financial data standards so that data are comparable across agencies and (2) by holding agencies more accountable for the quality of the information disclosed. Such increased transparency provides opportunities for improving the efficiency and effectiveness of federal spending and improving oversight to prevent and detect fraud, waste, and abuse of federal funds. In conclusion, identifying and addressing instances of fragmentation, overlap, and duplication is challenging. While some progress has been made, more work remains. We plan to conduct further analysis to look for additional or emerging instances of fragmentation, overlap, and duplication and opportunities for cost savings or revenue enhancement. Likewise, we will continue to monitor developments in the areas we have already identified in this series. We stand ready to assist this and other committees in further analyzing the issues we have identified and evaluating potential solutions. Chairman Issa, Ranking Member Cummings, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer questions. For further information on this testimony or our April 8, 2014, report, please contact Orice Williams Brown, Managing Director, Financial Markets and Community Investment, who may be reached at (202) 512- 8678 or [email protected], and A. Nicole Clowers, Director, Financial Markets and Community Investment, who may be reached at (202) 512- 8678 or [email protected]. Contact points for the individual areas listed in our 2014 annual report can be found at the end of each area at http://www.gao.gov/products/GAO-14-343SP. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

As the fiscal pressures facing the government continue, so too does the need for executive branch agencies and Congress to improve the efficiency and effectiveness of government programs and activities. Opportunities to take action exist in areas where federal programs or activities are fragmented, overlapping, or duplicative. To highlight these challenges and to inform government decision makers on actions that could be taken to address them, GAO is statutorily required to identify and report annually to Congress on federal programs, agencies, offices, and initiatives, both within departments and government-wide, which have duplicative goals or activities. GAO has also identified additional opportunities to achieve greater efficiency and effectiveness by means of cost savings or enhanced revenue collection. This statement discusses the (1) new areas identified in GAO's 2014 annual report; (2) status of actions taken by the administration and Congress to address the 162 areas previously identified in GAO's 2011, 2012 and 2013 annual reports; and (3) opportunities to address the issues GAO identified. To identify what actions exist to address these issues and take advantage of opportunities for cost savings and enhanced revenues, GAO reviewed and updated prior work and recommendations for consideration. GAO's 2014 annual report identifies 64 new actions that executive branch agencies and Congress could take to improve the efficiency and effectiveness of 26 areas of government. GAO identifies 11 new areas in which there is evidence of fragmentation, overlap, or duplication. For example, under current law, individuals are allowed to receive concurrent payments from the Disability Insurance and Unemployment programs. Eliminating the overlap in these payments could save the government about $1.2 billion over the next 10 years. GAO also identifies 15 new areas where opportunities exist either to reduce the cost of government operations or enhance revenue collections. For example, Congress could rescind all or part of the remaining $4.2 billion in credit subsidies for the Advanced Technology Vehicles Manufacturing Loan program unless the Department of Energy demonstrates sufficient demand for this funding. The executive branch and Congress have made progress in addressing the approximately 380 actions across 162 areas that GAO identified in its past annual reports. As of March 6, 2014, the date GAO completed its progress update audit work, nearly 20 percent of these areas were addressed, over 60 percent were partially addressed, and about 15 percent were not addressed, as shown in the figure below. Executive branch and congressional efforts to address these and other actions over the past 3 years have resulted in over $10 billion in cost savings with billions of dollars more in cost savings anticipated in future years. Better data and a greater focus on outcomes are essential to improving the efficiency and effectiveness of federal efforts. Currently, there is not a comprehensive list of all federal programs and agencies often lack reliable budgetary and performance information about their own programs. Without knowing the scope, cost, or performance of programs, it is difficult for executive branch agencies or Congress to gauge the magnitude of the federal commitment to a particular area of activity or the extent to which associated federal programs are effectively and efficiently achieving shared goals.

The Customs Aviation Program was established in 1969 to reduce the level of smuggling, increase smugglers' risk and cost, and improve detection and apprehension of drug smuggling by aircraft, boats, and vehicles. The Customs Aviation Program gets its authority from a number of sources. The Office of National Drug Control Policy (ONDCP) has designated the Customs Service as the lead federal agency responsible for interdicting the movement of illicit drugs into the United States. In addition, 19 U.S.C. 1590 also provides the specific legal authority under which Customs enforces aviation smuggling laws. Congress provided specific language regarding the operations of the Customs Air Program beginning with Customs fiscal year 1996 appropriation, contained in P.L. 104-52. The provision stated that the program's operations include, among other things, "the interdiction of narcotics and other goods; the provision of support to Customs and other Federal, State, and local agencies in the enforcement or administration of laws enforced by the Customs Service; and, at the discretion of the Commissioner of Customs, the provision of assistance to Federal, State, and local agencies in other law enforcement and emergency humanitarian efforts." The Customs Aviation Program is headed by the Executive Director, Air Interdiction Division, located in Washington, D.C. The Executive Director reports to the Assistant Commissioner, Customs Office of Investigations. Its field headquarters, the Customs National Aviation Center (CNAC), located in Oklahoma City, OK, provides operational, administrative, and logistical control and accountability over all Customs aviation resources. In addition, the aviation program also operates its Domestic Air Interdiction Coordination Center (DAICC) in Riverside, CA, which conducts radar surveillance using various radar sources to identify, intercept, and apprehend suspect aircraft, utilizing Customs or other agencies' air assets. The aviation program maintains 10 air branches and 10 air units, as shown in appendix I. The ten air units are subcomponents of the branches and report to an air branch chief. The aviation program uses a variety of aircraft such as the P-3 long-range aircraft, the Blackhawk helicopter, and the Citation II, a high-speed, multijet fixed-wing aircraft. A detailed inventory of the Customs air fleet and pictures of selected aircraft are shown in table 3 and figure 5. As agreed with your office, we used the approach described in this section to respond to your request. We performed our review at U.S. Customs headquarters; the CNAC in Oklahoma City, OK; the DAICC in Riverside, CA; the Customs Air Branch in Miami, FL; and the Department of Defense's (DOD) headquarters and DOD's Southern Command's headquarters in Miami, FL. We also met with officials at ONDCP, the Drug Enforcement Administration (DEA), the U.S. Interdiction Coordinator, and the U.S. Coast Guard. To determine Customs Aviation Program missions and whether they had changed over time, we interviewed Customs Aviation Program officials and the Assistant Commissioner, Office of Investigations. We also reviewed relevant legislation, executive branch policies and guidance, Customs policies and procedures, the National Drug Control Strategy, and interagency agreements. In addition to these reviews, we interviewed officials at ONDCP, DOD, DEA, and the U.S. Coast Guard. To determine the Customs Aviation Program's resources and activities for fiscal years 1992 to 1997, we reviewed congressional appropriations to Customs for the program. We examined Customs documents showing staffing, aircraft, and staff support levels for these years. We also reviewed total annual program funding and expenditures by mission. To determine the activities of the aviation program for fiscal years 1992 to 1997, we reviewed expenditures by mission and data on flight hours for fiscal years 1992 through 1997. To determine which aircraft take-off cancellations were related to resource constraints and which were not, we analyzed the reasons for the cancellations. For those cancellations that occurred because an aircraft or aircrew was not available, we categorized as resource dependent. For a small percentage of cancellations (4 percent) we were unable to determine the reason for cancellation. All other cancellations we categorized as not resource dependent. Customs officials agreed with this approach. To determine the adequacy of the performance measures Customs uses to judge the results of its aviation program efforts, we interviewed officials from Customs and other federal agencies involved in drug control and interdiction and reviewed relevant documents provided by these agencies. We reviewed the ONDCP National Drug Control Strategy and Customs documents showing the results of the aviation program over the past 6 fiscal years. To obtain information on Customs Aviation Program performance measures for its antidrug activities, we interviewed officials responsible for the Customs Aviation Program and reviewed key agency documents such as Customs Aviation Program performance plans developed for implementing the Government Performance and Results Act of 1993 (GPRA) P.L. 103-62. We compared the Customs Aviation Program performance measurement plans with GPRA requirements to determine whether they conform to the principles of the act. We did our audit work between April and August 1998 in accordance with generally accepted government auditing standards. Since the establishment of the Customs Aviation Program in 1969, its basic mandate to use air assets to counter the drug smuggling threat has not changed. The program was established to reduce the level of drug smuggling; increase smugglers' risk and cost; and improve the detection and apprehension of drug smuggling by aircraft, boats, and vehicles. What has changed, however, is the amount of resources spent among the three specific mission areas--border interdiction, foreign counterdrug operations, and other law enforcement support. Program priorities, as measured by the amount of mission flight hours, have shifted from border interdiction to supporting foreign counterdrug operations. The percent of flight hours used to provide support to other law enforcement agencieshas decreased slightly. Key events in Customs Aviation Program history are shown in appendix II. As shown in figure 1, flight hours for the border interdiction mission decreased from about 40 percent of total flight hours in fiscal year 1993 (the earliest year complete data were available) to 24 percent in fiscal year 1997. Flight hours for the foreign counterdrug operations mission increased from less than 1 percent in fiscal year 1993 to 23 percent in fiscal year 1997. During this 5-year period, the other law enforcement support mission decreased slightly from about 59 percent of total mission flight hours to 53 percent. From fiscal year 1993 to fiscal year 1997, the total number of flight hours for all missions decreased over one-third, from about 45,000 hours to about 29,000 hours, as shown in figure 2. An original mission of the aviation program was aimed at border interdiction to counter the air drug smuggling threat along the Southwest border. By 1965, drug smugglers had turned to private aircraft as an effective means of border penetration. By 1969, major unchallenged drug smuggling routes had been established along the entire southern border of the United States. At that time, Customs owned only one single-engine aircraft. By 1972, Customs had acquired 11 fixed-wing aircraft and 8 helicopters to challenge the increasing drug threat and had established air branches in San Diego, CA; Tucson, AZ; Corpus Christi, TX; and Miami, FL. In the early 1980s as the air drug smuggling threat decreased along the Southwest border and increased in the Gulf of Mexico and Florida areas, the Customs Aviation Program, along with other Customs units and other law enforcement agencies, began to address the critical drug smuggling problem facing those areas. DOD assets and Federal Aviation Administration (FAA) radar were dedicated in support of the aviation program's border interdiction mission. Navy aircraft were used to detect and notify Customs Service aircrews of suspect drug smuggling targets. In the mid-1980s, Customs acquired its first P-3 aircraft for long-range surveillance and patrol activity and initiated its deployment of aerostats (i.e., radar mounted on balloons that are tethered to land bases or ships) to provide detection coverage along the southern border of the United States and the Caribbean area. In 1987, Congress directed the establishment of Command, Control, and Intelligence centers to provide coordinated tactical control among the various agencies for air interdiction. Customs established a center in Richmond Heights, FL, and one in Riverside, CA. In 1994, these centers were consolidated into the DAICC in Riverside, CA. The border interdiction mission is generally accomplished through a four-step process: (1) using DOD or FAA radar or other means, such as failure to file a flight plan with FAA or detection by patrol aircraft, to detect aircraft that are suspected of drug smuggling; (2) dispatching an interceptor aircraft, such as the high-speed, multijet engine Citation II, to physically locate the suspect aircraft and check the aircraft's registration number through various law enforcement databases to determine whether it has been involved in previous illegal activities; (3) employing tracker aircraft, such as the P-3, to follow the suspect aircraft to its destination; and (4) using a Blackhawk helicopter, which is a military aircraft capable of being staffed with several Customs or other federal, state, or local law enforcement officers, to stop the suspect aircraft when it lands, detain the crew, search the aircraft, and, if appropriate, arrest the suspect(s) for drug smuggling and seize any illegal drugs. As part of its border interdiction mission, Customs aircraft are also deployed to interdict land and marine targets as appropriate. Customs started its foreign counterdrug operations in 1990. They began in Mexico and Central America with Customs aircraft being utilized to provide early detection of drug trafficking flights and other activities. The foreign counterdrug operations were greatly expanded in November of 1993, when President Clinton signed Presidential Decision Directive 14 (PDD-14), which established a new framework for international drug control efforts. PDD-14 directed an international drug control strategy to assist nations showing the political will to combat drug-trafficking organizations and interdict drug trafficking. Additionally, PDD-14 called for a shift in the focus of cocaine interdiction from the transit zone (i.e., the 2-million square-mile area between the United States and South American borders) to the source zone (i.e., countries where cocaine is produced, primarily Columbia and Peru). Customs responded to PDD-14 by dedicating increased resources to its foreign counterdrug operations, primarily in South America, and less to border interdiction. These operations primarily support DOD, which is the lead agency for detecting and monitoring drug smuggling aircraft in the source zone countries. Currently, Customs has aircraft and aircrews in Mexico, Central America, and South America performing counterdrug activities. The Customs Aviation Program supports U.S. foreign counterdrug operations by temporarily assigning aircraft and aircrews from its various air branches and units to Mexico, Central America, and South America. Customs aircraft and aircrews in these operations are used to detect and follow suspect drug trafficking aircraft and, if appropriate, alert host country apprehension forces. Customs aircraft and aircrews are also called upon to fly intelligence-gathering missions in support of U.S. foreign counterdrug activities. The P-3, and the Citation II are used in the foreign counterdrug operations mission. Another original mission of the Customs Aviation Program was to assist other Customs units, the Department of the Treasury, and other federal, state, and local law enforcement agencies by providing other aviation law enforcement support. By 1996, Customs had acquired 61 aircraft, which are largely dedicated to the law enforcement support mission. In fiscal year 1997, Congress terminated the Bureau of Alcohol, Tobacco, and Firearms (ATF) aviation program and directed the Customs Aviation Program to assume ATF's aviation responsibilities. As a result, Customs established aviation units in Sacramento, CA; Kansas City, KS; and Cincinnati; OH, for this new responsibility. Since 1993, support to other law enforcement agencies, which also included emergency humanitarian efforts, have accounted for about one-half of the Customs Aviation Program's activities and seizures. The Customs Aviation Program provides support to other law enforcement agencies by using its aircraft to provide surveillance of ongoing criminal investigations, such as undercover operations or following a suspect vehicle. The Customs Aviation Program primarily uses single-engine, fixed-wing aircraft and small helicopters in its law enforcement support role. Between fiscal years 1992 and 1997, the Aviation Program's overall funding, aircraft mission takeoffs, personnel, and number of aircraft have decreased. As a result of these reductions, Customs air branches have reduced their operations. While Customs' Aviation Program funding increased slightly in fiscal year 1993, overall its budget, excluding capital investments, decreased between fiscal years 1992 and 1997, as shown in figure 3. In constant or inflation-adjusted dollars, the decrease was 31 percent. The funding level for salaries and expenses, in constant dollars, decreased by about 15 percent. Similarly, funding for operations and maintenance declined by about 40 percent in constant dollars. In fiscal years 1992 through 1994, salaries and expenses comprised just over one-third of the annual program total, compared with just under two-thirds of the total for operations and maintenance. However, in the last 3 fiscal years, salaries and expenses increased to just under half of the total, while operations and maintenance decreased to just over one-half. According to Customs officials, these reductions forced the agency in 1994 to reduce its border interdiction response from 24 hours per day to 16 hours per day at four of its air branches. As of August 1998, Miami, FL; Tucson, AZ; and San Angelo, TX; are the only 3 of the 10 air branches that provide 24-hours-per-day coverage. Customs officials told us that the branches work together as a means to compensate, in part, for the reduced coverage each branch provides. Miami air branch officials told us their branch works with the other branches to provide coverage when needed. In addition, Customs officials told us they ended 24-hour maintenance shifts at all the air branches and that only one maintenance crew is available during the day at each air branch. As shown in table 1, the total number of aircraft mission takeoffs decreased from about 22,000 in fiscal year 1992 to about 15,000 in fiscal year 1997. The number of times an aircraft did not take off after originally being requested to do so, increased from 1,013 in fiscal year 1992 to 2,076 in fiscal year 1997. This translates into a reduction from a 96 percent take-off rate in fiscal year 1992 to an 88 percent take-off rate in fiscal year 1997. Although the take-off rate decreased by 8 percent from fiscal year 1992 to fiscal year 1997, the actual number of cancelled takeoffs more than doubled. We analyzed the cancelled takeoffs for fiscal years 1992 and 1997 as shown in table 2. Most of the increase in the number of cancelled takeoffs was attributable to reasons that did not depend on resources, such as missions being cancelled or postponed by the law enforcement officials originally requesting the flight. However, other cancellations occurred because Customs Aviation Program resources, such as the appropriate aircraft or aircrew for the mission, were not available. For example, in October 1996, the California Riverside Aviation unit near the DAICC was requested to provide backup aviation support to the State Narcotics Task Force on a surveillance mission. However, this support could not be provided by the unit because the Cessna 210 aircraft or aircrew was not available; therefore, the case agent cancelled the backup request. In April 1997, several cancellations occurred because the Miami air branch did not have an aviation interdiction officer available for radar patrol. As shown in figure 4, the Customs Aviation Program's number of authorized personnel decreased by 11 percent between fiscal years 1992 and 1997, from 960 to 854. Also, the program's number of actual personnel decreased by 22 percent, from 956 to 745. According to Customs officials, the aviation program lost personnel due to budget reductions, a hiring freeze in fiscal years 1993 through 1996, and attrition due to hiring of Customs Aviation Program pilots by commercial airlines. During this time, an average of about three people per month left the aviation program. In fiscal year 1997, the hiring freeze ended and the aviation program began hiring personnel. In fiscal year 1992, Customs implemented a new strategic plan to carry out its aviation program. The plan called for an authorized personnel level of 960, and the program received funding in fiscal year 1992 for this personnel level. However, program officials said that the plan could not be carried out fully because foreign counterdrug operations were added as a principal mission in fiscal year 1994, and the budget was reduced in fiscal year 1995. Table 3 shows the total number of aircraft operated by the Customs Aviation Program. The number of aircraft declined about 10 percent between fiscal years 1992 and 1997. Customs officials said that during fiscal years 1993 and 1994, the number of fixed-wing aircraft decreased from 61 to 38 due to budget reductions. In addition, officials said that as of August 1998, they were unable to operate all of their aircraft because of insufficient funding. For example, four additional high-speed Blackhawk helicopters were being kept in storage because of the high costs of operation. (See figure 5 for pictures of selected aircraft.) Operations and maintenance costs per aircraft flight hour have increased over the last several years. For example, the cost per flight hour in real dollars to operate a P-3 increased from $2,979 in 1994 to $3,687 in 1997, for a Blackhawk helicopter the cost increased from $2,419 to $3,859, and for the Citation II it increased from $1,070 to $1,885. Customs officials said increased costs was one of the reasons they were flying fewer hours per year. The other primary reasons were that trained pilots and other aircrew members were being dedicated to other missions or that aircraft were unavailable because they have been dedicated to another mission or were undergoing extended maintenance. Customs currently is developing performance measures to more adequately report the results for its aviation program. The Customs Aviation Program uses measures such as seizures and the number of suspect aircraft detected to gauge the results of its efforts. For example, in fiscal year 1997, Customs reported seizing about 22,900 pounds of cocaine and about 9,100 pounds of marijuana. In addition, for their foreign counterdrug operations, Customs reported a track rate of 57 percent in the transit zone. The track rate is the percentage of suspected narcotics trafficking aircraft that were detected and tracked by Customs P-3 aircraft and which were transferred to interdiction or apprehension forces or tracked to the landing and delivery site in the transit zone. However, these performance measures track activity, not results or effectiveness. Several Customs Aviation Program officials, for example, made this point by noting that it is unclear whether an increase in seizures indicates that Customs has become more effective or that the amount of drug smuggling has increased. We have previously reported that traditional measures, such as the number of seizures, pose problems for measuring the performance of drug interdiction programs. We have also recognized that developing sound, results-oriented performance measures and accompanying data is still a difficult and time-consuming task. Customs has also used other measures, such as an air-threat index, in an attempt to measure the results of its aviation program. The air-threat index used various indicators, such as the number of stolen and/or seized aircraft, to determine the potential threat of air drug smuggling. However, the air-threat index, as well as selected other performance measures, have been discontinued because Customs determined they were not good measures of results and effectiveness. For example, the aircraft seizures indicator took into account only those seizures in which the aircraft was seized, eliminating those events related to smuggling where drugs were seized but for one reason or another, the aircraft was not seized. Customs Aviation Program officials said that, given their limited success with earlier efforts to measure program results, Customs is currently revising its performance measures. Customs Aviation Program officials told us that one of the primary obstacles to developing meaningful performance measures is that much of the program's success depends on the actions of other federal departments and state and local law enforcement agencies, as well as the cooperation of foreign government law enforcement agencies. The officials said the measures they are developing also need to be more consistent with GPRA, which seeks to shift the focus of federal management and decisionmaking away from concentrating on the activities performed to a focus on the results of those activities that are undertaken. Consequently, Customs is developing a performance measure that quantifies the increase in the cost of doing business for a drug smuggler as a result of Customs Aviation Program activity. Customs is also now developing a performance measure to judge the change in a drug smugger's behavior. This would be an assessment of Customs' success in forcing the drug trafficker to change the routes and/or methods used for smuggling drugs into the U.S. Customs officials said that these new measures will be part of their fiscal year 2000 budget request. We provided a draft of this report for comment to the Secretary of the Treasury and the Commissioner of Customs. On August 6, 1998, we met with the Acting Executive Director of the Customs Aviation Program and members of his staff who provided oral comments for Treasury and Customs. These officials concurred with our draft report and provided some technical comments, which we incorporated where appropriate. As agreed with your staff, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days from the date of this letter. At that time, we will send copies of this report to the Ranking Minority Member of your Subcommittee, the Chairmen and Ranking Minority Members of other congressional committees with jurisdiction over the Customs Service, the Secretary of the Treasury, and the Commissioner of Customs. We will also make copies available to others upon request. The major contributors to this report are listed in appendix III. If you or your staff have any questions on this report, please call me on (202) 512-8777. Drug smugglers used private aircraft and established unchallenged smuggling routes along the entire U.S. southern border. Aviation program was established and its principal mission was border interdiction. Smuggling threat shifted from the southern border to the Gulf of Mexico and south Florida. Command, Control, Communications, and Intelligence Center West became operational. Counterdrug operations began in Mexico with two Citations. Customs National Aviation Center, the program's operational headquarters, was established in Oklahoma City. Foreign counterdrug operations in South America began. Overall program funding and personnel decreased. Other law enforcement support accounted for about half of the aviation program's flight hour activities. PDD-14 established a new framework for international drug control efforts. Hiring freeze in effect. Flight hours shifted from border interdiction to foreign counterdrug operations and other law enforcement support. Increased number of P-3 and Citation aircraft were dedicated to the program's South American operations. Twenty-four-hour maintenance of aircraft ended at all branches. Domestic border interdiction response was reduced from 24 hours per day to 16 hours per day at four air branches. Aviation program was developing Government Performance and Results Act (GPRA) measures that program officials say will more accurately measure effectiveness. 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Pursuant to a congressional request, GAO provided information on the Customs Service's Customs Aviation Program, focusing on the: (1) program's missions and how they have changed since fiscal year (FY) 1992; (2) annual level of resources and activities since FY 1992; and (3) adequacy of the performance measures Customs uses to judge the results of its aviation program. GAO noted that: (1) since the establishment of the Customs Aviation Program in 1969, its basic mandate to use air assets to counter the drug smuggling threat has not changed; (2) originally, the Customs Aviation Program had two principal missions: (a) border interdiction of drugs being smuggled by plane into the United States; and (b) law enforcement support to other Customs offices as well as other federal, state, and local law enforcement agencies; (3) in 1993, President Bill Clinton instituted a new policy to control drugs coming from South and Central America; (4) because Customs aircraft were to be used to help carry out this policy, foreign counterdrug operations became a third principal mission for the aviation program; (5) since then, the program has devoted about 25 percent of its resources to the border interdiction mission, 25 percent to foreign counterdrug operations, and 50 percent to other law enforcement support; (6) Customs Aviation Program funding decreased from about $195 million in FY 1992, to about $135 million in FY 1997--about 31 percent in constant or inflation-adjusted dollars; (7) while available funds have decreased, operations and maintenance costs per aircraft flight hour have increased; (8) Customs Aviation Program officials said that this increase in costs is one of the reasons they are flying fewer hours each year; (9) from FY 1993 to FY 1997, the total number of flight hours for all missions decreased by over one-third, from about 45,000 hours to about 29,000 hours; (10) the size of Customs' fleet dropped in FY 1994, when Customs took 19 surveillance aircraft out of service because of funding reductions; and the fleet has remained at about 115 since then; (11) the number of Customs Aviation Program onboard personnel has dropped steadily, from a high of 956 in FY 1992 to 745 by the end of FY 1997; (12) Customs has been using traditional law enforcement performance measures for the aviation program; (13) these measures, however, are used to track activity, not results or effectiveness; (14) until 1997, Customs also used an air threat index as an indicator of its effectiveness in detecting illegal air traffic; (15) however, Customs has discontinued using this indicator, as well as selected other performance measures, because Customs determined that they were not good measures of results and effectiveness; and (16) recognizing that these measures were not providing adequate insights into whether the program was producing desired results, Customs is developing new performance measures in order to better measure results.

Ally Financial is one of the country's largest financial holding companies, with total assets of $148.5 billion as of March 31, 2014. Its primary line of business is automotive financing--both consumer financing and leasing and dealer floor-plan financing. Ally Financial (when it was known as GMAC) formerly served as General Motors Company's (GM) captive automotive finance company. GMAC's subsidiaries offered financial services such as auto insurance and residential mortgages. In 2006, Cerberus Capital Management purchased 51 percent of the company (GM retained 49 percent). As the housing market declined in the late 2000s, the previously profitable GMAC mortgage business unit began producing significant losses. For example, the company's Residential Capital LLC (ResCap) subsidiary lost approximately $17 billion from 2007 through 2009. During the same period, U.S. automobile sales dropped from 16.4 million to 10.4 million cars and light trucks, negatively affecting the company's core automobile financing business. On May 14, 2012, ResCap and certain of its wholly owned direct and indirect subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court). The bankruptcy created uncertainties about Ally Financial's financial obligations. As a financial holding company, Ally Financial is regulated and supervised by the Federal Reserve. Under the Dodd-Frank Act and implementing regulations, the Federal Reserve conducts an annual supervisory stress test of bank holding companies with $50 billion or more in total consolidated assets to evaluate whether the companies have sufficient capital to absorb losses resulting from adverse economic conditions. For the stress tests, the Federal Reserve projects revenue, expenses, losses, and resulting post-test capital levels, and regulatory capital ratios, including the tier 1 capital ratio and the tier 1 common ratio, under three economic scenarios (baseline, adverse, and severely adverse).holding companies to conduct an annual company-run stress test using the same macroeconomic scenarios that the Federal Reserve uses to conduct its supervisory stress test. In addition, the Federal Reserve requires the same bank The Federal Reserve also conducts an annual exercise, CCAR, to help ensure that large bank holding companies have robust, forward-looking capital planning processes that take into account their unique risks and set aside sufficient capital to operate during periods of economic and financial stress. The Federal Reserve evaluates capital adequacy; internal processes for assessing capital adequacy; plans for capital distributions, such as dividend payments or stock repurchases; and other actions that affect capital. The Federal Reserve may object to a capital plan because of significant deficiencies in the planning process or because one or more capital ratios would fall below required levels under the assumption of stress and planned distributions. If the Federal Reserve objects to a proposed capital plan, the bank holding company is permitted to make capital distributions only if the Federal Reserve indicates in writing that it does not object. The company also must resubmit the capital plan after remediating the deficiencies. In March 2013, the Federal Reserve reported the results of its 2013 supervisory stress test and of the CCAR exercise. The Federal Reserve found that Ally Financial's tier 1 common capital ratio fell below the required 5 percent under the severely adverse scenario. Ally Financial was the only one of the 18 bank holding companies tested that fell below this required level. The Federal Reserve objected to Ally Financial's capital plan during the 2013 CCAR. According to the Federal Reserve, Ally Financial's capital ratios did not meet the required minimums under the proposed capital plan. Specifically, the Federal Reserve reported that under stress conditions, Ally Financial's plan resulted in a tier 1 common ratio of 1.52 percent, which is below the required level of 5 percent under the capital plan rule. According to the Federal Reserve CCAR results paper, these results assumed that Ally Financial remained subject to contingent liabilities associated with ResCap. The Federal Reserve required Ally Financial to resubmit its capital plan, which Ally Financial did in September 2013. Ally Financial owns Ally Bank, an Internet- and telephone-based bank. Ally Bank is a state-chartered nonmember bank supervised by FDIC and the Utah Department of Financial Institutions. Ally Bank had more than $55.9 billion in total deposits as of March 31, 2014. To help stabilize the automotive industry and avoid further economic disruptions, Treasury disbursed $79.7 billion through AIFP from December 2008 through June 2009. The assistance was used to support two automakers, Chrysler and GM, and their automotive finance companies, Chrysler Financial and GMAC.outlined guiding principles for the investments, including In July 2009, Treasury exiting its investments as soon as practicable in a timely and orderly manner that minimizes financial market and economic impact; protecting taxpayer investment and maximizing overall investment returns within competing constraints; improving the strength and viability of GM and Chrysler so that they could contribute to economic growth and jobs without government involvement; and managing its ownership stake in a hands-off, commercial manner, including voting its shares only on core governance issues, such as the selection of a company's board of directors and major corporation events or transactions. In late December 2008, as a part of AIFP, Treasury agreed to purchase $5 billion in senior preferred equity from GMAC and received an additional $250 million in preferred shares through warrants that Treasury exercised immediately. Treasury subsequently provided GMAC with additional assistance through TARP. In May 2009, Treasury purchased $7.5 billion of mandatory convertible preferred shares from GMAC. Also, in May 2009, Treasury exercised its option to exchange an $884 million loan to GM for a 35.4 percent common ownership share in GMAC. In December 2009, Treasury made additional investments in Ally Financial--$2.5 billion of trust preferred securities and approximately $1.3 billion of mandatory convertible preferred shares.December 2009, Treasury converted $3 billion of existing mandatory convertible preferred shares into common stock, increasing its common equity ownership from 35 to 56.3 percent. In December 2010, Treasury converted $5.5 billion of existing mandatory convertible preferred shares into common stock, increasing its common equity ownership to approximately 74 percent of Ally Financial. Ally Financial announced a plan in 2012 to repurchase Treasury's mandatory convertible preferred shares, worth $5.9 billion, to reduce Treasury's investment in the company. However, this plan stalled after the Federal Reserve objected to Ally Financial's initial 2013 capital plan submission, partly because of uncertainty about the company's obligations associated with the ResCap bankruptcy. Two key regulatory and legal developments allowed Ally Financial and Treasury to move ahead with plans to reduce Treasury's investments in the company in late 2013. First, in November 2013, the Federal Reserve did not object to Ally Financial's resubmitted capital plan. Second, in December 2013, the bankruptcy proceedings of Ally Financial's mortgage subsidiary, ResCap, were substantially resolved. Following the resolution of these issues, Treasury significantly reduced its ownership stake in Ally Financial--primarily through sales of common stock--from 74 to 16 percent as of June 30, 2014. Also as of June 30, 2014, Treasury had received $17.8 billion (including interest and dividends), which exceeds the total Treasury assistance to the company of $17.2 billion. Two key regulatory and legal developments in the second half of 2013 helped Treasury accelerate the wind-down of its investments in Ally Financial. Federal Reserve did not object to Ally Financial's resubmitted capital plan: In November 2013 Ally Financial received a "nonobjection" from the Federal Reserve to its resubmitted 2013 CCAR capital plan, which enabled Ally Financial to move forward on its repurchase of $5.9 billion of the remaining Treasury-owned mandatory convertible preferred shares. As we previously reported, Treasury and Ally Financial agreed in August 2013 that Ally would repurchase the mandatory convertible preferred shares, conditioned on receiving a nonobjection on the resubmitted capital plan and the closing of a private placement securities transaction. Ally Financial resubmitted its plan in September 2013 and the Federal Reserve approved it on November 15, 2013. The Federal Reserve nonobjection enabled Ally Financial to complete the private placement of common shares valued at $1.3 billion announced in August 2013. The private placement, intended in part to help finance the repurchase of the $5.9 billion remaining Treasury-owned mandatory convertible preferred shares, was completed in November 2013, as was the repurchase of the Treasury shares. More recently, Ally Financial received a nonobjection from the Federal Reserve in March 2014 on its annual capital plan. Completion of the ResCap bankruptcy: In December 2013, the bankruptcy of Ally Financial's ResCap subsidiary was substantially resolved. The Bankruptcy Court entered an order confirming a bankruptcy plan on December 11, 2013, which became effective on December 17, 2013. The final bankruptcy agreement included a settlement, which the bankruptcy court judge had approved in June 2013, releasing Ally Financial from any and all legal claims by ResCap and, subject to certain exceptions, all other third parties, in exchange for $2.1 billion in cash from Ally Financial and its insurers. According to Ally Financial, its mortgage operations were a significant portion of its operations and were conducted primarily through ResCap. With the completion of the ResCap settlement, Ally Financial largely exited the mortgage origination and servicing business. Pub. L. No. 84-511, SS 4(a)(2), 70 Stat. 133, 135 (codified at 12 U.S.C. SS 1843(a)(2)). Ally Financial settled allegations of violations of the Equal Credit Opportunity Act by paying $98 million relating to the execution of consent orders issued by the Department of Justice and the Consumer Financial Protection Bureau. After the legal and regulatory developments in late 2013, the pace of Treasury's reduction in its ownership share of Ally Financial accelerated. From December 2013 through June 2014, Treasury reduced its ownership share of Ally Financial by almost 80 percent (see fig. 1). In November 2013, Ally Financial made cash payments totaling $5.9 billion to repurchase all remaining mandatory convertible preferred shares outstanding and terminate an existing share adjustment provision.Additionally, Ally Financial issued $1.3 billion of common equity to third- party investors, reducing Treasury's ownership share from 74 to 63 percent. In January 2014, Treasury completed a private placement of Ally Financial common stock valued at approximately $3 billion, further reducing Treasury's ownership share of Ally Financial to 37 percent. According to Treasury, the decision to undertake a private placement at that time was based on market conditions, as well as information Treasury received about increasing investor interest from the underwriter of two previous private placements of Ally Financial shares--the $1.3 billion private placement Ally Financial completed in November 2013 and an approximate $900 million private offering by GM of its remaining Ally Financial stock in December 2013. These transactions contributed to building an investor base for the stock, according to Treasury and Ally Financial. Treasury said the positive results of the March 2014 Federal Reserve stress test and CCAR contributed to the decision to further reduce its ownership share. The day after the release of the CCAR results in March 2014, Treasury announced that it would sell Ally Financial common stock in an initial public offering (IPO) and in April 2014, completed the IPO of 95 million Treasury shares at $25 per share. The $2.4 billion sale reduced Treasury's ownership share to approximately 17 percent. Following the IPO, Ally Financial became a publicly held company. In May 2014, Treasury received $181 million from the sale of additional shares after underwriters exercised the option to purchase an additional 7 million shares from Treasury at the IPO price. This additional sale reduced Treasury's ownership share to approximately 16 percent. As of June 30, 2014, Treasury had received $17.8 billion in sales proceeds and interest and dividend payments on its total assistance to Ally Financial of $17.2 billion. Based on the stock prices, as of June 30, 2014, Treasury's remaining investment in Ally Financial, which consists of common stock, was valued at almost $1.8 billion. Treasury stated that it would like to divest its ownership stake in Ally Financial in a manner that balances the speed of recovery with maximizing returns for taxpayers. Treasury officials told us that Treasury does not have a specific date by which it intends to fully divest from the company, but that its decision on timing will be based on market conditions. These market conditions, in part, will reflect Ally Financial's financial performance. Since 2013, Ally Financial has continued its evolution into a publicly held, monoline finance company in the automotive sector with an Internet bank. Ally Financial's financial condition continued to stabilize in late 2013 and early 2014 and the company raised significant levels of common equity through private and public share offerings. According to recent rating agency analyses, Ally Financial is competitive in automotive financing, particularly in the floor-plan business segment, but faces potential competitive challenges, such as its reliance on GM and Chrysler auto financing relationships. Ally Financial's business structure has been simplified and clarified over the past year, according to rating agency analyses and federal regulatory officials. Specifically, the completion of the ResCap bankruptcy marked the company's exit from the mortgage origination and servicing business. Ally Financial became a financial holding company in December 2013, which, according to the company, enabled it to retain its insurance and auction lines of business and maintain its full suite of products for dealers. Ally Financial also completed sales of its European and Latin American automotive finance operations to GM Financial, GM's captive financing Ally company, and its Canadian operations to Royal Bank of Canada.Financial expects to complete GM Financial's acquisition of its remaining international operation--its China joint venture, in which the company is a 40 percent owner--in 2014, subject to government approvals in China. Since our last review in 2013, Ally Financial's financial performance has continued to stabilize as illustrated by multiple capital, profitability, and liquidity measures. Taking into account the resolution of ResCap, the sale of international operations, and other factors, the three largest credit rating agencies upgraded Ally Financial's ratings, although the ratings remain below investment grade. Ally Financial's capital position has remained the same or improved since 2009--the year it became subject to regulatory and reporting requirements following its conversion to a bank holding company in December 2008. Capital can be measured in several ways, but we focused on tier 1 capital because it is currently the strongest form of capital (see table 1). We examined Ally Financial's tier 1 capital ratio and tier 1 leverage ratio and compared them to minimums required under the Federal Reserve's capital adequacy guidelines for bank holding companies. We also examined Ally Financial's tier 1 common ratio. The Federal Reserve has long held the view that bank holding companies generally should operate with capital positions well above the minimum regulatory capital ratios, with the amount of capital held commensurate with a bank holding company's risk profile. Tier 1 capital and tier 1 common capital ratios: Higher tier 1 capital and common capital ratios may indicate that a bank holding company is in a better position to absorb financial losses. A tier 1 capital ratio measures tier 1 capital as a percentage of risk-weighted assets. As shown in table 1, Ally Financial's tier 1 capital ratio increased from 2009 to 2010 but has declined slightly since 2011. Federal Reserve Capital Adequacy Guidelines require bank holding companies to have a tier 1 risk-based capital ratio of at least 4 percent. Ally Financial's tier 1 capital ratio exceeded the required minimum each year from 2009 through 2013. In 2013, Ally Financial reported that the tier 1 capital ratio declined, in part, because of the repurchase of Treasury's mandatory convertible preferred shares, which qualified as tier 1 capital. A tier 1 common capital ratio measures common capital--that is, the common equity component of tier 1 capital as a share of risk- weighted assets. Ally Financial's tier 1 common ratio has increased from 4.85 percent at the end of 2009 to 8.84 percent at the end of 2013. Tier 1 leverage ratio: A tier 1 leverage ratio shows the relationship between a banking organization's core capital and total assets. The tier 1 leverage ratio is calculated by dividing the tier 1 capital by the firm's average total consolidated assets. Generally, a larger tier 1 leverage ratio indicates that a company is less risky because it has more equity to absorb losses in the value of its assets. As shown in table 1, Ally Financial's leverage ratio has been reduced by 20 percent since 2009 but remains well above the regulatory minimum guideline of 3 or 4 percent, depending on the bank holding company's composite rating. 12 C.F.R. 225, Appendix D, SS II. profitability, including net income (loss), net interest spread, return on assets, and nonperforming asset ratio. Net income (loss): Ally Financial suffered a net loss in 2009 of $10 billion, but has reported net income for 4 of the last 5 years. As shown in figure 2, the 2009 loss was driven by substantial losses in its mortgage business operating unit. Ally Financial reported net income of $361 million in 2013, down from net income of $1.2 billion in 2012. The company attributed the decline to circumstances including a tax valuation adjustment of $1 billion in 2012; the 2013 payment of $1.4 billion as part of the ResCap settlement agreement; and the $98 million payment in connection with the Department of Justice and Consumer Financial Protection Bureau consent orders. Net interest spread: The net interest spread is the difference between the average rate on total interest-earning assets and the average rate on total interest-bearing liabilities, excluding discontinued operations for the period. In general, the larger the spread, the more a company is earning. Ally Financial's net interest spread increased from a reported 0.31 percent at the end of 2009 to 1.75 percent at the end of 2013, meaning that Ally Financial is earning more interest on its assets than it is paying interest on its liabilities (see table 2). Return on assets (ROA): ROA is calculated by dividing a company's net income by its total assets. It is an indication of how profitable a company is relative to its total assets and gives an idea of management's efficiency in using its assets to generate earnings. A higher ROA suggests that a company is using its assets efficiently. Ally Financial reported improved ROA from 2009 to 2013, with a reported negative 5.81 percent ROA for 2009 and a positive 0.23 percent in 2013. Nonperforming asset ratio: This ratio measures asset quality by dividing the value of nonperforming assets by the value of total assets. The lower the ratio, the fewer poorly performing assets a company holds. Ally Financial's nonperforming asset ratio fell from 4.36 percent in 2009 to 1.19 percent in 2013 (see table 2). Ally Financial's liquidity position generally has stabilized since 2009. To examine Ally Financial's liquidity position, we examined the company's total liquidity ratio, bank deposits, and operating cash flow. Total liquidity ratio: Liquidity ratios measure a bank's total liquid assets against its total liabilities. Generally, the ratios indicate a bank's ability to sell assets quickly to cover short-term debts--with a higher ratio providing a larger margin of safety. Overall, Ally Financial's liquidity ratio remained fairly stable from the third quarter of 2009 through the fourth quarter of 2013 (see fig. 3). Declines in liquidity levels in 2012 and 2013 were associated with repayments of government assistance. For example, according to Ally Financial, the decline in liquidity in 2013 was due to the repurchase of the Treasury mandatory convertible preferred shares and the redemption of certain high-coupon, callable debt. For the quarter ending March 31, 2014, Ally Financial reported a total liquidity ratio of 16.01 percent. Bank deposits: Bank deposits are the funds that consumers and businesses place with a bank, and growth in deposits is an important factor in the bank's liquidity position. From December 2008 to March 2014, deposits at Ally Bank, Ally Financial's Internet bank, grew almost 190 percent, from $19.3 billion to $55.9 billion, of which approximately $45.2 billion were retail (consumer) deposits. Deposits accounted for 43 percent of Ally Financial's total funding as of the first quarter of 2014, providing the company with a low-cost source of funding that is less sensitive to interest rate changes and market volatility than other sources of funding. Operating cash flow: From the first quarter of 2010 through the third quarter of 2013, Ally Financial generated positive cash flow from operating activities (see fig. 4). Since the third quarter of 2013, cash flows have varied, with Ally reporting negative cash flow in the fourth quarter of 2013 and positive cash flow at the end of the first quarter of 2014. According to Ally Financial, 2013 declines in operating cash flow (compared with the prior year) were driven by the settlement of derivative transactions, but were partially offset by sales and repayments of mortgage and automotive loans. Ally Financial's changing financial condition is reflected in its credit rating. Although Ally's credit rating remains below investment grade, its long- term credit rating with the three largest credit rating agencies has been upgraded multiple times since 2009. Most recently, Ally's long-term ratings with Moody's, Standard and Poor's, and Fitch Ratings were upgraded to Ba3, BB, and BB+, respectively. According to rating agency analyses, Ally Financial is a strong competitor in automotive financing, although the company faces competitive challenges. Analysts have said that Ally Financial is competitive in automotive financing, particularly in the floor-plan business segment. In addition, as mentioned previously in this report, Ally Bank has continued to increase its level of retail deposits. Analysts have pointed to potential competitive challenges for Ally Financial, such as its reliance on GM and Chrysler automotive financing relationships. As we previously reported, GM and Chrysler have established captive financing units. Ally's exclusive lending relationships with GM and Chrysler have ended as the two automakers have begun to rely on their captive financing units. For example, the agreement between GM and Ally Financial on dealer and consumer lending was revised in early 2014. Among other changes, Ally Financial no longer enjoys The captive exclusivity with regard to GM lending arrangements.financing units of GM and Chrysler have begun to increase their financing activities. However, according to Ally Financial representatives, the company is the only automotive finance company that offers a suite of products to dealers (financing, insurance, and auction services) and as a result, the company expects to continue to be competitive in this segment. Moreover, Ally Financial representatives told us that the company has been focusing more on increasing profitability than on market share--consistent with its goals as a publicly held company, which include maximizing return to shareholders. Company representatives also have said in public statements that Ally Financial has been focusing on reducing its noninterest expenses and lowering its cost of funds. Ally Financial also faces competition from other large bank holding companies in consumer automobile financing. We compared the amount of Ally Financial consumer automobile financing with that of four large bank holding companies (Bank of America Corporation, Capital One Financial Corporation, JPMorgan Chase & Company, and Wells Fargo & Company) that reported consumer automobile loans. These data do not include all types of automobile financing, such as automobile leasing and dealer financing, but only retail consumer automobile loans for the time period.lending exceeded that of Ally Financial (see fig 5). The dollar amount of consumer automobile loans that Wells Fargo, JPMorgan Chase, and Capital One made increased from March 2011 through March 2014, while the dollar amount of Ally Financial financing has declined since the fourth quarter of 2012. According to Federal Reserve officials, this decline likely reflects the sale of the international automotive finance operations. We provided a draft of this report to FDIC, the Federal Reserve, and Treasury for their review and comment. In addition, we provided a copy of the draft report to Ally Financial to help ensure the accuracy of our report. Treasury provided written comments that are reprinted in appendix II. Ally Financial provided technical comments, which we have incorporated, as appropriate. FDIC and the Federal Reserve did not provide comments. In its written comments, Treasury generally concurred with our findings. Treasury noted that approximately $17.8 billion has been recovered to date from Ally Financial through repayments, a private placement, and an initial public offering. Treasury also noted that it will unwind its remaining ownership stake in a way that balances the speed of recovery with maximizing returns to taxpayers. We are sending copies of this report to FDIC, the Federal Reserve, and Treasury, and the appropriate congressional committees. This report will also be available at no charge on our website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. This report is based on our continuing analysis and monitoring of the Department of the Treasury's (Treasury) activities in implementing the Emergency Economic Stabilization Act of 2008 (EESA), which provided us with broad oversight authorities for actions taken under the Troubled Asset Relief Program (TARP). This report examines (1) the status of Treasury's investments in Ally Financial Inc. (Ally Financial) as of June 30, 2014, and its efforts to wind down those investments; and (2) the financial condition of Ally Financial through March 31, 2014. To examine the status of Treasury's investments, we reviewed TARP reports, which included monthly reports to Congress and daily TARP updates regarding the Automotive Industry Financing Program (AIFP) program data. Using the AIFP program data, we analyzed Treasury's equity ownership and recovery of funds in Ally Financial for the time period from January 2009 through June 2014. We have previously assessed the reliability of the AIFP program data from Treasury. For example, we tested the Office of Financial Stability's internal controls over financial reporting as they related to our annual audit of the office's financial statements and found the information to be sufficiently reliable based on the results of our audit of the TARP financial statements for fiscal years 2009--2013. AIFP was included in these financial audits. addition, for this review, we reviewed the data for completeness and obvious errors such as outliers. Based on this review, we determined that the data were sufficiently reliable for our purposes. EESA, which was signed into law on October 3, 2008, established the Office of Financial Stability within Treasury and provided it with broad, flexible authorities to buy or guarantee troubled mortgage-related assets or any other financial instruments necessary to stabilize the financial markets. SS 101(a), 122 Stat. at 3767 (codified at 12 U.S.C. SS 5211(a)). Review 2014: Assessment Framework and Results.interviewed officials from Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and representatives from Ally Financial. To assess the financial condition of Ally Financial, we measured the institution's capital ratios, net income, net interest spread margin, return on assets, nonperforming asset ratio, liquidity ratio, bank deposits, and operating cash flow, generally from 2009 through the first quarter (March 31) of 2014. We obtained these data from SNL Financial, a provider of financial information. We have determined that SNL Financial data are sufficiently reliable for past reports, and we reviewed past GAO data reliability assessments to ensure that we, in all material respects, used the data in a similar manner and for similar purposes. We also reviewed reports by several credit rating agencies on how they rate Ally Financial's financial strength. Although we have reported on actions needed to improve the oversight of rating agencies, we included these ratings because the ratings are widely used by Ally Financial, Treasury, and market participants. To obtain information on the financial ratios and indicators used in the analyses of Ally Financial's financial condition, we reviewed relevant documentation and interviewed officials from FDIC, the Federal Reserve, Treasury, and representatives from Ally Financial. For the comparison of retail (consumer) automotive lending for five large bank holding companies, including Ally Financial, we used Federal Reserve regulatory filings (Form FR-Y9C). For each data source we reviewed the data for completeness and obvious errors and determined that these data were sufficiently reliable for our purposes. We conducted this performance audit from March 2014 to August 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Karen Tremba (Assistant Director), Catherine Gelb (Analyst-in-Charge), Bethany Benitez, William Chatlos, Risto Laboski, Terence Lam, Barbara Roesmann, and Jena Sinkfield made significant contributions to this report.

As part of its Automotive Industry Financing Program, funded through the Troubled Asset Relief Program (TARP), Treasury provided $17.2 billion of assistance to Ally Financial (formerly known as GMAC). Ally Financial is a large financial holding company, the primary business of which is auto financing. TARP's authorizing legislation mandates that GAO report every 60 days on TARP activities. This report examines (1) the status of Treasury's investments in Ally Financial and its efforts to wind down those investments and (2) the financial condition of Ally Financial. To address these issues, GAO reviewed and analyzed available industry, financial, and regulatory data from 2009 through June 2014. GAO also reviewed rating agency analyses, Treasury reports and documentation detailing Treasury's investments in Ally Financial and its divestments from the company, as well as Ally Financial's financial filings and reports. GAO also interviewed officials from the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Treasury, and representatives from Ally Financial. GAO provided a draft of this report to FDIC, the Federal Reserve, Treasury, and Ally Financial. Treasury generally concurred with GAO's findings. Ally Financial provided technical comments, which GAO has incorporated, as appropriate. FDIC and the Federal Reserve did not provide comments. GAO makes no recommendations in this report. The Department of the Treasury (Treasury) reduced its ownership stake in Ally Financial Inc. (Ally Financial) from 74 percent in October 2013, to 16 percent as of June 30, 2014. As shown in the figure below, the pace of Treasury's reduction in its ownership share of Ally Financial accelerated in 2013 and corresponds with two key events. First, in November 2013, the Board of Governors of the Federal Reserve System (Federal Reserve) did not object to Ally Financial's resubmitted 2013 capital plan, which allowed Ally Financial to repurchase preferred shares from Treasury and complete a private placement of common shares. Second, in December 2013 the bankruptcy proceedings of Ally Financial's mortgage subsidiary, Residential Capital LLC (ResCap), were substantially resolved. The confirmed Chapter 11 plan broadly released Ally Financial from any and all legal claims by ResCap and, subject to certain exceptions, all other third parties, in exchange for $2.1 billion in cash from Ally Financial and its insurers. As of June 30, 2014, Treasury had received $17.8 billion in sales proceeds and interest and dividend payments on its total assistance to Ally Financial of $17.2 billion. Ally Financial's financial condition has continued to stabilize in late 2013 and early 2014 as illustrated by multiple capital, profitability, and liquidity measures. For example, Ally Financial's capital ratios have remained above regulatory minimum levels since 2009, which indicates that it is in a better position to absorb financial losses. In addition, the company raised significant levels of common equity through private and public share offerings. According to recent credit rating agency analyses, Ally Financial is competitive in automotive financing, particularly in the floor-plan business segment, which focuses on dealer financing. However, analysts reported that the company faces potential competitive challenges, such as the loss of certain exclusive relationships with General Motors Company and Chrysler Group LLC.

In response to the creation of TANF, states implemented more work- focused welfare programs, and research shows that these changes--in concert with other policy changes and economic conditions--contributed to raising the incomes of single parent families so that fewer were eligible for cash assistance. In designing and implementing their new TANF programs, states focused more than ever before on helping welfare recipients and other low-income parents find jobs. Many states implemented work-focused programs that stressed moving parents quickly into jobs and structured the benefits to allow more parents to combine welfare and work. States also imposed financial consequences, or sanctions, on families that did not comply with TANF work or other requirements, strengthening the incentives for TANF participants to comply with work requirements. Other concurrent policy changes contributed to an increase in the share of single parents in the labor force. These included an increase in the Earned Income Tax Credit (EITC) in the 1990s and increases in the minimum wage in 1996 and 1997, both of which contributed to an increase in the returns to work. Additional funds for federal and state work supports such as child care also made it easier for single parents to enter the labor force. Finally, the strong economy of the 1990s facilitated the move from welfare to work for many TANF recipients. A decline in the unemployment rate and strong economic growth contributed to the widespread availability of job openings for workers of all skill levels in many parts of the country. During this period, labor force participation increased among single mothers, the population most affected by TANF--from 58 percent in 1995--the year prior to the creation of TANF--to 71 percent in 2007, with most of this increase occurring immediately following the passage of welfare reform. Because the incomes of many single-parent families increased as a result of these policies, in total, 420,000 fewer families had incomes low enough to be eligible for cash assistance in 2005 compared to 1995, according to HHS data. At the same time that some families worked more and had higher incomes, others had income that left them still eligible for TANF cash assistance; however, many of these eligible families were not participating in the program. According to our estimates, the vast majority--87 percent--of the caseload decline can be explained by the decline in eligible families participating in the program, in part because of changes to state welfare programs. (See Fig. 1). These changes include mandatory work requirements, changes to application procedures, lower benefits, and policies such as lifetime limits on assistance, diversion policies, and sanctions for non-compliance, according to a review of the research. While mandatory work activities assisted some participants in getting jobs, according to a research synthesis conducted for HHS, these mandates may have led other families to choose not to apply rather than be expected to fulfill the requirement to work. Other families may have found it more difficult to apply for or continue to participate in the program, especially those with poor mental or physical health or other characteristics that make employment difficult. A decline in average cash benefits may also have contributed to the decline in participation. Average cash benefits under 2005 TANF rules were 17 percent lower than they were under 1995 AFDC rules, according to our TRIM3 estimates, as cash benefit levels in many states have not been updated or kept pace with inflation. Research also suggests that in response to lifetime limits on the amount of time a family can receive cash assistance eligible families may hold off on applying for cash assistance and "bank" their time, a practice that could contribute to the decline in families' use of cash assistance. In addition, fewer families may have applied or completed applications for TANF cash assistance because of state policies and practices for diverting applicants from cash assistance; nearly all states have at least one type of diversion strategy, such as the use of one-time nonrecurring benefits instead of monthly cash assistance. Finally, some studies and researchers noted that full sanctions for families noncompliance--those that cut off all benefits for a period of time--are associated with declines in the number of families receiving cash assistance, although more research is needed to validate this association. During the recent economic recession, caseloads increased in some states but decreased in others, as circumstances in individual states as well as states' responses to the economic conditions varied. Between December 2007 and September 2009, 37 states had increases in the number of families receiving TANF cash assistance while 13 states had decreases. However, the degree of change in families receiving TANF cash assistance varied significantly by state, as some states experienced caseload increases or decreases of over 25 percent while others experienced minimal changes of 0 to 5 percent. Nationwide, the total number of families receiving TANF cash assistance increased by 6 percent during this time period although the subset of two-parent families receiving such assistance increased by 57 percent. Initially few states reported reducing TANF-related spending on family and/or work supports in response to the recession, instead using funding sources such as the Emergency Contingency Fund created by the Recovery Act to respond to rising caseloads and/or to establish or expand subsidized employment programs. However, through their comments on our national survey and during our site visits, state officials discussed how the economic recession has caused changes to local TANF service delivery in some states. A majority of state TANF officials nationwide, as well as TANF officials from all eight localities we visited, reported that they made changes in local offices' TANF service delivery because of the economic recession. Specifically, of the 31 states reporting such changes through our survey, 22 had reduced the number of TANF staff, 11 had reduced work hours at offices, and 7 had reduced the number of offices. Officials in all three states we visited also reported that local TANF caseworkers are now managing an increased number of TANF cash assistance families per person. As a result of these increased caseloads, along with tightened resources, local officials in all three of the states we visited expressed their concerns that staff are less able to provide services to meet TANF cash assistance families' needs and move them toward self-sufficiency. Research on how families are faring after welfare reform has shown that, like those who receive TANF cash assistance, families that have left welfare, either for work or for other reasons, tend to remain low income and most depend in part on other public benefits. As we noted in a 2005 report, most of the parents who left cash welfare found employment and some were better off than they were on welfare, but earnings were typically low and many worked in unstable, low-wage jobs with few benefits and advancement opportunities. There is evidence that some former TANF recipients have had better outcomes; for example, a 2009 study found that, in general, former TANF recipients in three cities, especially those who had left TANF prior to 2001, had higher employment rates and average income levels than they had while they were on TANF. However, even among working families, many rely on government supports such as the EITC, Medicaid, the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program, and other programs to help support their families and lift them out of poverty, as most parents who recently left welfare are not earning enough to be self-supporting. In addition, a considerable body of work has documented families who are often described as "disconnected" from the workforce. It is not yet known whether or to what extent the recession has led to an increase in the number of these families. A recent GAO analysis of the characteristics of low-income families several years post-welfare reform found that while families who were receiving TANF cash assistance in 2005 had low incomes, a third worked full-time and most received other public supports, according to the most recent data available. The median household income of families receiving TANF cash assistance was $9,606 per year, not including means-tested benefits. One third of families who received TANF cash assistance at some point during the year (33 percent) were engaged in full-time employment, while 44 percent were headed by an adult without earnings. About a fifth (18 percent) of these families were headed by an adult who had a work- limiting disability. The vast majority of families receiving TANF cash assistance--91 percent--also received at least one other public benefit, with most (88 percent) receiving benefits from the Supplemental Nutritional Assistance Program (SNAP), formerly known as the Food Stamp Program, and a smaller proportion receiving subsidized housing (22 percent), child care subsidized by the Child Care and Development Fund (CCDF) (11 percent), or Supplemental Security Income (SSI), a cash assistance program for low-income people with disabilities (22 percent). Only 16 percent of families receiving cash assistance included married couples, and even fewer--less than 10 percent--had income from an unmarried partner. Many TANF eligible families do not participate in the program, possibly because they left the program or because they did not apply. Our analysis found that on average, these families had higher incomes than TANF recipients, but median incomes remained low, a significant proportion did not work full time, and many received public supports other than TANF. Compared to TANF cash assistance recipients, eligible non-recipients had higher median incomes ($15,000 per year) and higher rates of full-time employment (44 percent). However, a significant proportion of TANF- eligible non-recipient families--41 percent--were headed by an adult without any earnings, and 11 percent had a work limiting disability. A somewhat lower percentage of those eligible but not receiving TANF cash assistance received other public benefits (66 percent received any benefit), but a majority lived in households that received SNAP (59 percent). Receipt of other benefits was also somewhat lower than among TANF recipients, with 13 percent receiving subsidized housing, 8 percent receiving CCDF-subsidized child care, and 18 percent receiving SSI. More eligible non-participating families were headed by married couples than participating families, but no more had income from an unmarried partner. A small subgroup of families eligible for but not receiving TANF cash assistance (732,000 families in 2005), did not work and did not receive SSI benefits and this group has lower incomes than TANF recipients and other eligible non-recipients. In addition, these families also had lower receipt of other public benefits compared to TANF recipients. Among families with no earned income that received neither TANF nor SSI, the median income from all sources was $7,020, an amount equal to about 45 percent of the federal poverty threshold for a family consisting of one adult and two children. Twelve percent of this group of families was headed by a parent who reported having a work-limiting disability. The extent to which these families received other public benefits was similar to that of other families eligible but not participating in TANF, with 66 percent receiving any benefit. Most (63 percent) received SNAP benefits while 18 percent received subsidized housing, and 4 percent received CCDF-subsidized child care. These more disadvantaged non-participants accounted for 11 percent of all families who were eligible for TANF cash assistance in 2005. Data on caseload trends, state policies, and how families are faring can provide important insight into how TANF programs are working. However, work participation rates--a key accountability feature of TANF, as currently measured and reported--do not appear to be achieving the intended purpose of encouraging states to engage specified proportions of TANF adults in work activities. In addition, as cash assistance caseloads fell, many states shifted their spending away from cash assistance toward work supports such as child care, highlighting information gaps at the federal level in how many families received TANF services and how states used federal and state MOE funds to meet TANF goals. To promote TANF's focus on work, HHS measures state performance by the proportion of TANF participants engaged in allowable work activities. States are expected to ensure that at least 50 percent of all families receiving TANF cash assistance participate in one or more of 12 categories of work activities for an average of 30 hours per week. PRWORA established penalties for states that did not meet their required work participation rates and gave HHS the authority to make determinations regarding these penalties. However, states can take advantage of program options to make it easier to meet their required rates. For example, states can annually apply to HHS for a caseload reduction credit that generally decreased the state's required work participation rates by the same percentage that the state's caseload decreased since a specified year, established as 1995 in PRWORA. Because of the significant drop in caseload size, many states were able to reduce their required work participation rate. In fact, 18 states reported caseload reductions of at least 50 percent in fiscal year 2006, effectively reducing their required work participation rate to zero. In addition, states can modify the calculation of their work participation rates by funding certain families with state maintenance-of-effort (MOE) dollars rather than federal TANF block grant dollars. By using state MOE dollars rather than federal dollars, states are able to remove these families from the work participation rate calculation. Between 2001 and 2006, all but two states met the participation rate requirement, according to HHS data. However, nationally, between 31 and 34 percent of families receiving cash assistance met their work requirements during this time. In 2006, DRA reauthorized the TANF block grant through fiscal year 2010 and made several modifications that were generally expected to strengthen TANF work requirements intended to help more families attain self-sufficiency, and to improve data reliability. For example, DRA modified the caseload reduction credit by changing the base year from 1995 to 2005, and it mandated that families receiving cash assistance funded with state maintenance of effort dollars be included in the calculation of the work participation rates. It also directed HHS to issue regulations defining the 12 work activities and included new requirements to better ensure the reliability of work participation rate data. We found that the proportion of families receiving TANF cash assistance that met work participation requirements has changed little since DRA was enacted and is still below the 50 percent generally specified as the required rate. In fiscal years 2007 and 2008--the two years following DRA for which national data are available--between 29 and 30 percent of families receiving TANF cash assistance met their work requirements. In numbers of families, 243,000 of 816,000 families met their work requirements in fiscal year 2008. The small decrease in the proportion of families that met their requirements after DRA may be related, in part, to the federal work activity definitions and tightened work hour reporting and verification procedures states had to comply with after the act, as well as states' ability to make the required changes. The types of work activities in which families receiving TANF cash assistance most frequently participated were similar before and after DRA. For example, among families that met their work requirements, the majority participated in unsubsidized employment in the years both before and after DRA. In all of the years analyzed, the next most frequent work activities were job search and job readiness assistance, vocational educational training, and work experience. Although the national rate did not change significantly, fewer states met the required work participation rates after DRA, according to HHS data. As before DRA, states used a variety of options and strategies to meet their required work participation rate. For example: States continued to request caseload reduction credits to help lower their required work participation rates; however, the credits were significantly smaller after DRA, since caseloads went down less after 2005. Some states lowered their required rates by spending state MOE dollars in excess of what is required under federal law on TANF-related programs - a practice we found enabled 22 states to meet their rates in 2007 and 14 states in 2008. Total state MOE expenditures increased by almost $2 billion between fiscal years 2006 and 2008, which appears to be related to state spending on programs and services such as preventing and reducing out-of-wedlock pregnancies. Some states used policies to ensure that families complying with their individual work requirements were included in the work participation rate calculation by, for example providing monthly cash assistance to working families previously on TANF or about to lose TANF eligibility because their working incomes placed them just above eligibility thresholds. 18 states have implemented such programs since DRA. In contrast, after DRA required that state maintenance of effort dollars be included in the calculation of the work participation rates, some states removed certain nonworking families from the calculation of their rates by funding cash assistance for these families with state dollars unconnected to the TANF program - a practice we found in 29 states. We learned that states often use these state-funded programs to provide cash assistance to families that typically have the most difficulty meeting the TANF work requirements, such as families with a disabled member or recent immigrants and refugees. In short, because of the various factors that affect the calculation of states' work participation rates, the rate's usefulness as an indicator of a state's effort to help participants achieve self-sufficiency is limited. Moreover, the rate does not allow for clear comparisons across state TANF programs or comparisons of individual state programs over time. This is the same conclusion we reached in our 2005 report that triggered some of the DRA changes to improve this measure of states' performance. Further, our 2005 review before DRA changes as well as the one we just completed in May of this year indicate that the TANF work rate requirements as enacted, in combination with the flexibility provided, may not serve as an incentive for states to engage more families or to work with families with complex needs. Many states have cited challenges in meeting work performance standards under DRA, such as new requirements to verify participants' actual activity hours and certain limitations on the types and timing of activities that count toward meeting the requirements. The TANF work rate requirements--as established in the original legislation and revised in the Deficit Reduction Act--may not yet have achieved the appropriate balance between flexibility for states and accountability for federal TANF goals. The substantial decline in traditional cash assistance caseloads combined with state spending flexibilities under the TANF block grant allowed states to broaden their use of TANF funds. As a result, TANF and MOE dollars played an increasing role in state budgets outside of traditional cash assistance payments. In our 2006 report that reviewed state budgets in nine states, we found that in the decade since Congress created TANF, the states used their federal and state TANF-related funds throughout their budgets for low-income individuals, supporting a wide range of state priorities, such as refundable state earned income credits for the working poor, prekindergarten, child welfare services, mental health, and substance abuse services, among others. While some of this spending, such as that for child care assistance, relates directly to helping cash assistance recipients leave and stay off the welfare rolls, other spending is directed to a broader population that did not necessarily ever receive welfare payments.. This is in keeping with the broad purposes of TANF specified in the law: 1. providing assistance so that children could be cared for in their own homes or in the homes of relatives; 2. ending families' dependence on government benefits by promoting job preparation, work, and marriage; 3. preventing and reducing the incidence of out-of-wedlock pregnancies; 4. encouraging the formation and maintenance of two-parent families. More recent data indicated that this trend has continued, even under recessionary conditions. In fiscal year 2009, federal TANF and state MOE expenditures for purposes other than cash assistance totaled 70 percent of all expenditures compared with 27 percent in fiscal year 1997, when states first implemented TANF, as shown in figure 2. In addition, of the 21 states we surveyed for our February 2010 report, few reported that they had reduced federal TANF and MOE spending for other purposes, such as child care and subsidized employment programs, to offset increased expenditures for growth in their cash assistance caseloads. States that increased spending on cash assistance while maintaining or increasing spending for other purposes did so by spending reserve funds, accessing the TANF Contingency Fund, accessing the TANF Emergency Contingency Fund created by the Recovery Act, or a combination of the three. This shift in spending left gaps in the information gathered at the federal level to ensure state accountability. Because existing oversight mechanisms focus on cash assistance, which no longer accounts for the majority of TANF and MOE spending, we may be missing important information on the total numbers served and how states use TANF funds to help families to achieve program goals in ways beyond their welfare-to- work programs. For example, states have used significant portions of their TANF funds to augment their child care subsidy programs, which often serve non-TANF families, yet we do not know how many children are served or what role these subsidies play in helping low-income families avoid welfare dependency, a key TANF goal. Further, many states use TANF funds to fund a significant portion of their child welfare programs. In effect, there is little information on the numbers of people served by TANF-funded programs other than cash assistance, and there is no real measure of workload or of how services supported by TANF and MOE funds meet the goals of welfare reform. Another implication of changing caseloads relates to their changing composition, with about half of the families receiving cash assistance composed of cases with no adult receiving assistance in fiscal year 2008 compared with less than one-quarter in fiscal year 1998 (see fig. 3). There are four main categories of "child-only" cases: (1) the parent is disabled and receiving SSI; (2) the parent is a noncitizen and therefore ineligible; (3) the child is living with a nonparent relative; and (4) the parent has been sanctioned and removed from cash assistance for failing to comply with program requirements, and the family's benefit has been correspondingly reduced. These families, with parents or guardians not receiving TANF cash assistance and generally not subject to work requirements, have not been the focus of efforts to help families achieve self-sufficiency. Nearly 15 years after the creation of TANF, the expected upcoming reauthorization of the program has brought renewed interest to efforts to assess how well the program is meeting the needs of low income families with children--most headed by women--and putting them on a path to self-sufficiency. While the dramatic decline in the TANF caseload following welfare reform and the increase in employment among single mothers has been cited as evidence for the program's success, questions have been raised about its effect on families. Many who left the rolls transitioned to low wage, unstable jobs, and research has shown that a small subset of families who neither receive TANF nor earn income may have been left behind. Following the recent economic recession, poverty among children has climbed to its highest level in years. A central feature of the TANF block grant is the flexibility it provides to states to design and implement welfare programs tailored to address their own circumstances, but this flexibility must be balanced with mechanisms to ensure state programs are held accountable for meeting program goals. Over time we have learned that states' success in engaging TANF cash assistance recipients in the type, hours, and levels of work activities specified in the law has, in many cases, been limited, though they have met the required targets using the flexibility allowed. Although the DRA changes to TANF work requirements were expected to strengthen the work participation rate as a performance measure and move more families toward self-sufficiency, the proportion of TANF recipients engaged in work activities remains unchanged. States' use of the modifications allowed in federal law and regulations, as well as states' policy choices, have diminished the rates' usefulness as the national performance measure for TANF, and shown it to be limited as an incentive for states to engage more families or work with families with complex needs. Furthermore, while states have devoted significant amounts of the block grant funds as well as state funds to other activities, little is known about use of these funds. Lack of information on how states use these funds to aid families and to meet TANF goals hinders decision makers in considering the success of TANF and what trade offs might be involved in any changes to TANF when it is reauthorized. We provided a draft of the reports we drew on for this testimony to HHS for its review, and copies of the agency's written responses can be found in the appendices of the relevant reports. In its comments, HHS generally said that the reports were informative and did not disagree with our findings. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Committee may have. For questions about this statement, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include Hedieh Rahmanou Fusfield, Rachel Frisk, Alexander G. Galuten, Gale C. Harris, Kathryn A. Larin, and Deborah A. Signer. Temporary Assistance for Needy Families: Implications of Recent Legislative and Economic Changes for State Programs and Work Participation Rates, GAO-10-525. Washington, D.C.: May 28, 2010. Temporary Assistance for Needy Families: Implications of Changes in Participation Rates, GAO-10-495T. Washington, D.C.: March 11, 2010. Temporary Assistance for Needy Families: Fewer Eligible Families Have Received Cash Assistance Since the 1990s, and the Recession's Impact on Caseloads Varies by State, GAO-10-164. Washington, D.C.: February 23, 2010. Poverty in America: Consequences for Individuals and the Economy. GAO-07-343T. Washington, D.C.: January 24, 2007. Welfare Reform: Better Information Needed to Understand Trends in States' Uses of the TANF Block Grant. GAO-06-414. Washington, D.C.: March 3, 2006. Welfare Reform: More Information Needed to Assess Promising Strategies to Increase Parents' Incomes. GAO-06-108. Washington, D.C.: December 2, 2005. Welfare Reform: HHS Should Exercise Oversight to Help Ensure TANF Work Participation Is Measured Consistently across States. GAO-05-821. Washington, D.C.: August 19, 2005. TANF AND SSI: Opportunities Exist to Help People with Impairments Become More Self-Sufficient. GAO-04-878. Washington, D.C.: September 15, 2004. Welfare Reform: Information on Changing Labor Market and State Fiscal Conditions. GAO-03-977. Washington, D.C.: July 15, 2003. Welfare Reform: Former TANF Recipients with Impairments Less Likely to Be Employed and More Likely to Receive Federal Supports. GAO-03-210. Washington, D.C.: December 6, 2002. Welfare Reform: With TANF Flexibility, States Vary in How They Implement Work Requirements and Time Limits. GAO-02-770. Washington, D.C.: July 5, 2002. Welfare Reform: States Provide TANF-Funded Work Support Services to Many Low-Income Families Who Do Not Receive Cash Assistance. GAO-02-615T. Washington, D.C.: April 10, 2002. Welfare Reform: States Are Using TANF Flexibility to Adapt Work Requirements and Time Limits to Meet State and Local Needs. GAO-02-501T. Washington, D.C.: March 7, 2002. Welfare Reform: Progress in Meeting Work-Focused TANF Goals. GAO-01-522T. Washington, D.C.: March 15, 2001. Welfare Reform: Moving Hard-to-Employ Recipients into the Workforce. GAO-01-368. Washington, D.C.: March 15, 2001. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Temporary Assistance for Needy Families (TANF) program, created in 1996, is one of the key federal funding streams provided to states to assist women and children in poverty. A critical aspect of TANF has been its focus on employment and self-sufficiency, and the primary means to measure state efforts in this area has been TANF's work participation rate requirements. Legislative changes in 2005 were generally expected to strengthen these work requirements. Given changes in the number of families participating in TANF over time and questions about whether the program is achieving its goals, this testimony draws on previous GAO work to focus on 1) key changes to state welfare programs made in response to TANF and other legislation and their effect on caseload trends; 2) how low-income single-parent families are faring; and 3) how recent developments in state programs and the economy may affect federal monitoring of TANF. To address these issues, in previous work conducted from November 2008 to May 2010, GAO analyzed state data reported to the Department of Health and Human Services; used microsimulation analyses; surveyed state TANF administrators in 50 states and the District of Columbia; interviewed officials in 21 states selected to represent a range of economic conditions and TANF policy decisions; conducted site visits to Florida, Ohio, and Oregon; and reviewed relevant federal laws, regulations, and research. Changes states made to their welfare programs as they implemented TANF contributed to a significant decline in program participation, but caseloads are starting to increase in many states. The strong economy of the 1990s, TANF's focus on work, and other factors contributed to increased family incomes and a decline in the number of families poor enough to be eligible for cash assistance. However, research shows that state policies--including TANF work requirements, time limits, and sanction and diversion policies--also contributed to the caseload decline, as fewer eligible families participated in the program. In recent years, states have varied in their response to changes in economic conditions, with caseloads rising in 37 states and falling in 13 states between December 2007 and September 2009, the latest data available when we did our work. Like TANF recipients, families who left TANF, as well as those who qualified for the program but who did not participate, had low incomes and continued to rely on other government supports. In the years following welfare reform, many of the parents who left cash assistance found employment, and some were better off than they were on welfare, but earnings were typically low and many worked in unstable, low-wage jobs with few benefits. Among eligible families who did not participate, a small subset did not work and had very low incomes. Efforts to measure states' engagement of TANF recipients in work activities and to monitor states' use of all TANF funds have been of limited use in ensuring accountability for meeting federal TANF goals, according to our analysis. Work participation rates--a key performance measure for TANF, as currently measured and reported, do not appear to be achieving the intended purpose of encouraging states to engage specified proportions of TANF recipients in work activities. In addition, states' decisions to shift their spending from cash assistance to other programs and work supports such as childcare have highlighted gaps in the information available at the federal level on how many families received TANF services and how states used funds to meet TANF goals. A central feature of the TANF block grant is the flexibility it provides to states to design and implement welfare programs tailored to address their own circumstances, but this flexibility must be balanced with mechanisms to ensure state programs are held accountable for meeting program goals. The limited usefulness of current measures of work participation and the lack of information on how states use funds to aid families and to meet TANF goals hinders decision makers in considering the success of TANF and what trade offs might be involved in any changes to TANF when it is reauthorized.

The reserve components of the Army and Air Force include both the National Guard and Reserves. These components account for about 85 percent of the total reserve personnel and funding. The Navy, Marine Corps, and Coast Guard have only Reserves. Because the Coast Guard Reserve is such a small force--about 8,000 personnel in 1996--and is under the Department of Transportation, we are not including it in our discussion. Table 1 shows that all the reserve components have been reduced in size since fiscal year 1990. Except for the Marine Corps, the components are projected to be reduced even further by fiscal year 2001. Between fiscal years 1990 and 2001, the reserve components are expected to decline by slightly more than 20 percent. The Guard and Reserve comprised about 35 percent of DOD's total military force in 1990, and they are projected to comprise about 38 percent of the force by the end of fiscal years 1996 and 2001. However, the active and reserve composition of each of the services differs considerably. For example, the Guard and Reserve are projected to comprise slightly over 50 percent of the total Army for fiscal years 1996 and 2001, but the Reserves are projected to comprise less than 20 percent of the Naval and Marine Corps total forces for the same years. According to DOD's fiscal year 1996 budget request, the reserve components were projected to receive about 7 percent of total DOD funding for fiscal years 1996 and 2001. This percentage is slightly higher than the percentage in 1990. Table 2 shows the distribution of funds by component for fiscal years 1990, 1996, and 2001. The reserve components are expected to provide critical capabilities that are projected to be needed for two major regional conflicts, the military strategy articulated in DOD's 1993 bottom-up review. Examples of these capabilities are as follows: The Army reserve components provide all or significant portions of many of the Army's support functions, including 100 percent of the forces that provide fresh water supply, over 95 percent of the civil affairs units, about 85 percent of the medical brigades, about 75 percent of the chemical defense battalions, and about 70 percent of the heavy combat engineer battalions. The Air Force reserve components provide about 80 percent of aerial port units, over 60 percent of tactical airlift and air rescue and recovery units, and about 50 percent of aerial refueling units. The Naval Reserve contributes 100 percent of the heavy logistics support units, over 90 percent of the cargo handling battalions, and about 60 percent of the mobile construction battalions. The Gulf War was the first major test of the Total Force policy. Over 200,000 reservists served on active duty either voluntarily or as a result of involuntary call-up. Very few of the combat units in the reserve components were called up for the war; however, the support units were deployed extensively. According to a study by the Institute for Defense Analyses for DOD's Commission on Roles and Missions, many reserve component combat and support units that were deployed for the war demonstrated their ability to perform to standard with little postmobilization training. However, the experience among the services was mixed, according to the study. For example, the Marine Corps called up and deployed more of its Reserve combat units than the other military services, and the units carried out their missions successfully. The Air Force deployed few of its reserve component combat forces, but the forces that were deployed demonstrated that they could perform in a war, if needed. The Army did not deploy National Guard combat brigades that were associated with active divisions because those divisions were deployed on short notice and the Army believed the brigades needed extensive postmobilization training. In a 1991 report, we stated that the three Army National Guard brigades activated for the Gulf War were inadequately prepared to be fully ready to deploy quickly. Army officials have testified that, although combat brigades were intended to participate in contingency conflicts, the envisioned conflicts were not of the immediate nature of the Gulf War. We found that when the three brigades were activated, many soldiers were not completely trained to do their jobs; many noncommissioned officers were not adequately trained in leadership skills; and Guard members had difficulty adjusting to the active Army's administrative systems for supply and personnel management, which were different from those the Guard used in peacetime. The activation also revealed that the postmobilization training plans prepared by the three brigades during peacetime had underestimated the training that would be necessary for them to be fully combat ready. About 140,000 of the 200,000 reservists called up for the Gulf War were from the Army reserve components, and most of those individuals were in support units. We reported in 1992 and testified in 1993 that the Army had difficulty providing adequate support forces. In our testimony, we stated that the Army used a large portion of some types of support units, such as heavy and medium truck units and water supply companies, and totally exhausted its supply of other units, even though it had deployed only about one-quarter of its combat divisions. Reserve component personnel have been involved in virtually every contingency operation since the Gulf War. For example, over 1,300 Army Reserve and National Guard personnel were activated for Uphold Democracy in Haiti to replace individuals deployed from home stations, provide transportation and logistics, and bolster special operations capabilities such as civil affairs. The Air Force relied on reserve component volunteers to provide airlift, aerial refueling, and operational relief of fighter squadrons for Provide Promise and Deny Flight in Bosnia and Provide Comfort in Iraq. Marine Corps reservists provided security for refugee camps at Guantanamo Bay, and Naval reservists participated in Caribbean operations to intercept refugee vessels. Thousands of reservists have participated in recent peace operations. For example, the President, using his Selected Reserve Callup authority, authorized the activation of up to 4,300 reservists to support operations in Bosnia. As of February 22, 1996, 3,475 reservists had been mobilized, and according to DOD Reserve Affairs officials, the first reserve rotation is in place. Additionally, about 960 volunteers have been deployed. Our recent work on the use of volunteers has shown that they have had the necessary skills and qualifications to perform their jobs and have performed well. Last week we reported that the Army National Guard's combat forces far exceed projected requirements for two major regional conflicts. Army National Guard combat forces consist of 8 divisions, 15 enhanced brigades, and 3 separate combat units. Today, about 161,000 Guard personnel are in these combat units, including about 67,000 in the 15 enhanced brigades. We stated that the Guard's eight combat divisions and three separate units are not required to accomplish the two-conflict strategy, according to Army war planners and war planning documents that we reviewed. The Joint Chiefs of Staff have not assigned these divisions and units for use in any major regional conflict currently envisioned in DOD planning scenarios. Moreover, although the Joint Chiefs of Staff have made all 15 enhanced brigades available for war planning purposes, the planners have identified requirements for less than 10 brigades to achieve mission success in a war. According to DOD documents and Army officials, the excess forces are a strategic reserve that could be assigned missions, such as occupational forces once an enemy has been deterred and rotational forces. However, we could find no analytical basis for this level of strategic reserve. State and federal laws generally authorize the Guard to provide military support to state authorities for certain missions, such as disaster relief. Support skills, such as engineering and military police, are most often needed for state missions. The Guard primarily supplements other state resources for these missions. According to a recent study by RAND's National Defense Research Institute, the Guard has used only a small percent of its total personnel over the last decade to meet state requirements. At the time of our review, the Army was studying alternatives to redesign the Guard's combat structure to meet critical shortages that the Army had identified in its support capabilities. The Army's most recent analysis projects a shortage of 60,000 support troops, primarily in transportation and quartermaster units. Furthermore, a recent Joint Chiefs of Staff exercise concluded that maintaining sufficient support forces is critical to executing the two-conflict strategy. DOD's Commission on Roles and Missions concluded in its report that reserve component forces with lower priority tasks, such as the Guard's eight combat divisions, should be eliminated or reorganized to fill shortfalls in higher priority areas. The Commission also reported that, even after filling the shortfalls, the total Army would still have more combat forces than required and recommended that these forces be eliminated from the active or reserve components. The end of the Cold War and budgetary pressures have provided both the opportunity and the incentive to reassess defense needs. Because the Guard's combat forces exceed projected war requirements and the Army's analysis indicates a shortage of support forces, we believe it is appropriate for the Army to study the conversion of some Guard combat forces to support roles. Therefore, in our recent report, we recommended that the Secretary of the Defense, in conjunction with the Secretary of the Army and the Director of the Army National Guard, validate the size and structure of all the Guard's combat forces and that the Secretary of the Army prepare and execute a plan to bring the size and structure in line with validated requirements. We also recommended that, if the Army study suggests that some Guard combat forces should be converted to support roles, the Secretary of the Army follow through with the conversion because it would satisfy shortages in its support forces and further provide the types of forces that state governors have traditionally needed. Moreover, we recommended that the Secretary of Defense consider eliminating any Guard forces that exceed validated requirements. DOD fully concurred with our recommendations. In the aftermath of the Gulf War, the Army adopted a new training strategy that was designed to prepare combat brigades to deploy within 90 days of mobilization. The strategy refocuses peacetime training goals on proficiency at the platoon level and below, rather than up through the brigade level, for mission-essential tasks and gunnery. The strategy also includes efforts to improve individual job and leader training and implements a congressionally mandated program that assigned 5,000 active Army advisers to the brigades. In June 1995, we reported on 7 of 15 brigades that were scheduled to become enhanced brigades. We selected these seven brigades because they were roundout or roundup brigades to active component divisions and had received preference for training and resources. They had also been required to be ready to deploy at the Army's highest readiness level within 90 days of mobilization. Therefore, their deployment criteria did not change when they became enhanced brigades. We reported on the readiness status of the seven combat brigades during 1992 through 1994, the first 3 years the new training strategy was tested, focusing on whether (1) the new strategy had enabled the brigades to meet peacetime training goals, (2) the advisers assigned to the brigades were working effectively to improve training readiness, and (3) prospects for having the brigades ready for war within 90 days were likely. For the most part, none of the brigades came close to achieving the training proficiency sought by the Army. The brigades were unable to recruit and retain enough personnel to meet staffing goals, and many personnel were not sufficiently trained in their individual job and leadership skills. Even if the brigades had made improvements in individual training, their 23-percent personnel turnover rate would quickly obliterate such gains. Collective training was also problematic. In 1993, combat platoons had mastered an average of just one-seventh of their mission-essential tasks, compared with a goal of 100 percent, and less than one-third of the battalions met gunnery goals. Although gunnery scores improved for four brigades in 1994, the brigades reported no marked improvement in the other key areas. The adviser program's efforts to improve training readiness were limited by factors such as (1) an ambiguous definition of the advisers' role; (2) poor communication between the active Army, advisers, brigades, and other National Guard officials, causing confusion and disagreement over training goals; and (3) difficult working relationships. The relationship between the active Army and the state-run Guard was characterized by an "us and them" environment that could undermine prospects for significant improvement in the brigades' ability to conduct successful combat operations. We also reported that it was highly uncertain whether the Guard's mechanized infantry and armor brigades could be ready to deploy 90 days after mobilization. Models estimated that the brigades would need between 68 and 110 days before being ready to deploy. However, these estimates assumed that the brigades' peacetime training proficiency would improve to levels near those envisioned by the training strategy, thus shortening postmobilization training. One model, which included the possibility that the strategy's goals would not be met, estimated that as many as 154 days would be required to prepare the brigades to deploy. In commenting on our report in April 1995, DOD generally agreed with our conclusions, however, DOD said it was too early in the implementation of the initiatives to evaluate improvement in the brigades' readiness. In February 1996, we obtained the latest information on the enhanced brigades' training proficiency from the Army's U.S. Forces Command. According to Command officials, some of the same problems we identified in our report continue to exist and the enhanced brigades have not reached platoon-level proficiency. Specifically, the officials told us that the brigades experienced training difficulties during 1995, which precluded the units from being validated at platoon-level proficiency. Some of the problems that had a negative impact on unit training were (1) low attendance by personnel at annual training, (2) shortages in junior and senior enlisted personnel and officers, and (3) severe deficiencies in individual skills proficiency. For example, one brigade reported that 36 percent of its soldiers were not qualified in their individual military occupational skills. Despite the problems, Command officials said some brigades are improving, however, they have minimal data to support that position. The training situation with the enhanced brigades calls into question whether the current strategy of deploying National Guard combat brigades within 90 days is realistic. The continental air defense mission evolved during the Cold War to detect and intercept Soviet bombers attacking North America via the North Pole. This mission is carried out primarily by dedicated Air National Guard units. In his 1993 report on roles and missions, the Chairman of the Joint Chiefs of Staff had determined that the United States no longer needed a large, dedicated continental air defense force. Consequently, the Chairman recommended that the dedicated force be significantly reduced or eliminated and that existing active and reserve general purpose forces be tasked to perform the mission. The Secretary of Defense agreed with the Chairman's recommendations and directed the Air Force to reduce the dedicated force but retain the mission primarily as an Air Force reserve component responsibility. To date, the Air Force has not aggressively implemented the Chairman's or the Secretary of Defense's recommendations. Rather, the Air Force continues to keep a dedicated force for the air defense mission and has reduced the force by less than 20 percent. We reported in May 1994 that a dedicated continental air defense force was no longer needed because the threat of a Soviet-style air attack against the United States had largely disappeared. As a result of the greatly reduced threat, the air defense force had been focusing its activities on air sovereignty missions. However, those missions could be performed by active and reserve general purpose and training forces because they had comparable or more capable aircraft, were located at or near most existing continental air defense bases and alert sites, and had pilots capable of performing air sovereignty missions or being trained to perform such missions. We stated that implementing the Chairman's recommendations could result in significant savings. The amount of savings would depend on whether the dedicated air defense units were disbanded or assigned another mission. The Air Force reduced its dedicated Air National Guard force from 180 to 150 aircraft. We do not believe this reduction is in line with the Chairman's recommendation. Moreover, we believe that retaining 150 dedicated aircraft would unnecessarily drain operation and maintenance funds. We asked the Congressional Budget Office to estimate the savings from the 1995 defense plan if all the air defense units were disbanded and their missions assigned to existing units. On the basis of a force of 150 aircraft, the office estimated a total savings of about $1.8 billion from fiscal years 1997 through 2000. Mr. Chairman, this concludes my prepared statement. I would be happy to address any questions you or other members of the subcommittee may have. 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GAO discussed the readiness of armed forces reserve components. GAO noted that: (1) reserve components provided crucial support and combat functions in the Persian Gulf War and in various peacekeeping operations; (2) the Army National Guard's combat forces far exceed projected force requirements for two major regional conflicts, while the Army has critical shortages in support functions; (3) none of the enhanced brigades that it reviewed achieved the training proficiency that the Army required for deployment within 90 days of mobilization; (4) active-duty advisers assigned to National Guard brigades were limited by an ambiguous definition of their role, poor management communication, and difficult working relationships; (5) it is uncertain that the Guard's mechanized infantry and armor brigades could deploy within 90 days after mobilization; (6) while it has found that a dedicated continental air defense force is no longer necessary to defend North America against a long-range air threat, the Air Force has only reduced its dedicated Air National Guard force for this mission from 180 aircraft to 150 aircraft; and (7) eliminating continental air defense units and assigning their missions to existing units could save $1.8 billion from fiscal years 1997 through 2000.

Since it started development in 2003, FCS has been at the center of the Army's efforts to modernize into a lighter, more agile, and more capable combat force. The FCS concept involved replacing existing combat systems with a family of manned and unmanned vehicles and systems linked by an advanced information network. The Army anticipated that the FCS systems, along with the soldier and enabling complementary systems, would work together in a system of systems wherein the whole provided greater capability than the sum of the individual parts. The Army expected to develop this equipment in 10 years, procure it over 13 years, and field it to 15 FCS-unique brigades--about one-third of the active force at that time. The Army also had planned to spin out selected FCS technologies and systems to current Army forces throughout the system development and demonstration phase. As we have reported in 2009, the FCS program was immature and unable to meet DOD's own standards for technology and design from the start. Although adjustments were made, such as adding time and reducing requirements, vehicle weights and software code grew, key network systems were delayed, and technologies took longer to mature than anticipated (see fig. 1). By 2009, after an investment of 6 years and an estimated $18 billion, the viability of the FCS concept was still unknown. As such, we concluded that the maturity of the development efforts was insufficient and the program could not be developed and produced within duced within existing resources. existing resources. In April 2009, the Secretary of Defense proposed a significant restructuring of the FCS program to lower risk and address more near-term combat needs. The Secretary noted significant concerns that the FCS program's vehicle designs--where greater information awareness was expected to compensate for less armor, resulting in lower weight and higher fuel efficiency--did not adequately reflect the lessons of counterinsurgency and close-quarters combat operations in Iraq and Afghanistan. As such, the Secretary recommended accelerating fielding of ready-to-go systems and capabilities to all canceling the vehicle component of the FCS program, reevaluating the requirements, technology, and approach, and re-launching the Army's vehicle modernization program, and addressing fee structure and other concerns with current FCS contracting arrangements. In June 2009, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued an acquisition decision memorandum that canceled the FCS acquisition program, terminated manned ground vehicle development efforts, and laid out plans for follow-on Army brigade combat team modernization efforts. DOD directed the Army to transition to an Army-wide modernization plan consisting of a number of integrated acquisition programs, including one to develop ground combat vehicles. Subsequently, the Army has been defining its ground force modernization efforts per the Secretary's decisions and the June 2009 acquisition decision memorandum. Although the details are not yet complete, the Army took several actions through the end of calendar year 2009. It stopped all development work on the FCS manned ground vehicles--including the non-line of sight cannon--in the summer of 2009 and recently terminated development of the Class IV unmanned aerial vehicle and the countermine and transport variants of the Multifunction Utility/Logistics and Equipment unmanned ground vehicle. For the time being, the Army is continuing selected development work under the existing FCS development contract, primarily residual FCS system and network development. In October 2009, the Army negotiated a modification to the existing contract that clarified the development work needed for the brigade modernization efforts. The Army is implementing DOD direction and redefining its overall modernization strategy as a result of the Secretary of Defense's decisions to significantly restructure the FCS program. It is transitioning from the FCS long-term acquisition orientation to a shorter-term approach that biannually develops and fields new increments of capability within capability packages. It now has an approved acquisition program that will produce and field the initial increment of the FCS spinout equipment, which includes unmanned aerial and ground vehicles as well as unattended sensors and munitions, and preliminary plans for two other major defense acquisition programs to define and develop follow-on increments and develop a new GCV. The Army also plans to integrate network capabilities across the Army's brigade structure and to develop and field upgrades to other existing ground force equipment. The first program, Increment 1, is a continuation of previous FCS- related efforts to spin out emerging capabilities and technologies to current forces. Of the Army's post-FCS modernization initiatives, Increment 1, which includes such FCS remnants as unmanned air and ground systems, unattended ground sensors, the non-line-of-sight launch system, and a network integration kit, is the furthest along in the acquisition development cycle (see fig. 2). The network integration kit includes, among other things, the integrated computer system, an initial version of the system-of-systems common operating environment (SOSCOE), early models of the Joint Tactical Radio System, and a range extension relay. In December 2009, the Army requested and DOD approved, with a number of restrictions, the low- rate initial production of Increment 1 systems that are expected to be fielded in the fiscal year 2011-12 capability package. The Army will be continuing Increment 1 development over the next 2 years while low- rate initial production proceeds. The projected development and production cost to equip nine brigades with the Increment 1 network and systems, supported by an independent cost estimate, would be about $3.5 billion. Network Integration Kit (NIK) Provides enhanced communications and situational awareness through radios with multiple software waveforms, connections to unattended sensors, and links to existing networking capabilities. Provides force protection in an urban setting through a leave- behind, network-enabled reporting system of movement and/or activity in cleared areas. Provides independent, soldier-level aerial reconnaissance, surveillance, and target acquisition capability. For the time being, the Army is continuing selected development work-- primarily that related to Increment 1, Increment 2, and network development--under the existing FCS development contract. In October 2009, the Army negotiated a modification to the existing contract, which clarified the development work needed for the brigade modernization efforts. The Army previously awarded a contract for long lead item procurement for Increment 1. A modification to that contract was recently issued to begin low-rate initial production of the Increment 1 systems. The Army has also recently released a request for proposals for the technology development phase of the proposed GCV development effort. Contractor proposals for GCV are expected to include plans and/or solutions for, among other things, survivability (hit avoidance system, armor, and vehicle layout) and mobility (propulsion and power generation and cooling). According to the request for proposals, the proposals can utilize prior Army investment in armor recipes, but they will not get an inherent advantage for doing so. Each solution will be based on its own merits. Contractor proposals are to be submitted in April 2010 and contract awards, for cost-plus type contracts, are to be awarded after the Milestone A decision in September 2010. The challenge facing both DOD and the Army is to set these ground force modernization efforts on the best footing possible by buying the right capabilities at the best value. In many ways, DOD and the Army have set modernization efforts on a positive course, and they have an opportunity to reduce risks by adhering to the body of acquisition legislation and policy reforms--which incorporate knowledge-based best practices we identified in our previous work--that have been introduced since FCS started in 2003. The new legislation and policy reforms emphasize a knowledge-based acquisition approach, a cumulative process in which certain knowledge is acquired by key decision points before proceeding. In essence, knowledge supplants risk over time. Additionally, DOD and the Army can further reduce risks by considering lessons learned from problems that emerged during the FCS development effort. Initial indications are that the Army is moving in that direction. However, in the first major acquisition decision for the Army's post-FCS initiatives, DOD and the Army--because they want to support the warfighter quickly--are proceeding with low-rate initial production of one brigade set of Increment 1 systems despite having acknowledged that the systems are immature, unreliable, and cannot perform as required. The body of acquisition legislation and DOD policy reforms introduced since FCS started in 2003 incorporates nearly all of the knowledge-based practices we identified in our previous work (see table 2). For example, DOD acquisition policy includes controls to ensure that programs have demonstrated a certain level of technology maturity, design stability, and production maturity before proceeding into the next phase of the acquisition process. As such, if the Army proceeds with preliminary plans for new acquisition programs, then adherence to the acquisition direction in each of its new acquisition efforts provides an opportunity to improve the odds for successful outcomes, reduce risks for follow-on Army ground force modernization efforts, and deliver needed equipment more quickly and at lower costs. Conversely, acquisition efforts that proceed with less technology, design, and manufacturing knowledge than best practices suggest face a higher risk of cost increases and schedule delays. As shown in table 2, the cumulative building of knowledge consists of information that should be gathered at three critical points over the course of a program: Knowledge point 1 (at the program launch or Milestone B decision): Establishing a business case that balances requirements with resources. At this point, a match must be made between the customer's needs and the developer's available resources--technology, engineering, knowledge, time, and funding. A high level of technology maturity, demonstrated via a prototype in its intended environment, indicates whether resources and requirements match. Also, the developer completes a preliminary design of the product that shows that the design is feasible and that requirements are predictable and doable. Knowledge point 2 (at the critical design review between design integration and demonstration): Gaining design knowledge and reducing integration risk. At this point, the product design is stable because it has been demonstrated to meet the customer's requirements as well as cost, schedule, and reliability targets. The best practice is to achieve design stability at the system-level critical design review, usually held midway through system development. Completion of at least 90 percent of engineering drawings at this point provides tangible evidence that the product's design is stable, and a prototype demonstration shows that the design is capable of meeting performance requirements. Knowledge point 3 (at production commitment or the Milestone C decision): Achieving predictable production. This point is achieved when it has been demonstrated that the developer can manufacture the product within cost, schedule, and quality targets. The best practice is to ensure that all critical manufacturing processes are in statistical control-- that is, they are repeatable, sustainable, and capable of consistently producing parts within the product's quality tolerances and standards--at the start of production. The Army did not position the FCS program for success because it did not establish a knowledge-based acquisition approach--a strategy consistent with DOD policy and best acquisition practices--to develop FCS. The Army started the FCS program in 2003 before defining what the systems were going to be required to do and how they were going to interact. It moved ahead without determining whether the FCS concept could be developed in accordance with a sound business case. Specifically, at the FCS program's start, the Army had not established firm requirements, mature technologies, a realistic cost estimate, or an acquisition strategy wherein knowledge drives schedule. By 2009, the Army still had not shown that emerging FCS system designs could meet requirements, that critical technologies were at minimally acceptable maturity levels, and that the acquisition strategy was executable within estimated resources. With one notable exception, there are initial indications that DOD and the Army are moving forward to implement the acquisition policy reforms as they proceed with ground force modernization, including the Secretary of Defense's statement about the ground vehicle modernization program--to "get the acquisition right, even at the cost of delay." In addition, DOD anticipates that the GCV program will comply with DOD acquisition policy in terms of utilizing competitive system or subsystem prototypes. According to a DOD official, a meeting was recently held to consider a materiel development decision for the GCV, and the Army is proposing to conduct a preliminary design review on GCV before its planned Milestone B decision point. Additionally, a configuration steering board is planned for later in 2010 to address reliability and military utility of infantry brigade systems. In the first major acquisition decision for the Army's post-FCS initiatives, DOD and the Army--because they want to support the warfighter quickly--are proceeding with low-rate initial production of Increment 1 systems despite having acknowledged that systems are immature, are unreliable, and cannot perform as required. In December 2009, the Under Secretary of Defense for Acquisition, Technology, and Logistics approved low-rate initial production of Increment 1 equipment for one infantry brigade but noted that there is an aggressive risk reduction plan to grow and demonstrate the network maturity and reliability to support continued Increment 1 production and fielding. In the associated acquisition decision memorandum, the Under Secretary acknowledged the risks of pursuing Increment 1 production, including early network immaturity; lack of a clear operational perspective of the early network's value; and large reliability shortfalls of the network, systems, and sensors. The Under Secretary also said that he was aware of the importance of fielding systems to the current warfighter and that the flexibility to deploy components as available would allow DOD to "best support" the Secretary of Defense's direction to "win the wars we are in." Because of that, the Under Secretary specified that a number of actions be taken over the next year or more and directed the Army to work toward having all components for the program fielded as soon as possible and to deploy components of the program as they are ready. However, the Under Secretary did not specify the improvements that the Army needed to make or that those improvements are a prerequisite for approving additional production lots of Increment 1. The approval for low-rate initial production is at variance with DOD policy and Army expectations. DOD's current acquisition policy requires that systems be demonstrated in their intended environments using the selected production-representative articles before the production decision occurs. However, the testing that formed the basis for the Increment 1 production decision included surrogates and non-production- representative systems, including the communications radios. As we have previously noted, testing with surrogates and non-production- representative systems is problematic because it does not conclusively show how well the systems can address current force capability gaps. Furthermore, Increment 1 systems--which are slated for a fiscal year 2011-12 fielding--do not yet meet the Army's expectations that new capabilities would be tested and their performance validated before being deployed in a capability package. As noted in 2009 test results, system performance and reliability during testing was marginal at best. For example, the demonstrated reliability of the Class I unmanned aerial vehicle was about 5 hours between failure, compared to a requirement for 23 hours between failure. The Army asserts that Increment 1 systems' maturity will improve rapidly but admits that it will be a "steep climb" and not a low-risk effort. While the Under Secretary took current warfighter needs into account in his decision to approve Increment 1 low-rate initial production, it is questionable whether the equipment can meet one of the main principles underpinning knowledge-based acquisition--whether the warfighter needs can best be met with the chosen concept. Test reports from late 2009 showed conclusively that the systems had limited performance, and that this reduced the test unit's ability to assess and refine tactics, techniques, and procedures associated with employment of the equipment. The Director, Operational Test and Evaluation, recently reported that none of the Increment 1 systems have demonstrated an adequate level of performance to be fielded to units and employed in combat. Specifically, the report noted that reliability is poor and falls short of the level expected of an acquisition system at this stage of development. Shortfalls in meeting reliability requirements may adversely affect Increment 1's overall operational effectiveness and suitability and may increase life-cycle costs. In addition, in its 2009 assessment of the increment's limited user test--the last test before the production decision was made--the Army's Test and Evaluation Command indicated that the Increment 1 systems would be challenged to meet warfighter needs. It concluded that, with the exception of the Non-Line-of-Sight Launch System, which had not yet undergone flight testing, all the systems were considered operationally effective and survivable, but with limitations, because they were immature and had entered the test as pre-production representative systems and/or pre- engineering design models. Additionally, the Command noted that these same systems were not operationally suitable because they did not meet required reliability expectations. Army and DOD officials made a very difficult decision when they canceled what was the centerpiece of Army modernization--the FCS program. As they transition away from the FCS concept, both the Army and DOD have an opportunity to improve the likely outcomes for the Army's ground force modernization initiatives by adhering closely to recently enacted acquisition reforms and by seeking to avoid the numerous acquisition pitfalls that plagued FCS. As DOD and the Army proceed with these significant financial investments, they should keep in mind the Secretary of Defense's admonition about the new ground vehicle modernization program: "get the acquisition right, even at the cost of delay." Based on the preliminary plans, we see a number of good features such as the Army's decision to pursue an incremental acquisition approach for its post-FCS efforts. However, it is vitally important that each of those incremental efforts adheres to knowledge-based acquisition principles and strikes a balance between what is needed, how fast it can be fielded, and how much it will cost. Moreover, the acquisition community needs to be held accountable for expected results, and DOD and the Army must not be willing to accept whatever results are delivered regardless of military utility. We are concerned that in their desire for speedy delivery of emerging equipment to our warfighters in the field, DOD and the Army did not strike the right balance in prematurely approving low-rate initial production of Increment 1 of brigade modernization. Although the Army will argue that it needs to field these capabilities as soon as possible, none of these systems have been designated as urgent and it is not helpful to provide early capability to the warfighter if those capabilities are not technically mature and reliable. If the Army moves forward too fast with immature Increment 1 designs, then that could cause additional delays as the Army and its contractors concurrently address technology, design, and production issues. Production and fielding is not the appropriate phase of acquisition to be working on such basic design issues. In our upcoming report, we will make recommendations intended to reduce the risk of proceeding into production with immature technologies. In that regard, we will recommend that the Secretary of Defense mandate that the Army correct the identified maturity and reliability issues with the Increment 1 network and systems prior to approving any additional lots of the Increment 1 network and systems for production. Specifically, the Army should ensure that the network and the individual systems have been independently assessed as fully mature, meet reliability goals, and have been demonstrated to perform as expected using production- representative prototypes. We will also recommend that the Secretary of the Army should not allow fielding of the Increment 1 network or any of the Increment 1 systems until the identified maturity and reliability issues have been corrected. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or members of the subcommittee may have. For future questions about this statement, please contact me on (202) 512-4841 or [email protected]. Individuals making key contributions to this statement include William R. Graveline, Assistant Director; William C. Allbritton; Andrea M. Bivens; Noah B. Bleicher; Tana M. Davis; Marcus C. Ferguson; and Robert S. Swierczek. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Since 2003, the Future Combat System (FCS) program has been the centerpiece of the Army's efforts to transition to a lighter, more agile, and more capable combat force. In 2009, however, concerns over the program's performance led to the Secretary of Defense's decision to significantly restructure and ultimately cancel the acquisition program. As a result, the Army is outlining a new approach to ground force modernization. This statement outlines the Army's preliminary post-FCS actions and identifies the challenges DOD and the Army must address as they proceed. This testimony is based on GAO's report on the Army's Ground Force Modernization effort scheduled for release March 15, 2010. It emphasizes the December 2009 decision to begin low-rate initial production for Increment 1 of the Brigade Combat Team Modernization. The Army is implementing DOD direction and redefining its overall modernization strategy as a result of the Secretary of Defense's decision to significantly restructure the FCS program. It is transitioning from the FCS long-term acquisition orientation to a shorter-term approach that biannually develops and fields new increments of capability within capability packages. It now has an approved acquisition program that will produce and field the initial increment of the FCS spinout equipment, which includes unmanned aerial and ground vehicles as well as unattended sensors and munitions. It has preliminary plans for two other major defense acquisition programs to (1) define and develop follow-on increments and (2) develop a new Ground Combat Vehicle (GCV). The individual systems within Increments 1 and 2 are to be integrated with a preliminary version of an information network. Currently, the Army is continuing selected development work--primarily that related to Increments 1 and 2, and the information network--under the existing FCS development contract. The Army has recently released a request for proposals for the technology development phase of the proposed GCV development effort. The Army's projected investment in Increments 1 and 2 and GCV is estimated to be over $24 billion through fiscal year 2015. With these modernization efforts at an early stage, DOD and the Army face the immediate challenge of setting themon the best possible footing by buying the right capabilities at the best value. DOD and the Army have an opportunity to better position these efforts by utilizing an enhanced body of acquisition legislation and DOD policy reforms--which now incorporate many of the knowledge-based practices that GAO has previously identified--as well as lessons learned from the FCS program. Preliminary plans suggest the Army and DOD are strongly considering lessons learned. However, DOD recently approved the first of several planned low-rate initial production lots of Increment 1 despite having acknowledged that the systems and network were immature, unreliable, and not performing as required. That decision reflects DOD's emphasis on providing new capabilities quickly to combat units. This decision did not follow knowledge-based acquisition practices and runs the risk of delivering unacceptable equipment to the warfighter and trading off acquisition principles whose validity has been so recently underscored. The Army needs to seize the opportunity of integrating acquisition reforms, knowledge-based acquisition practices, and lessons-learned from FCS into future modernization efforts to increase the likelihood of successful outcomes.

We found that as of September 30, 2011, more than $794 million in undisbursed balances remained in PMS in 10,548 expired grant accounts. These are accounts that were more than 3 months past the grant end date, had no activity for 9 months or more, and therefore should be considered for grant closeout. This is an improvement from 2008, when we reported that at the end of calendar year 2006, roughly $1 billion in undisbursed funding remained in expired PMS grant accounts. These expired grant accounts do not include accounts associated with grant programs for which the duration of the grant is not limited to a specific time period, such as payments to states for the Medical Assistance Program, known as Medicaid, and Temporary Assistance for Needy Families. This improvement is notable given that the overall amount of grant disbursements through PMS increased by about 23 percent from 2006 to 2011. However, more work needs to be done to further improve the timeliness of grant closeout and reduce undisbursed balances. We have highlighted three areas in need of particular attention. First, we found that undisbursed balances remained in grant accounts several years past their expiration date. We found that 991 expired grant accounts containing a total of $110.9 million in undisbursed funding were more than 5 years past the grant end date at the end of fiscal year 2011. Of these, 115 expired grant accounts containing roughly $9.5 million in undisbursed funding remained open more than 10 years past the grant end date. Federal regulations generally require that grantees retain financial records and other documents pertinent to a grant for a period of 3 years from the date of submission of the final report. Over time, the risk increases that grantees will not have retained the financial documents and other grant information that federal agencies need to properly reconcile financial information and make the necessary adjustments to grant award amounts and amounts of federal funds paid to recipients. This could potentially result in the payment of unnecessary and unallowable costs. Second, we found that a small percentage of grant accounts (a little more than 1 percent) with undisbursed balances of $1 million or more accounted for more than a third of the total undisbursed funds in expired grant accounts. Overall, 123 accounts from eight different federal agencies had more than $1 million in undisbursed balances at the end of fiscal year 2011 for a combined total of roughly $316 million in undisbursed balances. Accounts with undisbursed balances remaining after the grant end date can indicate a potential grant management problem. Data showing that some grantees have not expended large amounts of funding, such as $1 million or more, by the specified grant end date raise concern that the grantees may not have fully met the program objectives for the intended beneficiaries within the agreed-upon time frames. Third, we found more than 28,000 expired grant accounts in PMS with no undisbursed balances remaining that had not been closed out as of the end of fiscal year 2011. According to data provided by PSC, PMS users were charged a total of roughly $173,000 per month to maintain the more than 28,000 expired grant accounts with zero-dollar balances listed on the year-end closeout report. This would represent roughly $2 million in fees if agencies were billed for these accounts for the entire year. While the fees are small relative to the size of the original grant awards, they can accumulate over time. If the grant has otherwise been administratively and financially closed out, then agencies are paying fees to maintain grant accounts that are no longer needed. However, the presence of expired grant accounts with no undisbursed funds remaining raises concerns that administrative and financial closeout--the final point of accountability for these grants, which includes such important tasks as the submission of financial and performance reports--may not have been completed. In addition to data from PMS, we also reviewed data from the ASAP system and found that as of September 30, 2011, $126.2 million in undisbursed balances remained in 1,094 dormant grant accounts. Agencies can use the information in these reports to help identify accounts in need of attention and unspent funds available for deobligation. For example, agencies may want to focus attention on accounts where there has been no activity for a prolonged period. We found roughly $11 million in 179 accounts that had been inactive for 5 years or more. We have found that when agencies made concerted efforts to address timely grant closeout, they, their inspectors general, and auditors reported that they were able to improve the timeliness of grant closeouts and decrease the amount of undisbursed funding in expired grant accounts. Agencies' approaches generally focused on elevating timely grant closeouts to a higher agency management priority and on improving overall closeout processing. For example, in response to past audit reports, HHS officials reported increasing monitoring of grant closeout. Since fiscal year 2006, the HHS independent auditor had routinely reported on concerns with management controls over grant closeout, including a backlog of HHS grant accounts in PMS that were already beyond what the auditor considered a reasonable time frame for closeout. In fiscal year 2011, the independent auditor noted significant improvements in the closeout of grants in PMS. While we found that roughly three-fourths of all undisbursed balances in expired PMS grant accounts were from grants issued by HHS, we also found that the total undisbursed balances in these accounts represented the lowest percentage (2.7 percent) for any federal department included on the In comments on our draft report, September 30, 2011, closeout report.HHS reported that it had identified $116 million in undisbursed balances in PMS available for deobligation through a special initiative begun in 2011 and is updating existing department policies and procedures to improve the grant closeout process going forward. In 2008, we recommended that OMB instruct all executive departments and independent agencies to annually track the amount of undisbursed balances in expired grant accounts and report on the status and resolution of the undisbursed funding in their annual performance reports. At the time, OMB supported the intent of our recommendations, but its comments did not indicate a commitment to implement our recommendations. Starting in 2010, OMB has issued guidance to track and report on undisbursed balances in expired grant accounts to only certain federal departments and entities covered by the Commerce, Justice, Science, and Related Agencies Appropriations Act, as required by law. However, in its instructions, OMB equated "expired grant accounts" with expired appropriation accounts. Based on this definition, OMB's guidance included grant accounts that were still available for disbursement and was not limited only to those grant accounts eligible for closeout. In our review of CFO Act agencies' annual performance reports for fiscal years 2009 to 2011, we found that systematic, agencywide information on undisbursed balances in grant accounts eligible for closeout was largely lacking. In our 2012 grant closeout report, we reiterate our recommendation that OMB instruct all executive departments and independent agencies to report on the status and resolution of the undisbursed funding in grants that have reached the grant end date in their annual performance reports, the actions taken to resolve the undisbursed funding, and the outcomes associated with these actions. In addition, we recommend that the Director of OMB take the following three actions: Revise the definition of "undisbursed balances in expired grant accounts" in future guidance issued to agencies to focus on undisbursed balances obligated to grant agreements that have reached the grant end date and are eligible for closeout. Instruct agencies with undisbursed balances still obligated to grants several years past their grant end date to develop and implement strategies to quickly and efficiently take action to close out these grants and return unspent funds to the Treasury when appropriate. Instruct agencies with expired grant accounts in federal payment systems with no undisbursed balances remaining to develop and implement procedures to annually identify and close out these accounts to ensure that all closeout requirements have been met and to minimize any potential fees for accounts with no balances. OMB staff said that they generally agreed with the recommendations and will consider them as they review and streamline grant policy guidance. OMB did not provide specific actions or time frames with which it would address the issues that we have raised. We will continue to monitor OMB's action on our recommendations. The challenge presented by undisbursed balances in expired grant accounts is just one of a number of grants management challenges we have identified in our past work. Grants continue to be an important tool used by the federal government to achieve national objectives. As the federal government confronts long-term and growing fiscal challenges, its ability to maintain the flow of intergovernmental revenue, such as through grant programs, could be constrained. To make the best use of federal grant funds, it is critical to address grants management challenges that could impact the efficiency and effectiveness of federal grants processes. Accordingly, the Subcommittee has requested that we examine a number of areas involving these issues in future work. However, before I discuss these I would like to put them in a broader context by briefly describing the level of recent federal grant spending and how it has changed over the last three decades. Grants have been, and continue to be, an important tool used by the federal government to provide program funding to state and local governments. According to OMB, federal outlays for grants to state and local governments increased from $91 billion in fiscal year 1980 (about $221 billion in 2011 constant dollars) to over $606 billion in fiscal year 2011. Although many federal departments and agencies award grants, HHS, which administers the Medicaid program, is by far the largest grant- making agency, with grants outlays of almost $348 billion in fiscal year 2011, or about 57 percent of the total federal grants outlays that year. Even when Medicaid's outlays of $275 billion are excluded, HHS remains the largest federal grant-making department.federal outlays for grants to state and local governments over the period from fiscal years 1980 to 2011, in constant dollars, and the increasing amount of this total that went to Medicaid over time. Given the federal government's use of grants to achieve national objectives and respond to emerging trends, this Subcommittee has recently requested that we conduct a number of grant-related reviews in support of its oversight efforts. Today, I would like to briefly highlight four areas where our previous work and that of the inspectors general and others have identified challenges, and where we are beginning the work you requested related to the management of grant programs. Specifically, they are the streamlining of grants management processes; the measurement of grant performance; grant lessons learned from implementing the American Recovery and Reinvestment Act of 2009 (Recovery Act); and internal control weaknesses in grants management processes. For more than a decade, the federal government has undertaken several initiatives aimed at streamlining governmentwide grants management. Over the years, Congress has expressed concern over the inconsistencies and weaknesses we and the inspectors general have found in grants management and oversight. In response to your request we plan to examine the progress OMB and federal grant governance bodies have made toward streamlining grants management. We also expect to assess what further actions should be taken to simplify processes, reduce unnecessary burdens, and improve the governance of streamlining initiatives. We plan to report our results next year. We also expect to evaluate the extent to which there are governmentwide requirements for measuring and reporting grant performance and the extent to which federal agencies measure grant performance to report progress toward their goals, as well as offer assistance to grantees on collecting data and reporting grant performance. As with our streamlining work, the specifics of this grant performance reporting work are currently under development, and we anticipate a 2013 report. In our past work we have reported that effective performance accountability provisions are of fundamental importance in assuring the proper and effective use of federal funds to achieve program goals. Under the Recovery Act, grants have played an important role in distributing federal funds in light of the most serious economic crisis since the Great Depression. As of June 2012, Treasury had paid out more than $250 billion in Recovery Act funds to state and local governments, much of it through grants. Given the significant investment made in the Recovery Act, and the considerable challenges facing our nation moving forward, this Subcommittee recognized the importance of collecting, analyzing, and sharing grant lessons and insights gained as a result of this process. Building on our previous reviews, we will examine lessons from the implementation of the Recovery Act--including specific examples of practices and approaches that worked as well as challenges encountered by federal, state, and local agencies. Among the potential issues to consider are the efforts to facilitate coordination and collaboration among federal, state, local, and nongovernmental partners and actions taken to enhance the organizational and administrative capacity of federal partners. Once again, we anticipate reporting to the Subcommittee next year. Finally, in numerous reviews over the years, we have identified weaknesses in federal agencies' processes for managing and overseeing grant programs. Among the issues we are planning to address in future work is how federal agencies can improve internal control over grants monitoring. We will also examine what improvements, if any, are needed in federal agencies' internal controls to help ensure the primary grantees are providing adequate oversight of subgrantees. The improvements made in the timeliness of grant closeouts since our 2008 report demonstrate that congressional oversight can lead agencies to focus attention on a specific grant challenge, and result in real progress. However, our recent update of our earlier analysis of undisbursed balances also shows that more still needs to be done to close out grants; agencies would use their resources most effectively by focusing initially on older accounts with larger undisbursed balances. As our review of past grant work suggests, there are numerous other issues where congressional attention could also likely pay dividends. This is all the more relevant because federal grant programs remain important tools to achieve national objectives and continue to be a significant component of federal spending. We look forward to continuing to support this Subcommittee's efforts to examine the design and implementation of federal grants and participating in its active oversight agenda. Chairman Carper, Ranking Member Brown, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have. If you or your staff have any questions about this testimony, please contact me at (202) 512-6806 or [email protected], or Beryl H. Davis, Director, at (202) 512-2623 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Phyllis L. Anderson, Assistant Director; Peter Del Toro, Assistant Director; Thomas M. James, Assistant Director; Kimberly A. McGatlin, Assistant Director; Laura M. Bednar, Maria C. Belaval, Anthony M. Bova, Amy R. Bowser, Virginia A. Chanley, Melissa L. King, Thomas J. McCabe, Diane N. Morris, and Omari A. Norman. Additional contributions were made by Andrew Y. Ching, Travis P. Hill, Jason S. Kirwan, Jennifer K. Leone, Cynthia M. Saunders, Albert C. Sim, and Michael Springer. While there can be substantial variation among grant programs, figure 1 illustrates how closing out grants could allow an agency to redirect resources toward other projects and activities or return unspent funds to Treasury.

As the federal government confronts long-term fiscal challenges, it is critical to improve the efficiency of federal grants processes, such as grant closeout procedures that allow for the return of unspent balances to the Treasury. In 2008, GAO reported that about $1 billion in undisbursed funding remained in expired grant accounts in the largest civilian payment system for grants--PMS. For this statement, GAO provides information from its April 2012 report updating its 2008 analysis. GAO also describes federal grant spending over the last three decades and discusses other grant management challenges identified in its past work and that of others. This testimony addresses (1) the amount of undisbursed funding remaining in expired grant accounts; (2) actions OMB and agencies have taken to track undisbursed balances; (3) GAO recommendations to improve grant closeout; (4) recent and historical funding levels for federal grants; and (5) GAO's ongoing and future work on grants management issues. Closeout is an important final point of grants accountability. It helps to ensure that grantees have met all financial and reporting requirements. It also allows federal agencies to identify and redirect unused funds to other projects and priorities as authorized or to return unspent balances to the Department of the Treasury (Treasury). At the end of fiscal year 2011, GAO identified more than $794 million in funding remaining in expired grant accounts (accounts that were more than 3 months past the grant end date and had no activity for 9 months or more) in the Payment Management System (PMS). GAO found that undisbursed balances remained in some grant accounts several years past their expiration date: $110.9 million in undisbursed funding remained unspent more than 5 years past the grant end date, including $9.5 million that remained unspent for 10 years or more. Nevertheless, the more than $794 million in undisbursed balances remaining in PMS represents an improvement in closing out expired grant accounts with undisbursed balances in PMS compared to the approximately $1 billion GAO found in 2008. This improvement is notable given that the overall amount of grant disbursements through PMS increased by about 23 percent from 2006 to 2011. When agencies made concerted efforts to address timely grant closeout, they and their inspectors general and auditors reported that they were able to improve the timeliness of grant closeouts and decrease the amount of undisbursed funding in expired grant accounts. GAO found that raising the visibility of the problem within federal agencies can also lead to improvements in grant closeouts. However, GAO's review of agencies' annual performance reports for fiscal years 2009 to 2011 found that systematic, agencywide information on undisbursed balances in grant accounts eligible for closeout is still largely lacking. The challenge presented by undisbursed balances in expired grant accounts is just one of a number of grants management challenges identified in past GAO work. Addressing these challenges is critical to increasing the efficient and effective use of federal grant funds, which represent a significant component of overall federal spending. According to the Office of Management and Budget (OMB), federal outlays for grants to state and local governments, including Medicaid, increased from $91 billion in fiscal year 1980 (about $221 billion in 2011 constant dollars) to more than $606 billion in fiscal year 2011, accounting for approximately 17 percent of total federal outlays. During this 30-year period there has been a shift in grant spending, increasing the percentage of grant funding of Medicaid while decreasing the percentage of funding of non-Medicaid-related grant programs. GAO work on grants over the last decade has identified a range of issues related to the management of grant programs, including the streamlining of grants management processes, the measurement of grant performance, grant lessons learned from implementing the American Recovery and Reinvestment Act of 2009, and internal control weaknesses. GAO will be looking at each of these grants management issue areas in future work for this Subcommittee. For grant closeout, GAO's April 2012 report recommended OMB revise future guidance to better target undisbursed balances and instruct agencies to take action to close out grants that are past their end date or have no undisbursed balances remaining. OMB staff said they generally agreed with and will consider the recommendations.

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

The Department of the Treasury is authorized by the Congress to borrow money on the credit of the United States to fund operations of the federal government. The Bureau of the Public Debt is the organizational entity within Treasury that is responsible for prescribing the debt instruments and limiting and restricting the amount and composition of the debt. BPD accomplishes this by issuing marketable Treasury bills, notes, and bonds as well as nonmarketable securities, such as U.S. Savings Bonds. The bureau is also responsible for paying interest to investors and redeeming investors' securities. In addition, BPD has been given the responsibility to issue Treasury securities to trust funds for trust fund receipts not needed for current benefits and expenses. During fiscal year 1997, BPD issued over $2.34 trillion in Treasury securities to the public while redeeming about $2.31 trillion of debt held by the public. Most of the $2.34 trillion was raised through more than 160 securities auctions as well as the continual sale of savings securities at 40,000 locations throughout the country and investments in securities by state and local governments. Further, there was $152 billion of net borrowings from federal entities, primarily trust funds. BPD relies on a number of financial systems to process and track the money that is borrowed and to account for the securities it issues. One of its primary systems is the Public Debt Accounting and Reporting System, which is used to account for the federal debt. BPD also relies on various other systems to track marketable securities, savings bonds, and securities issued to state and local government entities and to generate interest transactions for the different securities. All of BPD's financial activities are processed at its data processing center in Parkersburg, West Virginia. In carrying out its debt responsibilities, BPD receives assistance from Federal Reserve Banks (FRB) located throughout the country, which serve as Treasury's fiscal agents. For instance, FRBs issue Treasury securities in electronic (book entry) form upon authorization by the Treasury and administer principal and interest payments on these securities. There are 12 FRBs with 25 branches throughout the country. FRBs use a number of information systems to help process issuance and redemption activities; generate interest payments; and account for marketable Treasury securities, nonmarketable savings securities, and savings securities stock. Data are initially processed at FRBs and then forwarded to BPD's Parkersburg, West Virginia, data center for further processing. The overall effectiveness of the BPD computer controls depends on the controls implemented by BPD's Assistant Commissioner for the Office of Information Technology. This person serves as Chief Information Officer and is responsible for overseeing the development, implementation, and operation of information processing systems. Our objectives were to evaluate and test the effectiveness of the controls over key financial management systems maintained and operated by BPD. Specifically, we evaluated general controls intended to protect data, files, and programs from unauthorized access, modification, prevent the introduction of unauthorized changes to systems and ensure that system software development and maintenance, applications software development and maintenance, computer operations, security, and quality assurance are performed by different people; ensure recovery of computer processing operations in case of a disaster or other unexpected interruption; and ensure that an adequate computer security planning and management program is in place. To evaluate the general controls, we identified and reviewed BPD's information system general control policies and procedures, conducted tests and observations of controls in operation, and held discussions with officials at the BPD data center to determine whether general controls were in place, adequately designed, and operating effectively. In addition, we attempted to obtain access to sensitive data and programs. These attempts, referred to as penetration testing, were performed with the knowledge and cooperation of BPD officials. To evaluate certain application controls, we tested two key BPD financial applications maintained and operated at the data center. Specifically, we evaluated application controls intended to ensure that access privileges establish individual accountability and proper segregation of duties, limit the processing privileges of individuals, and prevent and detect inappropriate or unauthorized activities; data are authorized, converted to an automated form, and entered into the application accurately, completely, and promptly; data are properly processed by the computer and files are updated correctly; and files and reports generated by the application (1) represent transactions that actually occur and (2) accurately reflect the results of processing, and reports are controlled and distributed to the authorized users. To assist in our evaluation and testing of general and application controls, we contracted with an independent public accounting firm. We determined the scope of our contractor's audit work, monitored its progress, and reviewed related working papers to ensure that the resulting findings were adequately supported. During the course of our work, we communicated interim findings and recommended corrective actions to BPD officials who informed us of the steps they planned to take or had taken to address the vulnerabilities we identified. We performed follow-up work to assess the status of any corrective actions taken as of September 30, 1997. The results of the follow-up work were also communicated to BPD. We performed our work at the BPD data center in Parkersburg, West Virginia, from March 1997 through January 1998 in accordance with generally accepted government auditing standards. We requested oral comments on a draft of this report from the Secretary of the Treasury or his designee. On August 31, 1998, the Commissioner of the Bureau of the Public Debt provided us with oral comments, which are discussed in the "Agency Comments" section. Our review of general controls over BPD's financial systems did not identify any weaknesses that placed BPD's financial information at significant risk of being accessed, compromised, or destroyed. However, we found certain vulnerabilities that warrant management's attention and action. Specifically, we found that BPD could improve its general controls by (1) strengthening logical access controls over the use of powerful system capabilities that can be used to access data and programs, (2) strengthening physical controls to further restrict and prevent unauthorized access, and (3) enhancing its service continuity and contingency plans. BPD could also improve its oversight and monitoring of computer security by ensuring that known security violations are investigated and resolved. A key control used by organizations to protect and control access to information maintained in their systems is the use of logical access controls. Logical access controls consist of safeguards, such as passwords, user IDs, and security software programs, that prevent unauthorized users from gaining access to computing resources and restrict the access of legitimate users to the specific systems, programs, and files that they need to conduct their work. BPD did not adequately control powerful system capabilities to prevent unauthorized changes to data and programs that could adversely affect the integrity and availability of the on-line systems environment. We also identified vulnerabilities in certain controls that detect unauthorized access to BPD's systems. Another key control for safeguarding financial data and computer resources from internal and external threats is physical access controls, such as locks, guards, fences, and surveillance equipment. Our review at the data center found physical access control vulnerabilities could allow access to sensitive areas within the BPD data center by employees whose jobs did not warrant such access. An organization's ability to respond to and maintain service after an emergency can be significantly affected by how well it has planned for such contingencies and tested those plans. An organizational contingency plan describes how an organization will deal with a full range of emergencies, from electrical power failures to catastrophic events, such as earthquakes, floods, and fires. The plan specifies the organization's emergency response, backup operations, and postdisaster recovery procedures to ensure the availability of critical resources and facilitate the continuity of operations. It also identifies essential business functions and prioritizes resources in order of criticality. To be most effective, a contingency plan should be periodically tested, and employees should be trained in and familiar with its use. In reviewing BPD's service continuity and contingency planning, we found vulnerabilities related to the close proximity of off-site storage, currentness and completeness of contingency plan testing, and adequacy of the backup power supply. In addition to establishing controls and preparing emergency response plans, an effective computer security management program requires that the organization be actively involved in planning and overseeing computer security activities. Such management involvement should include assigning explicit security responsibilities, regularly assessing risks, establishing and communicating security policies and procedures based on risks, and monitoring and periodically reviewing security controls. In reviewing general controls, we found security management vulnerabilities related to (1) "conflict of interest" issues in the reporting and follow-up of security violations and (2) verifying that background checks have been performed before granting employees access to systems. We also noted additional security management vulnerabilities related to the development of BPD-specific security policies and oversight of the security violation follow-up process. However, we verified that corrective actions resolving these vulnerabilities had been completed by BPD subsequent to September 30, 1997. In addition to testing general controls, we tested application controls for two key BPD financial applications maintained and operated at the BPD data center. We identified the following areas where improvements could be made: (1) strengthening access controls by further restricting system access rights and improving security monitoring and (2) managing accuracy controls more effectively by ensuring that established procedures are followed to prevent the unauthorized deletion of exception reports. Like general access controls, access controls for specific applications should be established to ensure individual accountability and proper segregation of duties, limit the processing privileges of individuals, and prevent and detect inappropriate or unauthorized activities. For the applications reviewed, we found that BPD granted greater access rights to users than required for their jobs, maintained inadequate documentation of access authorizations granted to users, and did not adequately monitor user activities relating to the applications. Accuracy controls are one of the processing controls used to ensure that data are valid and correctly processed. For one application, we determined that the automated controls for identifying and correcting exceptions need improvement. Specifically, established procedures were not followed to prevent inappropriate use of a powerful software utility to delete exception reports from production databases. The deletion of exception conditions may cause inaccuracies in the application's reporting. Because FRBs are integral to the operations of BPD, we also assessed general controls over BPD financial systems operated at FRBs and application controls for four key BPD financial applications maintained and operated by FRBs. Overall, we found these controls were effective. However, we found several vulnerabilities in general and application controls that require FRB management's attention and action. These include vulnerabilities in general controls involving (1) access to systems, programs, and data, including unauthorized external access and (2) service continuity and contingency planning. We also found vulnerabilities in access controls over two of the applications. During our review, we communicated our interim findings and recommended corrective actions for each specific finding to FRB management, and, in most cases, FRBs have acted or are acting to resolve the vulnerabilities that we identified. We will review the status of FRBs' other corrective actions as part of our fiscal year 1998 financial audits. Further, we are providing a separate report to the Board of Governors of the Federal Reserve System that summarizes the details of the control vulnerabilities at FRBs. BPD implemented other controls that reduce the risk that the computer control vulnerabilities identified in this report could result in material losses or misstatements in the financial statements occurring and not being detected promptly. For instance, we determined that the assignment of duties for issuing and redeeming securities provides adequate segregation between FRB and BPD personnel, and that reconciliations of their independent records are performed daily. In addition, although the organizational placement of the security branch function could create "conflict of interest" situations, we found that discussion of security issues at periodic Executive Board meetings provides an opportunity for management to identify any potential instances of conflicts of interest. Overall, the BPD and FRB general and application controls, combined with other effective features of their control environment, such as the clear separation of duties for issuing and redeeming securities, resulted in our opinion that management of BPD fairly stated that its related internal controls, including computer controls, were effective. As evidenced by our work on the financial audit of the Bureau of the Public Debt's Fiscal Year 1997 Schedule of Federal Debt, we determined that the financial information presented on the schedule was materially correct. In addition, these controls have reduced BPD's susceptibility to inadvertent or deliberate misuse, fraudulent use, alteration, or destruction of financial data by users and others gaining access to the systems. However, left uncorrected, the vulnerabilities included in this report could increase the risk of inappropriate disclosure and modification of sensitive information, misuse or damage of computer resources, and disruption of critical operations and thus warrant management's attention and action. To improve areas of vulnerability in general controls and application controls over BPD's financial systems cited in our July 31, 1998, "Limited Official Use" version of this report, we recommended in that report that you direct the Commissioner of the Bureau of the Public Debt to take the following actions. Correct each individual vulnerability we identified and communicated to BPD during our testing and summarized in the "Limited Official Use" report. Assign responsibility and accountability for correcting each vulnerability to designated individuals. These individuals should report regularly to the Commissioner on the status of all vulnerabilities, including actions taken to correct them. Work with FRBs to implement corrective actions to improve the computer control vulnerabilities related to BPD systems supported by FRBs that we identified and communicated to FRBs during our testing. BPD agreed with our findings and recommendations. The Commissioner of the Bureau of the Public Debt indicated that he was pleased that the review of BPD's general controls over financial systems did not identify any reportable conditions. Further, he stated that in most cases, BPD has corrected or is already taking actions to resolve the vulnerabilities identified in this report. We are sending copies of this report to the Commissioner of the Bureau of the Public Debt; the Director of the Office of Management and Budget; the Chairmen and Ranking Minority Members of the Senate Committee on Appropriations and its Subcommittee on Treasury, General Government, and Civil Service, Senate Committee on Finance, Senate Committee on Governmental Affairs, Senate Committee on the Budget, House Committee on Appropriations and its Subcommittee on Treasury, Postal Service, and General Government, House Committee on Ways and Means, House Committee on Government Reform and Oversight and its Subcommittee on Government Management, Information and Technology, House Committee on the Budget; and other interested congressional committees. Copies will be made available to others upon request. Should you or members of your staff have any questions concerning this report, please contact me at (202) 512-3406. Major contributors to this report are listed in appendix I. J. Lawrence Malenich, Assistant Director Barbara S. Oliver, Audit Manager Gregory C. Wilshusen, Assistant Director--Technical Advisor 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. 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Pursuant to a legislative requirement, GAO reviewed the general and application controls that support key automated financial systems maintained and operated by the Bureau of the Public Debt (BPD). GAO noted that: (1) overall, GAO found that BPD implemented effective computer controls; however, GAO identified certain vulnerabilities in general controls involving: (a) access to data and programs; (b) physical access; (c) contingency planning; and (d) security management; (2) GAO also identified vulnerabilities in the controls for two key BPD financial applications maintained and operated at the BPD data center in Parkersburg, West Virginia; (3) addressing these vulnerabilities requires: (a) strengthening access controls by further restricting system access rights and improving security monitoring; and (b) managing accuracy controls more effectively by ensuring that established procedures are followed to prevent unauthorized deletion of exception reports; (4) in most cases, BPD has corrected or is correcting the vulnerabilities that GAO identified; (5) GAO provided a general summary of the vulnerabilities that existed on September 30, 1997; (6) those that GAO verified had been fully resolved subsequent to September 30, 1997, GAO has so noted; and (7) GAO will review the status of BPD's other corrective actions as part of its fiscal year 1998 financial audits.

Administrative records are a growing source of information about individuals and households. Administrative records include records from government agencies, such as tax data and Medicare records, as well as commercial sources from major national data vendors. National administrative records refer to data compiled and maintained nationwide, including files compiled for the purpose of administering federal programs. In comparison, data compiled and maintained by municipalities are referred to as local administrative records, such as building permits and local tax records. According to Bureau officials, for the 2020 Census, the Bureau is researching how to determine the quality and usefulness of administrative records for obtaining addresses or information about individuals. Administrative records could reduce the cost of the census if they can help the Bureau reduce the workload for several operations, including address list building; quality assurance; and nonresponse follow-up, which, at $1.6 billion in 2010 and lasting several weeks, was the largest and most costly census field operation.testing program has nine research and testing projects that are exploring the expanded use of administrative records for these purposes. The Bureau's 2020 research and The Bureau already uses administrative records to produce annual population estimates for the nation, states, counties, cities, towns, and townships as part of its program to estimate changes in population size and distribution since the previous census. The Bureau produces estimates at the state and county-level based on births, deaths, migration, and changes in the number of people who live in group quarters, such as college dormitories and nursing homes. Estimates of the population of subcounty communities--which consist of both incorporated places, such as cities, boroughs, and villages, and minor civil divisions, such as towns and townships--are primarily based on data on housing units, occupancy rates, and persons per household plus an estimate of the population in group quarters. Local governments may challenge these population estimates through a process established by the Bureau's Population Estimates Challenge Program. Local data sources for challenges have included building permits, non-permitted construction, demolition permits, non-permitted demolitions, certificates of occupancy, utility connection data, and real and personal property tax information on residential units. The Bureau permitted localities to submit challenges for population estimates from 2001 to 2008. Counties and subcounties could challenge the Bureau's estimate based on evidence that the number of housing units in their locality differed from the Bureau's estimate of housing units. From 2001 to 2008, the Bureau reports revising population estimates from 287 challenges. These challenges were from 211 governments in 36 states and the District of Columbia. There were as few as 3 challenges in 2001 and as many as 61 each in 2006 and 2007. In 2010, the Bureau temporarily halted the challenge program beginning for estimates from 2009 to accommodate the 2010 decennial census. The Bureau is resuming the challenge program in 2013. According to the Bureau, communities that challenged their population estimate saw their estimate revised upward by an average of about 9.4 percent over the 8-year period. These challenges ranged from an estimated increase of over 186 percent for Bluffton, South Carolina, in 2008, to a decrease of almost 18 percent for Winthrop, Massachusetts, during the same year. In total, four communities submitted challenges containing evidence that resulted in a decrease in population. The effect of the program on smaller communities that participated was much larger, on average in percentage terms, than it was for larger communities that participated. According to Bureau data summarizing the program, communities with populations of less than 100,000 averaged an almost 13 percent upward revision in their population estimate--including the results of the challenge--compared to an average revision of less than 2 percent for communities with a population of more than 1 million (see table 1). Previously, the Bureau provided communities that chose to challenge their population estimate with examples of the types of records they could use to support their calculations, including permits for new residential construction, public utility connection data, real and personal property tax information on residential units, and records of annexations and other types of legal boundary changes. In practice, according to agency officials, the Bureau generally accepted all challenges, largely without regard to the data sources provided so long as they supported calculations of population change and covered the reporting periods required by the challenge program. The rule changes are intended to improve the quality of data that communities use to challenge the Bureau's population estimates and will affect the scope of what county and state governments can challenge. According to Bureau officials, these changes are based on research that shows that estimates based on some methods and records (e.g., births, deaths, and migration) are substantially more accurate than estimates based on others. The rules vary for different levels of government--subcounty, county or equivalent, and state. Subcounty. Under the new rules, subcounty governments should use building, demolition, and mobile home permits, and group quarter counts to challenge population estimates. The Bureau plans to reject challenges that rely solely on other types of data, except in cases where the data provide overwhelming evidence that the Bureau's estimate of population growth is in error.research shows that public utility records can vary widely in their reliability to indicate population growth, as well as in their availability to the public. Therefore, utility records will be treated as corroborating, or secondary, evidence to support other preferred data expected to be provided in support of challenges. Utility records were ordinarily accepted as a basis for successful challenges in the past. For example, according to a senior Bureau official, County and equivalent. Under the changes, county governments and their equivalents should use birth and death records, immigration data, and group quarters counts to challenge population estimates--a significant reduction in the types of records from what the Bureau has historically accepted. According to Bureau officials, research conducted over the past several years has demonstrated that county-level estimation methods based on other data sources do not produce, on average, as accurate estimates of population. Consequently, the Bureau plans to reject county-level challenges relying on other data sources. Under the changes, the Bureau will only accept county-level challenges to either the accuracy of the data the Bureau itself used when producing estimates or to whether the Bureau carried out its estimation procedures properly, such as in handling data files properly or carrying out calculations. Bureau officials acknowledged that local governments might see this reduction in the scope of permissible county-level challenges as being too restrictive, as evidenced by some public comments submitted in response to the proposed changes. Bureau officials stated that they will continue their dialogue with representatives of the Federal-State Cooperative for Population Estimates--a partnership between the Bureau and state governments--and other researchers about improving methods of estimating population, and may revisit the structure of the challenge program if future research demonstrates that an alternative method of estimating county population consistently outperforms that used by the Bureau. Figure 1 shows changes in the types of administrative records accepted by the challenge program. State. The Bureau will generally no longer permit state governments to submit their own challenges. Bureau officials stated that counties and cities are the most appropriate entities to submit a population challenge for their community because they have greater knowledge of their population. Bureau officials also said that they want to avoid situations where a state may challenge estimates for communities where respective local governments disagree with such challenges. The Bureau will allow states to submit challenges for counties or equivalents where there is no seat of government, such as in certain New England states and in parts of Alaska, but will otherwise require all communities affected by a challenge to have their government communicate directly with the Bureau. The changes to procedures are intended to improve the accuracy of revisions to population estimates stemming from challenges. The Bureau modified procedures so that challenges by subcounty governments to the Bureau's estimates of people living in traditional housing--not living in group quarters arrangements--will no longer affect county-level population estimates. Previously, successful subcounty challenges were added to respective county-level populations. The Bureau justifies the change with its research demonstrating that its method for estimating the county population that lives in housing is generally better than the method typically used to challenge subcounty estimates. According to Bureau officials, the method used to challenge subcounty estimates introduced an upward bias for communities that were experiencing population decline or a slowing of population growth. According to the change, any challenge that results in an increase to the estimate of a subcounty community's population living in traditional housing will be offset by a downward revision to the estimate for all other communities in the same county, in effect reallocating the estimated population within the county. Bureau officials emphasized that under the new procedures, as before, if a government successfully challenges the Bureau's estimate of the population living in group quarters arrangements within its community, the revision will be added to the county population as well, and will not be offset by changes to populations in other communities in the county. The Bureau also changed procedures so that it routinely reviews subcounty population challenges in light of each community's population growth trend, requiring corroborating information when a government claims population growth that is inconsistent with the trend. For example, one local government in the Midwest successfully challenged the Bureau's 2006 population estimate and received an increased population estimate of about 5.5 percent, even though evidence it submitted showed the number of housing units in the community was about 3.5 percent lower than the Bureau's original calculation for that year. Another local government successfully challenged the Bureau's 2007 population estimate and received an increased population estimate of about 7.4 percent, even though its evidence showed an increase in housing units of only about 0.8 percent. According to 2010 Census counts in both of these cases, the average actual annual population growth over the decade was far below the challenge result, and the trend in population was declining. A senior Bureau official with whom we spoke said that, in addition, this and other changes in procedures will reduce the incentive that some communities have had to file a challenge in order to provide a community only a temporary reprieve from an otherwise declining trend in their population. Challenge program officials told us that the program focuses its quality assurance on (1) reviewing the calculations presented in the documentation submitted by local governments as part of challenge submissions and (2) checking documents and calculations for internal consistency. Specifically, different worksheets local governments could choose to complete under the program have different data and calculations required to support a challenge, which Bureau staff review for accuracy and consistency. For example, Bureau staff would identify when local governments provided data on local building permits with a significant lag time, and then revise the submitted calculations accordingly since some of the buildings would thus have been constructed outside the time frame for which the population change was being estimated. Bureau officials told us that the Bureau assures quality of locally- submitted records by requiring a community's highest elected official-- such as a mayor or county commission chair--to certify the validity of data used in any challenge to a population estimate that its government submits. The Bureau takes such certification at "face value" and does not examine the quality of these records, which Bureau officials said would be prohibitively time consuming to investigate or verify. Bureau officials said that no change to that approach is planned for the future of the program. However, the Bureau is considering how to describe a quality threshold that local records should satisfy, or steps that local governments can take to check the quality of their records. Additionally, the Bureau distributes a review guide containing standardized procedures to local governments that are interested in participating in the challenge program. The guide includes instructions on filling out standardized worksheets and descriptions of the types of administrative records that can be relied on as sources of data for the challenge. According to Bureau officials, this helps to ensure consistency across challenges and potential revisions to population estimates. Moving forward, according to officials, the Bureau is preparing a quality assurance plan for Bureau staff who review challenges to better ensure proper handling and processing of challenges, as well as the review of calculations. The Bureau intends to develop the plan over the coming months, after the program has resumed. The Bureau is also undertaking an agency-wide effort to update its record keeping policies, which would include revising rules for retaining documentation submitted as part of the challenge program. Changes to record keeping policies would help the Bureau maintain challenge program documentation--including calculations of revised estimates--in the event the Bureau needs to perform any follow-up reviews. In our review of the 287 challenges submitted to the Bureau resulting in revised population estimates from 2001 to 2008, we identified a number of cases where documentation of challenges appeared either incomplete or inconsistent. For example, in some cases, documentation of corrections to local government's calculations was missing, as was certification from a community's highest elected official that data submitted with a challenge were valid. Also missing were notices to local governments from the Bureau on whether challenges were accepted. A lack of documentation could make it difficult for an independent verification of the integrity of the program. We discussed these documentation issues with Bureau officials. In response, they explained the steps they were taking to address them, such as documenting a record keeping policy for the program that includes descriptions of what documentation to create for each challenge and checklists of specific items to be retained in files. Bureau officials agreed to provide us with copies of the revised record keeping policy when the challenge program is resumed later in 2013. Because of these planned actions, we are not making a recommendation to the Bureau at this time. The Bureau is exploring the use of local records for the 2020 Census, but this effort will be of a lower priority than research on the use of national administrative records, in part because national records show greater promise than local records for controlling costs. The Bureau's research on the use of national administrative records for the 2020 Census is focused on their possible use for such purposes as (1) building the address list, (2) counting people, and (3) quality assurance and evaluation processes. In contrast, Bureau officials believe that the use of local administrative records is most likely to support the development of the 2020 address list. The Bureau has used local census records in this regard in prior decennials. In previous enumerations, the Bureau developed its address list in part by going door-to-door and canvassing every block in the country to verify street addresses. However, the process of going door-to-door is labor intensive. As a result, for 2020, the Bureau is exploring how to reduce much of the costly, national canvassing done in the past by combining both local and national administrative data with the United States Postal Service data it already uses, allowing the Bureau to continuously update its master address file throughout the decade. In particular, the Bureau is considering how it can more seamlessly integrate regular input from local government address lists and related geographic information systems into its existing address list and map development processes. The Bureau would like to update this information continuously rather than wait to receive the input as part of a one-time decennial update. In addition, the Bureau will research the quality of these updates to determine the extent to which it can rely on them without necessarily having to verify them door-to-door. Bureau officials stated that if time and resources permit, the Bureau will consider other ways that local records can be used to supplement the use of national records. The officials stated that while it is important to continue research on local records, because they may be helpful in targeting decennial operations to hard-to-count groups or those in certain geographic areas, the results of 2010 Census research and testing on national records has led Bureau officials to conclude that continuing research on national records, such as those listed in figure 2, should be a higher priority. Bureau officials believe that research on the more broadly available national records could yield cost savings more quickly than research on locally available records, and that given resource constraints, they should attempt to "lock in" at least some of the more likely cost savings before pursuing more uncertain ones. Moreover, legislation may be needed to allow the Bureau to expand its use of national records for decennial purposes. Figure 2 shows the national and local records the Bureau is considering and the operations these records could support. Beyond helping to develop the address list, local administrative records that have been used in the challenge program, such as school enrollment data, could supplement national records to either improve or evaluate the counting of targeted populations. Some Bureau stakeholders have suggested to the Bureau that these records, in some locations, may be more comprehensive and accurate than those records on which the Bureau already relies. For example, the Bureau is researching how statewide data, such as Supplemental Nutrition Assistance Program data from Illinois, Maryland, New York, and Texas, could enhance person and housing unit coverage--access to similar records is under negotiation with several other states. By matching records in these files with the 2010 Census and other administrative records, the Bureau is determining their suitability for use to identify addresses or people and their characteristics, as well as their accuracy. Additionally, the Bureau is considering research on other state-level files, such as those maintained by Bureau partners in Florida and Montana, which maintain records on utility use and residential construction, respectively. However, the Bureau would face some challenges using these records for decennial purposes. Bureau officials said local records are generally more difficult to systematically access or to apply broadly to census operations. In some cases, laws restrict the use of these records to certain purposes, so the Bureau may need to negotiate their use with various parties or work towards legislative change. For example, going beyond school system enrollment data and obtaining access to student and school lunch data that might help target hard-to-reach populations is restricted to use for educational purposes by the Family Educational Additionally, some of these records are not Rights and Privacy Act.aggregated nationally, which could make it difficult for the Bureau to obtain them. According to the Bureau, in other cases such as the Supplemental Nutrition Assistance Program, not all states maintain records equally well. If the Bureau ultimately has the time and resources to supplement national data with local data, officials stated that they will work to address these issues. We provided a draft of this report to the Department of Commerce. In response, we received written comments from the department, which are reprinted in appendix II. In its comments, the department stated that it appreciates the time and effort that we put into the draft report and thanked us for responding to technical comments provided earlier by Bureau staff. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to the Acting Secretary of Commerce, the Under Secretary of Economic Affairs, the Acting Director of the U.S. Census Bureau, and interested congressional committees. The report also is available at no charge on GAO's website at http://www.gao.gov. If you have any questions about this report please contact me at (202) 512-2757 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. The GAO staff that made major contributions to this report are listed in appendix III. To describe the U.S. Census Bureau's (Bureau) changes to how local administrative records will be used in the challenge program, we reviewed the August 10, 2012, Federal Register outlining proposed changes; the final rule, which was issued in the January 3, 2013, Federal Register; Bureau reports and presentations, which served as the basis for the changes; and comments received from state and local data experts solicited by the Federal Register on the proposed changes prior to the Bureau's issuance of the final rule. We also interviewed current and retired officials from the Bureau's Population Division responsible for implementing the challenge program. To describe the changes to how the Bureau will assure the quality of population estimates updated by the challenge program, we reviewed the Federal Register notice outlined earlier, and we interviewed Bureau officials to identify additional quality assurance steps the Bureau intends to implement. To better understand the current procedures and implications of these changes, we reviewed documentation the Bureau provided to local governments on submitting accurate documentation to challenge population estimates, including worksheets used to calculate revised population estimates. We conducted a case file review to identify specific quality assurance steps the Bureau has previously taken to review the quality of submissions from local governments. During our case file review, we observed a number of instances where case files and other documentation of challenges appeared to be incomplete or inconsistent. We reviewed each of the documentation weaknesses, and we shared our observations with ranking Bureau executive and program managers. To examine the Bureau's plans to use the types of local administrative records currently used by the challenge program to improve the cost or quality of the 2020 Decennial Census, we reviewed Bureau documentation on research and testing of administrative records for the 2020 Census, as well as our prior reports on the Bureau's research and testing efforts. Additionally, we interviewed the Bureau officials responsible for the research and testing efforts related to administrative records to understand which local records and processes from the challenge program the Bureau is considering for the 2020 Census. Other key contributors to this report include Ty Mitchell, Assistant Director; David Bobruff; Benjamin Crawford; Sara Daleski; Robert Gebhart; Will Holloway; Andrea Levine; Mark Ryan; and Timothy Wexler.

The Bureau's Population Estimates Challenge Program gives local governments the opportunity to challenge the Bureau's annual estimates of their population counts during the years between decennial censuses. Challenges rely on local administrative records, such as building and demolition permits. In addition to their role in the challenge program, these and national administrative records, such as tax data and Medicare records, could save the Bureau money if they are used to help build the Bureau's master address list, and reduce the need for certain costly and labor-intensive door-to-door visits among other things. GAO was asked to review changes to the challenge program and the Bureau's use of administrative records. This report describes the changes to: (1) how local administrative records will be used in the challenge program; (2) how the Bureau will assure the quality of population estimates updated by the challenge program; and describes (3) what plans, if any, the Bureau has to use the types of local administrative records used for the challenge program to improve the cost or quality of the 2020 Decennial Census. GAO reviewed documentary and testimonial evidence from Bureau officials and state and local data experts. Additionally, GAO interviewed Bureau officials to identify changes to the challenge program and reviewed documentation on the challenge program's quality assurance processes. GAO provided a draft of this report to the Department of Commerce. In response the Bureau provided technical comments, which were incorporated as appropriate. The Census Bureau (Bureau) issued significant changes to rules governing the records that communities use to challenge the Bureau's population estimates. Previously, the Bureau routinely accepted all challenges, largely without regard to the data sources cited or provided so long as they supported the calculations and covered the appropriate reporting periods. According to Bureau officials, these changes are based on research that shows that estimates based on some methods and records (e.g., births, deaths, and migration) are substantially more accurate than estimates based on others. Among other changes, the Bureau modified procedures so that challenges by subcounty governments to the Bureau's estimates of people living in housing units will no longer affect countylevel population estimates. Moving forward, any such challenge resulting in an increase in the estimate of a subcounty population will be offset by a downward revision to the population estimate of all other communities in the same county. Also, the Bureau plans to routinely review population challenges in light of each community's population growth trend.Corroborating data will be required for challenges inconsistent with the trend. Challenge program officials told GAO that in the past the program focused quality assurance on (1) reviewing the calculations in the documentation submitted by local governments as part of challenge submissions and (2) checking documents and calculations for internal consistency. Moving forward, the Bureau is preparing a quality assurance plan for Bureau staff who review challenges to better ensure proper handling and processing of challenges, as well as the review of calculations. The Bureau's 2020 research and testing program is exploring the use of local administrative records for the 2020 Census, such as those used in the challenge program, but this effort is a lower priority than research on the use of national records, in part because national administrative records show greater promise than local records for controlling costs. Bureau officials said local records show the most promise for supporting the development of the 2020 address list. Specifically, the Bureau is exploring how it can use local records to more seamlessly and continually update address lists and maps, rather than waiting to receive such information as part of a one-time decennial update. Bureau officials stated that it is important to continue research on local records because they may be helpful in targeting decennial operations to hard-to-count groups or those in certain geographic areas. However, the results of 2010 Census research and testing on national records have led Bureau officials to conclude that continuing research on national records should be a higher priority.

The Prometheus 1 project is part of NASA's Prometheus Nuclear Systems and Technology program to develop nuclear power technologies capable of providing power and propulsion for a new generation of missions. The Prometheus 1 spacecraft is being designed to use nuclear power and electric propulsion technologies to explore the outer reaches of the solar system. The Jupiter Icy Moons Orbiter (JIMO) mission--a 4 to 6-year study of three of Jupiter's moons: Callisto, Europa, and Ganymede--was the original destination identified by NASA. The JIMO mission's overarching science objectives were to (1) investigate the origin and evolution of the three moons; (2) scout their potential for sustaining life; and (3) determine the current rate of movement of surface ice and the rates at which the moons are weathered. With an unprecedented level of power, Prometheus 1, the first in a potential series of spacecraft, is expected to support the use of high capability science instruments and high power communications systems to provide scientists with an a unprecedented amount of scientific information. Figure 1 depicts the notional Prometheus 1 spacecraft. NASA contracted with the Jet Propulsion Laboratory (JPL) to manage the Prometheus 1 project and to manage development of the science mission payload. In turn, JPL awarded a $400-million contract for the initial development of the Prometheus 1 spacecraft to Northrop Grumman Space Technology in September 2004. NASA is collaborating with the Department of Energy's Office of Naval Reactors to develop and handle all issues related to the spacecraft's nuclear reactor. The Prometheus 1 project will have to compete for funding with other NASA programs. In January 2004, the President charged NASA with implementing a new strategy for space exploration--which includes the Prometheus 1 project--while simultaneously returning the shuttle to flight status and completing the International Space Station. NASA laid out its plan for implementing the strategy in its fiscal year 2005 budget request. In essence, NASA's implementation plan holds aeronautics, science, and other activities at near constant levels and transitions funding levels currently dedicated to the Space Station and shuttle programs to the space exploration strategy as the Space Station and shuttle programs phase out. This plan was predicated upon NASA's annual funding level receiving increases to about $18 billion a year by fiscal year 2008 and then remaining near that level, except for inflation, through at least 2020. In the last several years, we have undertaken a best practices body of work on how leading developers in industry and government use a knowledge-based approach to develop products that reduces risks and increases the likelihood of successful outcomes. Development of a sound business case based on this best practices model enables decision makers to be reasonably certain about their products at critical junctures during development and helps them make informed investment decisions. Our best practice work has shown that developing a sound business case based on matching requirements to resources is essential to implementing a knowledge-based approach. A sound business case includes the following elements well-defined requirements, preliminary design, realistic cost estimates, and mature technology. A knowledge-based business case also involves the use of controls or exit criteria to ensure that the required knowledge has been attained at each critical juncture. It ensures that managers will (1) conduct activities to capture relevant product development knowledge, (2) provide evidence that knowledge was captured, and (3) hold decision reviews to determine that appropriate knowledge was captured to allow a move to the next phase. If the knowledge attained at each juncture does not confirm the business case on which the effort was originally justified, the program does not go forward. Use of this approach has enabled leading organizations to deliver high quality products on time and within budget. Product development efforts that have not followed a knowledge-based business case approach can be frequently characterized by poor cost, schedule, and performance outcomes. Although NASA does not require projects to develop a formal business case based on matching requirements to resources, JPL project implementation policy, which establishes JPL's institutional structure for implementation and management of JPL flight projects in accordance with NASA policies, does require projects to develop documentation that includes elements essential to a sound business case. For example, before entering the preliminary design phase, JPL projects are required to develop preliminary requirements, a conceptual design, realistic cost estimates, and technology development plans. JPL projects are required to update and improve the fidelity of information in these documents by PDR. The information in these documents could provide NASA decision makers with the information necessary to support sound business case decisions based on matching requirements to resources at preliminary mission and systems review (PMSR) and PDR. In September 2004, the Congressional Budget Office reported that if NASA's costs for implementing the strategy were similar to prior analogous NASA programs--such as Apollo, Viking, and Mars Exploration Rover--NASA's funding needs could increase by 15 to 23 percent--or $40 billion to $61 billion--over the 16-year estimate. The Congressional Budget Office concluded that if funding were held constant, NASA would likely have to either eliminate mission content or delay schedules. NASA is still in the process of preparing initial justification for the Prometheus 1 project to enter the preliminary design phase. Consequently, at this time the level of funding NASA needs to execute the project is not fully defined. According to project officials, however, funding levels would need to be increased to support the planned launch of Prometheus 1 to Jupiter's Icy Moons. While NASA plans to have defined preliminary system requirements and an initial estimate of the life-cycle cost for Prometheus 1 by summer 2005--when the project enters the preliminary design phase-- the agency faces significant challenges in doing so. According to Prometheus 1 project management, current funding is inadequate to support a 2015 launch of Prometheus 1 as initially planned. Following small funding increases from fiscal years 2005 through 2007, the budget profile becomes relatively flat through fiscal year 2009 (see fig. 2). Project officials believe that the current profile would need to be increased beginning in fiscal year 2007 to reflect project needs of a Jupiter Icy Moons mission. Decision makers will not get their first comprehensive picture of the project's requirements and the resources needed to meet those requirements--the first basis for funding decisions--until PMSR scheduled for summer 2005. While the fiscal year 2006 request includes an updated Prometheus 1 funding profile, a funding profile based on life-cycle cost estimates--which NASA plans to have when it enters the preliminary design phase--will not be included until NASA's fiscal year 2007 request. The Prometheus 1 project office is required to develop preliminary requirements by PMSR. Defining the project's requirements and developing life-cycle cost estimates by then could be challenging, given the short time frames and NASA's past difficulties developing requirements and estimates. While it is not unusual for a project at this stage in acquisition to still be defining requirements, several factors could make it difficult for NASA to develop preliminary requirements by PMSR. The contractor, Northrop Grumman, was only recently selected, and according to project officials, input from both the contractor and Office of Naval Reactors is needed to finalize the preliminary ground, space, and launch systems requirements mandatory for PMSR. In addition, NASA continues to refine its requirements. For example, Prometheus 1 project management increased requirements for reactor lifetime, reactor power, and propellant tank capacity to ensure that the Prometheus 1 spacecraft and reactor designs could be used to support follow-on missions. Currently, project managers are working with broad NASA requirements for deep space exploration and more refined project requirements specific to the Prometheus 1 ground, space, and launch systems. NASA is also required to have an initial life-cycle cost estimate for Prometheus 1 at PMSR. However, because the estimate is based on a conceptual design, preliminary system requirements, and detailed technology development plans that are not yet complete, it will be difficult for NASA to develop an estimate in the short time available by PMSR. The project office is working with Northrop Grumman to merge and finalize the conceptual design. Once the conceptual design is finalized, the project office will update the work breakdown structure and develop a "grass roots" estimate of the spacecraft cost. However, project officials do not expect to receive cost estimates from the Office of Naval Reactors and Northrop Grumman, which are also needed to develop the estimate, until the end of February 2005. The JPL Costing Office will prepare a separate cost estimate based on its experiences with prior programs, and both JPL and NASA will contract for additional independent cost estimates. Adding to these complexities, NASA has historically had difficulty establishing life-cycle cost estimates. In May 2004, we reported that NASA's basic cost-estimating processes--an important tool for managing programs--lack the discipline needed to ensure that program estimates are reasonable. Specifically, we found that 10 NASA programs that we reviewed in detail did not meet all of our cost-estimating criteria--based on criteria developed by Carnegie Mellon University's Software Engineering Institute. Moreover, none of the 10 programs fully met certain key criteria--including clearly defining the program's life cycle to establish program commitment and manage program costs, as required by NASA. In addition, only three programs provided a breakdown of the work to be performed. Without this knowledge, we reported that the programs' estimated costs may be understated and thereby subject to underfunding and cost overruns, putting programs at risk of being reduced in scope or requiring additional funding to meet their objectives. In this report we recommended that NASA take a number of actions to improve its cost - estimating practices. NASA concurred noting that our recommendations validated and reinforced the importance of activities underway at NASA. By PDR--which occurs at end of the preliminary design phase and is scheduled for 2008--the fidelity of the information is expected to improve and could allow NASA to develop a business case that would match requirements with resources and provide decision makers with the information needed to determine whether continued investment in the project is warranted. However, in the past NASA has had difficulties developing the realistic requirements and cost estimates needed to develop a sound business case. To help ensure program requirements do not outstrip resources, leading commercial firms obtain the right knowledge about a new product's technology, design, and production at the right time. We have issued a series of reports on the success these firms have had in estimating the time and money to develop new and more sophisticated products--the kinds of results that NASA seeks. Our best practice work has shown that developing business cases based on matching requirements to resources before program start leads to more predictable program outcomes--that is, programs are more likely to be successfully completed within cost and schedule estimates and deliver anticipated system performance. A sound business case includes the following elements--well-defined requirements, a preliminary design, realistic cost estimates, and mature technology. While NASA does not require projects to develop a formal business case based on matching requirements to resources, JPL policy, which implements NASA policy, does require projects to develop documentation that could support formulation of a sound business case. Before a JPL project enters the preliminary design phase, JPL project implementation policy requires that the project develop preliminary requirements, a conceptual design, realistic cost estimates, and technology development plans. This policy also requires that the fidelity of information in these documents improve by PDR. The requirements and resource estimates NASA is developing for PMSR could form the basis for an initial business case based on matching Prometheus 1 requirements to available resources. However, Prometheus 1 project management plans to continue directing requirements changes to accommodate follow-on missions. While our work shows that the preliminary design phase is the appropriate place to conduct systems engineering to support requirement/cost trade-off decisions, NASA needs to remain cognizant that adding requirements could increase cost and risk. In addition, NASA has had past difficulty developing the realistic requirements and cost estimates needed to develop a sound business case. These difficulties have resulted in the termination of several major efforts after significant investment of resources. For example, in 2002 NASA terminated the Space Launch Initiative (SLI) program--a $4.8 billion, 5-year program to build a new generation of space vehicles to replace its aging space shuttle. SLI was a complex and challenging endeavor for NASA, both technically and from a business standpoint. The SLI program faced some of the same challenges that Prometheus 1 is struggling with today, such as the need to develop and advance new airframe and propulsion technologies. SLI did not achieve its goals, in part, because NASA did not develop realistic requirements and cost estimates. Leading firms make an important distinction between technology development and product development. Technologies that are not mature continue to be developed in the technology base--they are not included in a product development. Our best practices work has also shown that there is a direct relationship between the maturity of technologies and the accuracy of cost and schedule estimates. NASA's Prometheus 1 technologies are currently immature. The Prometheus 1 project office is preparing technology development plans to guide the development of each key technology during the preliminary design phase. Maturing technologies during the preliminary design phase is a key element of matching needs to resources before entering the product development phase. Our best practices work has shown that technology readiness levels (TRL)--a concept developed by NASA--can be used to gauge the maturity of individual technologies (see fig. 4). (See app. I for detailed definition of TRLs.) Specifically, TRL 6--demonstrating a technology as a fully integrated prototype in a realistic environment--is the level of maturity needed to minimize risks for space systems entering product development. While development of Prometheus 1 critical technologies is under way, the technologies will require extensive advancement before they are mature enough to provide the revolutionary capabilities of the Prometheus 1 spacecraft. The overall technology objective for Prometheus 1 is to safely develop and operate a spacecraft with a nuclear-reactor-powered electric propulsion system. To achieve this objective, the spacecraft will require advancement in several technology areas, including, nuclear electric power, power conversion and heat rejection systems, nuclear electric propulsion, high power communications, radiation-hardened electronics, and AR&D. (See app. II for a more detailed explanation of these technologies.) NASA's fiscal year 2005 budget request indicates that these technologies are either at TRL 3 (individual technologies have been demonstrated in a laboratory environment) or TRL 4 (system components have been demonstrated in a laboratory environment). Before NASA conducts the PDR in 2008, it will need to mature the technologies--each of which comes with a unique set of engineering challenges. To gauge the maturation of the Prometheus 1 technologies, the Prometheus 1 project office is preparing technology development plans, which rely on the use of maturity criteria tables (MCT), a concept similar to TRLs. The specific maturation criteria for each technology vary greatly, but all technologies are to be matured by PDR to the point that developmental models are complete, all major risks to each technology are retired, all major manufacturing issues are resolved, and plans for obtaining life data that will provide confidence that the hardware will meet the mission lifetime requirements are in hand. Prometheus 1 project officials believe these criteria roughly correspond to a TRL 5 (component and/or breadboard validation in a relevant environment) or a TRL 6 (system/subsystem model or prototype demonstration in a relevant environment). The program office's position is that using MCTs that are equivalent to TRL 5 and TRL 6 at PDR is appropriate because the program office is both the technology developer and product developer and, as such, has a thorough understanding of how mature the technologies need to be at certain points in time as the program progresses. Nevertheless, the dual role of project office as both technology and product developer is not unique, and our best practices body of work shows that a TRL 6 is the level of maturity needed to minimize risks for space systems entering product development. NASA is quickly approaching one of the most critical phases in its acquisition of Prometheus 1--the preliminary design phase. While the impetus for the changes made to the program--subsequent to our providing a draft of this report to NASA for comment--recognize the technical, schedule, and operational risk of this program, there is still much work to be done. Based on the information presented at PMSR, now scheduled for summer 2005, NASA will need to decide at what level to fund the project. However, NASA will be challenged to develop the information required at PMSR, given the compressed time frames. Although PDR is still several years out, NASA will face significant challenges in meeting this milestone, given the immaturity of the revolutionary technologies that NASA anticipates will be needed to successfully launch Prometheus 1. While NASA is developing well-defined criteria tables for maturing Prometheus 1 technologies, the many inherent unknowns in developing technologies frequently results in unanticipated difficulties and delays. NASA's current policy does not require projects to develop knowledge-based business cases that match requirements to available resources and include controls to ensure that sufficient knowledge has been attained and therefore the agency had not planned to develop such a business case for Prometheus 1. We have found, however, that establishing a formal business case based on a knowledge-based approach that includes matching requirements and available resources-- which include technical and engineering knowledge, time and funding-- and controls to ensure that sufficient knowledge has been attained at critical junctures within the product development process is an essential part of any product development justification. The risk associated with failing to meet these challenges is considerable. If NASA decides to move forward without adequate information at PMSR--that matches requirements and available resources and provides NASA decision makers with a clear understanding of Prometheus 1's potential return on investment--Prometheus 1 may be unable to compete for funding within NASA. Ultimately, NASA could find, as it has in the past, that the program must be cancelled after having invested millions of dollars. We recommend that the NASA Administrator take the following two actions: identify at PMSR the level of resources the agency is committing to the project and direct project officials to develop project requirements based on this resource constraint and ensure that prior to proceeding beyond PDR (currently planned for 2008) a sound business case is established which includes confirmation that (1) critical technologies have been successfully demonstrated as mature, (2) systems engineering has been conducted to support requirements/cost trade-off decisions, (3) requirements and resource estimates have been updated based on the results of the preliminary design phase, (4) knowledge based criteria are established at each critical juncture to ensure that relevant product development knowledge is captured, and (5) decision reviews are held to determine that appropriate knowledge was captured to allow a move to the next phase. In written comments on a draft of this report, NASA's Deputy Administrator stated that the agency concurs with the recommendations, adding that the recommendations validate and reinforce the importance of activities underway at NASA to improve NASA's management of complex technical programs. Subsequent to our draft report being provided to NASA for comment, significant changes were made to the Prometheus 1 project. NASA's fiscal year 2006 budget request includes changes to the Prometheus 1 project that directly address the recommendations in this report. According to NASA's budget justification, the agency is planning a less complex mission than the original JIMO mission. According to program officials who we consulted with following the release of the budget, eliminating the long reactor lifetime, stringent radiation hardening, multiple launches, and AR&D required for the JIMO mission will allow NASA "to walk before it runs" and significantly reduce cost and technical risks. As a result, NASA has delayed PMSR until summer 2005 and is conducting an analysis of alternatives to identify a relevant mission with reduced technical, schedule, and operational risk. The fiscal year 2006 budget request also reshapes the Prometheus 1 funding profile to provide an orderly increase in developmental activities. Notwithstanding agreement with our recommendations, the Deputy Administrator stated that NPR 7120.5B requires projects to develop a business case. As we noted in this draft report, we recognize that NASA policy requires the development of elements that could support the formulation of a knowledge-based business case. However, we found no explicit requirement within NPR 7120.5B for NASA projects to develop a business case of any kind. More importantly, while NPR 7120.5B does require that projects establish controls to monitor performance against cost, schedule, and performance baselines and to conduct reviews throughout the project's lifecycle, it does not establish specific knowledge- based controls to ensure that the knowledge necessary to match resources to requirements is in hand before moving forward. For example, whereas NPR 7120.5B requires projects to conduct a preliminary design review before entering NASA's implementation phase, i.e., product development, it does not establish knowledge-based criteria to ensure that technologies needed to meet essential product requirements have been demonstrated to work in a realistic environment. Likewise, NASA policy requires a critical design review during a project's implementation phase but does not include knowledge-based criteria to ensure the design is stable. We have found that such knowledge-based criteria, when tied to major events on a program's schedule, can disclose whether gaps or shortfalls exist in demonstrated knowledge, which can presage future cost, schedule and performance problems. In his comments, the Deputy Administrator also noted that the Exploration Systems Mission Directorate is in the process of initiating a number of reforms to its project management policies and specified formulation dates in the coming months. He outlined these reforms and explained how they will allow NASA to address the recommendations in our report. We are encouraged by these planned changes. If properly implemented, they could be positive steps toward implementing a knowledge-based approach to project management. The Deputy Administrator also requested that the relationship between JPL and NASA project management requirements be explicitly stated in the report. We moved the information from a footnote into the body of the report to clarify that relationship. We also addressed NASA's technical comments as appropriate throughout the report. To determine whether NASA is establishing justification for the project and ensuring critical technologies are mature, we conducted interviews with NASA Exploration Systems Mission Directorate and Prometheus 1 project officials at NASA Headquarters, Washington, D.C.; Marshall Space Flight Center, Huntsville, Ala.; and the Jet Propulsion Laboratory, Pasadena, Calif. We obtained and reviewed pertinent documents from the agency. We conducted quantitative and qualitative analyses of project schedules, risk assessments, budget documentation, technology maturity assessments and technology development plans. We compared these documents to criteria established in JPL and NASA policies governing developmental programs and to criteria for a knowledge based approach to acquisition described in GAO's best practices body of work. We discussed key project challenges with Prometheus 1 project officials, and conducted GAO team meetings to discuss analyses and developing issues. Our audit work was completed between April 2004 and January 2005. As agreed with your office, unless you announce its contents earlier, we will not distribute this report further until 30 days from its issuance date. At that time, we will send copies to the NASA Administrator and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Key contributors to this report are acknowledged in appendix IV. None (Paper studies and analysis) Invention begins. Once basic principles are observed, practical applications can be invented. The application is speculative and there is no proof or detailed analysis to support the assumption. Examples are still limited to paper studies. None (Paper studies and analysis) Active research and development is initiated. This includes analytical studies and laboratory studies to physically validate analytical predictions of separate elements of the technology. Examples include components that are not yet integrated or representative. Analytical studies and demonstration of nonscale individual components (pieces of subsystem). Basic technological components are integrated to establish that the pieces will work together. This is relatively "low fidelity" compared to the eventual system. Examples include integration of "ad hoc" hardware in a laboratory. Low fidelity breadboard. Integration of nonscale components to show pieces will work together. Not fully functional or form or fit but representative of technically feasible approach suitable for flight articles. Fidelity of breadboard technology increases significantly. The basic technological components are integrated with reasonably realistic supporting elements so that the technology can be tested in a simulated environment. Examples include "high fidelity" laboratory integration of components. High fidelity breadboard. Functionally equivalent but not necessarily form and/or fit (size weight, materials, etc.). Should be approaching appropriate scale. May include integration of several components with reasonably realistic support elements/ subsystems to demonstrate functionality. Lab demonstrating functionality but not form and fit. May include flight demonstrating breadboard in surrogate aircraft. Technology ready for detailed design studies. Representative model or prototype system, which is well beyond the breadboard tested for TRL 5, is tested in a relevant environment. Represents a major step up in a technology's demonstrated readiness. Examples include testing a prototype in a high fidelity laboratory environment or in simulated operational environment. Prototype--Should be very close to form, fit and function. Probably includes the integration of many new components and realistic supporting elements/subsystems if needed to demonstrate full functionality of the subsystem. High-fidelity lab demonstration or limited/restricted flight demonstration for a relevant environment. Integration of technology is well defined. Prototype near or at planned operational system. Represents a major step up from TRL 6, requiring the demonstration of an actual system prototype in an operational environment, such as in an aircraft, vehicle or space. Examples include testing the prototype in a test bed aircraft. Prototype. Should be form, fit and function integrated with other key supporting elements/subsystems to demonstrate full functionality of subsystem. Flight demonstration in representative operational environment such as flying test bed or demonstrator aircraft. Technology is well substantiated with test data. Technology has been proven to work in its final form and under expected conditions. In almost all cases, this TRL represents the end of true system development. Examples include developmental test and evaluation of the system in its intended weapon system to determine if it meets design specifications. Actual application of the technology in its final form and under mission conditions, such as those encountered in operational test and evaluation. In almost all cases, this is the end of the last "bug fixing" aspects of true system development. Examples include using the system under operational mission conditions. The nuclear reactor is the key element of the Prometheus 1 spacecraft. Without the power levels supplied by the reactor, the proposed propulsion, science, and communication systems are not feasible. Designing, constructing, and utilizing highly reliable, safe, portable nuclear reactors is not new--nuclear reactors have been used in submarines for almost 50 years. However, the United States has very little experience operating nuclear reactors in a space environment and tackling space unique nuclear application issues. The Office of Naval Reactors, the organizational unit in the Department of Energy responsible for developing nuclear reactors for the Navy, will be responsible for all portions of the Prometheus 1 reactor development effort. The space environment places significant weight constraints on the reactor design and requires semi-autonomous control. Unlike submarines and aircraft carriers, all spacecraft have serious weight constraints driven by the cost of launching payloads into orbit. Consequently, spacecraft designers put great effort into eliminating weight. Further, where conventional reactors have hands on operators, the Prometheus 1 reactor must be remotely controlled. NASA estimates that control communications will take about 40 minutes to travel one way between Earth and the Jovian system. A power conversion system accepts the thermal energy from the reactor and converts it to useful electrical power for the spacecraft. Power conversion is an integral part of any power generation system taking the form of steam turbine generators in terrestrial utility plants and nuclear submarines. NASA is considering two types of power conversion systems--dynamic and static. According to NASA, the dynamic systems under consideration offer the benefits of increased efficiency, reduced weight and mass, and decreased nuclear fuel requirements. The static systems, however, have a technology heritage in prior spacecraft and could offer increased reliability because they have no moving parts. Since the conversion process in a fission reactor is never 100 percent efficient, heat rejection is required to dissipate waste energy. This is usually accomplished with large pumped-water cooling systems on earth. Space based power conversion would require a large radiator system to dissipate the waste heat in the vacuum of space. The requirement to fold the large radiator system into the launch vehicle fairing and deploy it after launch complicates the radiator system design. (See fig. 1.) Operating electric propulsion systems in space applications, including deep space, is not new. There is extensive experience with electric propulsion systems on satellites. In addition, NASA's Deep Space 1 spacecraft was propelled using an electric propulsion ion thruster, similar in nature to the concept being developed for Prometheus 1. The thruster power levels required by Prometheus 1 have been demonstrated in a laboratory environment. The lifetime required by Prometheus 1, however, has not been demonstrated. Furthermore, lifetime testing of existing ion thrusters has demonstrated that these thrusters were approaching "wear out failure" after 30,352 hours. The Prometheus 1 thrusters will need to be qualified for operational durations approaching 120,000 hours. NASA recognizes that they will have to develop models and accelerated aging techniques to demonstrate the lifetime requirement. The nuclear reactor will provide increased electrical power for communications. This translates to increased bandwidth and data rates. The high power communications system onboard the Prometheus 1 spacecraft, will provide tens of compact disks full of data back to earth. Analogous missions such as Cassini provide only a couple of floppy disks full of data. (A floppy disk typically holds about 1.44 MB of data. A compact disk typically holds about 700 MB of data.) According to project officials, the higher power communications system on the Prometheus 1 spacecraft will require upgrades to the Deep Space Network, which are out of the purview of the Prometheus 1 project. There is no launch vehicle in the present or proposed U.S. inventory capable of launching the Prometheus 1 spacecraft, conceived for a mission to Jupiter's Icy Moons, into orbit in one piece. The conceptual design currently shows the Prometheus 1 spacecraft to weigh between 29 and 36 metric tons and be about 58 meters in length. The current concept is to use multiple launches, 2 to 5, to place the spacecraft components in orbit and to use AR&D technology to assemble the spacecraft in orbit. Prometheus 1 is relying on NASA's Demonstration Autonomous Rendezvous Technology and Hubble Robotic Servicing Mission, and the Defense Advanced Research Projects Agency's Orbital Express programs for AR&D technology. These programs use different sensors and approaches to AR&D thereby providing Prometheus 1 with various options for consideration. In addition to the contact named above, James Morrison, Jerry Herley, John Warren, Tom Gordon, Ruthie Williamson, Karen Sloan and Sylvia Schatz made key contributions to this report. Best Practices: Using a Knowledge-Based Approach to Improve Weapon Acquisition, GAO-04-386SP. Washington, D.C.: January 2004. Best Practices: Setting Requirements Differently Could Reduce Weapon Systems' Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003. Defense Acquisitions: DOD's Revised Policy Emphasizes Best Practices, but More Controls Are Needed. GAO-04-53. Washington, D.C.: November 10, 2003. Best Practices: Capturing Design and Manufacturing Knowledge Early Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 2002. Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices. GAO-02-469T. Washington, D.C.: February 27, 2002. Best Practices: Better Matching of Needs and Resources Will Lead to Better Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001. Best Practices: A More Constructive Test Approach Is Key to Better Weapon System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000. Defense Acquisition: Employing Best Practices Can Shape Better Weapon System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000. Best Practices: DOD Training Can Do More to Help Weapon System Program Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 16, 1999. Best Practices: Better Management of Technology Development Can Improve Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999. Defense Acquisitions: Best Commercial Practices Can Improve Program Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999. Defense Acquisition: Improved Program Outcomes Are Possible. GAO/T-NSIAD-98-123. Washington, D.C.: March 18, 1998. Best Practices: DOD Can Help Suppliers Contribute More to Weapon System Programs. GAO/NSIAD-98-87. Washington, D.C.: March 17, 1998. Best Practices: Successful Application to Weapon Acquisition Requires Changes in DOD's Environment. GAO/NSIAD-98-56. Washington, D.C.: February 24, 1998. Major Acquisitions: Significant Changes Underway in DOD's Earned Value Management Process. GAO/NSIAD-97-108. Washington, D.C.: May 5, 1997. Best Practices: Commercial Quality Assurance Practices Offer Improvements for DOD. GAO/NSIAD-96-162. Washington, D.C.: August 26, 1996.

In 2003, the National Aeronautics and Space Administration (NASA) initiated the Prometheus 1 project to explore the outer reaches of the Solar System. The Prometheus 1 spacecraft is being designed to harness nuclear energy that will increase available electrical power from about 1,000 watts to over 100,000 watts and enable the use of electric propulsion thrusters. Historically, NASA has had difficulty implementing some initiatives. NASA's failure to adequately define requirements and quantify the resources needed to meet those requirements has resulted in some projects costing more, taking longer, and achieving less than originally planned. Prometheus 1 will need to compete for NASA resources with other space missions--including efforts to return the shuttle safely to flight and complete the International Space Station. GAO was asked to determine (1) whether NASA is establishing initial justification for its investment in the Prometheus 1 project and (2) how the agency plans to ensure that critical technologies will be sufficiently mature at key milestones. NASA is in the process of establishing initial justification for its investment in the Prometheus 1 project but faces challenges establishing preliminary requirements and developing accurate cost estimates. Decision makers will not get their first comprehensive picture of the project's requirements and the resources needed to meet those requirements until the preliminary mission and systems review, scheduled for summer 2005. Defining the project's requirements and developing life-cycle cost estimates by then could be challenging, given the short time frames. The fidelity of this information should improve by the preliminary design review scheduled for 2008. At that time, NASA has the opportunity to use these more refined requirements and cost estimates to establish a sound business case for its investment in the Prometheus 1 project. According to Prometheus 1 project management, a flat funding profile is inadequate to ramp up for the planned 2015 launch of Prometheus 1, the project's first spacecraft to its original destination of Jupiter's Icy Moons. By matching requirements to resources a sound business case would allow NASA to determine whether trade-offs in the design of the spacecraft or the agency's expectations are needed to avoid outstripping available resources. Significant program cost and schedule increases in past programs can be traced to not matching requirements with resources at preliminary design review. While development of the Prometheus 1 technologies is under way, each will require extensive advancement before they are mature enough to support reliable cost estimates. NASA is preparing technology development plans that include measurable criteria to ensure the Prometheus 1 technologies are on track for meeting NASA's maturity requirements through the end of the preliminary design phase. GAO's best practices work has shown, however, that establishing a formal business case based on a knowledge-based approach that includes matching requirements and available resources--which include technical and engineering knowledge, time, and funding--and controls to ensure that sufficient knowledge has been attained at critical junctures within the product development process is an essential part of any product development justification. NASA's current policy does not require projects to develop knowledge-based business cases that match requirements to available resources and include controls to ensure that sufficient knowledge has been attained. Therefore, the agency had not planned to develop such a business case for Prometheus 1. Since GAO provided our draft report to NASA for comment, the agency released its fiscal year 2006 budget request that includes changes to Prometheus 1. If properly implemented, these changes could be positive steps in addressing the findings and recommendations in this report.

In 2004, the Coast Guard and the Minerals Management Service--a component of Interior that was subsequently reorganized into the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), and, most recently, the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE)-- signed a memorandum of understanding (MOU) to delineate inspection responsibilities between the agencies. Per the MOU, the Coast Guard is responsible for ensuring (1) the safety of life and property on offshore energy facilities and vessels engaged in OCS activities; (2) workplace safety and health, including enforcement of requirements related to personnel, workplace activities, and conditions and equipment on the OCS; and (3) security of offshore energy facilities. The MOU assigns Interior responsibility for, among other things, managing the nation's oil, natural gas, and other mineral resources on the OCS in a safe and environmentally sound manner. In addition to delineating inspection responsibilities between the Coast Guard and Interior, the MOU is further divided into five memorandums of agreement, one of which addresses the agencies' responsibilities where jurisdiction overlaps. In accordance with this memorandum of agreement, the Coast Guard is the lead agency with responsibility for the inspection and testing of all marine and lifesaving equipment onboard fixed and floating offshore energy facilities and MODUs, and Interior is the lead agency with responsibility for the inspection and testing of all production and drilling equipment on these facilities. The Coast Guard, however, had authorized Interior (specifically, what was then the Minerals Management Service) to perform inspections of fixed offshore energy facilities and to enforce Coast Guard regulations applicable to such facilities. For example, the Coast Guard is to conduct an initial inspection of each new fixed offshore energy facility to determine whether it is compliant with Coast Guard safety regulations. However, after the initial inspection, the Coast Guard has authorized Interior's inspectors to conduct such safety inspections on behalf of the Coast Guard and enforce Coast Guard regulations applicable to those facilities as a means to avoid duplicating functions, reduce federal costs, and increase oversight for Coast Guard compliance without increasing the frequency of inspections. Therefore, with respect to fixed offshore energy facilities, the only inspections for which the Coast Guard is exclusively responsible beyond the initial safety inspection are the annual security inspections, to the extent that these facilities meet the applicable criteria, as described below. The Coast Guard continues to have responsibility for conducting inspections and enforcing its regulations on floating offshore energy facilities and MODUs. In accordance with federal laws, agreements between the Coast Guard and Interior described above, and Coast Guard guidance, Coast Guard is responsible for conducting annual security inspections of offshore energy facilities that meet or exceed any one of three thresholds for production or personnel--(1) producing greater than 100,000 barrels of oil a day, (2) producing more than 200 million cubic feet of natural gas per day, or (3) hosting more than 150 persons for 12 hours or more in each 24-hour period continuously for 30 days or more. We refer to the 57 offshore energy facilities that met or exceeded these thresholds at some point from 2008 through 2010--and were therefore subject to security inspections during those years--as "OCS facilities." Of these 57 OCS facilities, all of which are located in the Gulf of Mexico, 41 are fixed OCS facilities and 16 are floating OCS facilities. Staff at Coast Guard headquarters oversee and develop policies and procedures for field staff to follow when conducting security inspections of OCS facilities and to assist affected owners and operators so that they can comply with maritime security regulations. Among other things, Coast Guard marine inspectors in the field units conduct security inspections of OCS facilities by taking helicopter rides to facilities that can range up to 200 miles offshore. Once arriving, inspectors are to conduct on-site interviews with facility security officers and observe operations to verify whether required security measures are in place. As of August 2011, the Coast Guard had about 12 active marine inspectors who were qualified to conduct security inspections of OCS facilities. These inspectors work out of six field units near the Gulf of Mexico--Mobile, Alabama; Morgan City, Louisiana; New Orleans, Louisiana; Corpus Christi, Texas; Galveston, Texas; and Port Arthur, Texas. In line with the responsibilities set forth in the MOU discussed above and to ensure compliance with applicable laws and regulations, Interior has an offshore oil and natural gas inspection program intended to verify that the operator complies with Interior regulations and requirements at a well site. Interior's offshore oil and natural gas oversight includes inspections of production activities including drilling, regular production activities, meters, abandoned platforms, and pipelines, among other things. Also in accordance with the MOU between the two agencies, Interior conducts both "full" and "limited" inspections of fixed offshore energy facility on behalf of the Coast Guard. During the full inspections of staffed, fixed offshore energy facilities, Interior's inspectors are to review all applicable Coast Guard requirements, which include 27 safety items. During limited inspections, which are to be conducted on all fixed offshore energy facilities in the course of conducting inspections at those facilities for Interior's purposes, Interior's inspectors are to review less than half of the safety items. During these inspections, Interior's inspectors are to, among other things, check for safety items such as the presence of equipment designed to prevent tripping, slipping, or drowning. Coast Guard OCS facility guidance provides that Coast Guard personnel are to conduct security inspections of OCS facilities annually, but our analysis of inspections data show that the Coast Guard has not conducted such inspections for most of these OCS facilities. For example, the Coast Guard conducted about one-third of the required annual inspections of OCS facilities from 2008 through 2010 (see table 1). Specifically, our analysis of Coast Guard inspections data shows that in 2008 the Coast Guard inspected 7 of 56 OCS facilities, which was e 13 percent of the required annual inspections. More recently, in 2010, th Coast Guard inspected 23 of 51 (45 percent) OCS facilities that the Coast Guard should have inspected. Our analysis of Coast Guard inspections data shows that the Coast Guard generally inspected a greater percentage of floating OCS facilities than fixed OCS facilities (see table 2). For example, from 2008 through 2010, the Coast Guard conducted annual security inspections of 54 percent of floating OCS facilities compared to 24 percent of fixed OCS facilities. During our interviews with Coast Guard marine inspectors and their supervisors, we learned that some field units did not know that they were responsible for conducting security inspections of these fixed facilities, approximately one-third of which are not staffed because operations are automated. For example, marine inspectors in the Coast Guard field unit that oversees more than half of the OCS facilities stated that they had only recently learned that they were responsible for conducting security inspections of fixed OCS facilities. These marine inspectors stated that they thought that security inspections of the fixed OCS facilities within their area of responsibility were carried out by another field unit and that they had only been conducting annual security inspections of the floating OCS facilities. Further, other Coast Guard officials stated that it is easier to arrange for security inspections of floating OCS facilities because marine inspectors visit those facilities more frequently for other types of inspections, such as hull or safety inspections, whereas for fixed OCS facilities, the Coast Guard is required to conduct an initial safety inspection of each new facility and then is solely responsible for conducting annual security inspections of fixed OCS facilities once a year for annual security inspections. The Coast Guard does not have procedures in place to help ensure that its field units conduct annual security inspections of OCS facilities annually in accordance with its guidance. Standards for Internal Control in the Federal Government state that internal controls should include control activities, such as policies, procedures, and mechanisms that help ensure management directives are carried out. However, the Coast Guard does not have such control activities in place. For example, the Coast Guard's OCS facility guidance does not describe specific procedures for the way in which Coast Guard staff should track whether annual security inspections have been conducted. Further, Coast Guard district officials and most local field unit supervisors and marine inspectors we spoke with do not maintain any kind of tool, such as a spreadsheet or calendar, to remind them when annual security inspections of OCS facilities are due. Coast Guard officials from five of the six Coast Guard field units that conduct annual security inspections of OCS facilities told us that they do not maintain a spreadsheet or other management tool to track whether annual security inspections had been conducted. For example, at three of these locations, Coast Guard officials told us they rely on owners and operators to inform them when inspections were due rather than independently tracking when annual inspections were due. As a result of no procedures or control activities to manage the offshore security inspection program, the Coast Guard is not complying with its established maritime security requirements for most of the OCS facilities. Without conducting annual inspections of OCS facilities, the Coast Guard may not be meeting one of its stated goals of reducing the risk and mitigating the potential results of an act that could threaten the security of personnel, the OCS facility, the environment, and the public. In our October 2011 report, we made a recommendation, among others, that the Coast Guard develop policies and procedures to monitor and track annual security inspections for OCS facilities to better ensure that such inspections are consistently conducted. The Coast Guard concurred with this recommendation and stated that it is planning to update its OCS facility policy guidance for field units to monitor and track annual security inspections for OCS facilities to better ensure that such inspections are consistently conducted. Interior's inspection program has not consistently met its internal targets for production inspections, as we have reported in recent years. In 2008, we reported that Interior had not met its targets for conducting production inspections--examining metering equipment used to measure oil and natural gas production. Interior officials responsible for conducting production inspections in the Gulf of Mexico told us they completed about half of the required inspections in 2007, raising uncertainty about the accuracy of oil and natural gas measurement. In March 2010, we found that Interior had not routinely met its oil and natural gas production inspection goals. Specifically, we reported that Interior met its inspection goals only once--in 2008--during fiscal years 2004 through 2008, for four district offices we reviewed in the Gulf of Mexico and the Pacific. Interior inspection staff told us that, during these years, there was a shortage of inspectors and that inspections were delayed because of cleanup related to Hurricanes Katrina and Rita in 2005. We are unable to present data for these years because, according to Interior officials, district offices often did not correctly record production inspections on their inspection forms; since then, Interior instituted a policy to record inspections correctly. Also in March 2010, we reported that Interior had encountered persistent human capital challenges in its inspection programs designed to ensure accurate measurement of oil and natural gas from federal lands and waters. In particular, we reported that Interior was hindered by difficulties in hiring, training, and retaining key inspections staff. We reported that this difficulty in attracting and retaining key staff contributed to challenges in meeting its responsibilities to conduct inspections, thereby, reducing its oversight of oil and gas development on federal leases, potentially placing the environment at risk. In our report, we made a number of recommendations to Interior to address these issues, some of which Interior is already in the process of implementing. Although Interior has not consistently met its internal targets for production inspections, it has exceeded its target for Coast Guard compliance inspections. For fiscal year 2010, the most recent year reported, Interior's goal was to conduct full inspections covering all applicable Coast Guard regulations on 10 percent of the estimated 1,000 staffed, fixed offshore energy facilities. For fiscal year 2010, Interior reported that it more than met this goal by conducting such inspections on 169 of the 1,021 staffed, fixed offshore energy facilities--about 17 percent. Further, Interior reported that it has met internal targets for these inspections for the previous 5 years. In addition, Interior reported that in fiscal year 2010 its inspectors also conducted limited inspections for compliance with Coast Guard regulations on all other fixed offshore energy facilities in the course of inspecting these facilities for their own purposes. Interior has recently been reorganizing its offshore inspection program, which has resulted in some uncertainty regarding its inspection capabilities. After the Deepwater Horizon incident in April 2010, Interior initiated a reorganization of its bureau responsible for overseeing offshore oil and natural gas activities. Specifically, in May 2010, Interior reorganized its Minerals Management Service--the bureau previously tasked with overseeing offshore oil and natural gas activities--and created the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE). On October 1, 2011, Interior was further reorganized by dividing BOEMRE into two separate bureaus, the Bureau of Ocean Energy Management (BOEM)--which oversees leasing and resource management, and the Bureau of Safety and Environmental Enforcement (BSEE)--which is responsible for issuing oil and natural gas drilling permits and conducting inspections. We have reported that Interior could face challenges during its reorganization. In June 2011, we testified that Interior's reorganization of activities previously overseen by MMS will require time and resources and may pose new challenges. We stated that while this reorganization may eventually lead to more effective operations, organizational transformations are not simple endeavors. We also expressed concern with Interior's ability to undertake this reorganization while meeting its oil and natural gas oversight responsibilities. We believe that these concerns are still valid today. While Interior was reorganizing its oversight responsibilities, it was also reforming its inspection program and, according to Interior, these reforms have created uncertainty regarding future oversight inspections. As part of the inspections program reform, Interior plans to hire additional staff with expertise in oil and natural gas inspections and engineering and develop new training programs for inspectors and engineers involved in its safety compliance and enforcement programs. Specifically, Interior reported in February 2011 that it was seeking to hire additional inspectors for its offshore inspection program to meet its needs during fiscal years 2011 and 2012. Interior reported that it had 62 inspectors--which, it reported, was not sufficient to provide the level of oversight needed for offshore oil and natural gas production. Interior has also requested additional funding to implement these changes. Further, Interior has stated that its new inspection program may involve inspectors witnessing more high-risk activities, and in-depth examination of some aspects of Gulf oil and natural gas production, and so inspections may take more time in the future and be more difficult to fold into the existing inspection schedules. As a result, Interior reported that it was difficult to determine how many inspections would be conducted in fiscal year 2012. While the Deepwater Horizon incident was not the result of a breakdown in security procedures or the result of a terrorist attack, the loss of the Deepwater Horizon, a foreign-flagged MODU, and the resulting oil spill have raised concerns about U.S. oversight over MODUs that are registered to foreign countries. In this regard, various circumstances govern the extent to which the Coast Guard oversees the security of MODUs. In general, MODUs operating on the OCS implement security measures consistent with applicable security requirements--specifically, they implement requirements in accordance with U.S. security regulations and the International Maritime Organization's International Ship and Port Facility Security (ISPS) Code. Depending on the particular characteristics and operations of the MODU--for example, its method of propulsion or its personnel levels--it may be subject to Coast Guard security regulations governing vessels (33 C.F.R. part 104) or OCS facilities (33 C.F.R. part 106). MODUs will fall under applicable Coast Guard regulations if (1) they are self-propelled--that is, they are capable of relocating themselves, as opposed to other types that require another vessel to tow them--in which case they are subject to the ISPS Code and 33 C.F.R. part 104, or (2) they meet production or personnel levels specified in 33 C.F.R. part 106. Whereas the Coast Guard may physically inspect a U.S.-flagged MODU to ensure compliance with applicable security requirements, the Coast Guard's oversight of foreign-flagged, self-propelled MODUs, such as the Deepwater Horizon, is more limited. In the case of self-propelled, foreign-flagged MODUs, the Coast Guard will assess compliance with part 104 by reviewing a MODU's International Ship Security Certificate, which certifies compliance with the ISPS Code. While Coast Guard inspectors may also observe security measures and ask security related questions of personnel, absent consent from the flag state, the inspectors generally do not have authority to review a self- propelled, foreign-flagged MODU's vessel security plan. In all other cases where MODUs are subject to Coast Guard security requirements, the Coast Guard assesses compliance with part 104 or part 106 through annual security inspections. Figure 1 illustrates the types of MODUs, the applicable security requirements, and the means by which the Coast Guard assesses compliance. The Coast Guard may not be fully aware of the security measures implemented by self-propelled, foreign-flagged MODUs because of its limited oversight of such MODUs. The Coast Guard and BOEMRE, BSEE's predecessor, conducted a joint investigation into the Deepwater Horizon incident, and the Coast Guard's report from the investigation emphasized the need to strengthen the system of Coast Guard oversight of foreign- flagged MODUs. The Coast Guard's report from the joint investigation stated that the Coast Guard's regulatory scheme for overseeing the safety of foreign-flagged MODUs is insufficient because it defers heavily to the flag state to ensure safety. While the investigation focused on issues that were not related to security, such as safety, these findings may have implications for security oversight because the Coast Guard also relies on the flag state to carry out responsibilities for assessing compliance with security requirements. The joint investigation team recommended, among other things, that the Commandant of the Coast Guard develop more comprehensive inspection standards for foreign-flagged MODUs operating on the OCS. The Commandant concurred with this recommendation and has chartered an Outer Continental Shelf Activities Matrix Team, which has been tasked with providing recommendations on the establishment and implementation of an enhanced oversight regime for foreign-flagged MODUs on the U.S. OCS. According to Coast Guard officials, it is likely that MODUs operating in deepwater would be subject to security requirements because the industry is increasingly using dynamically positioned MODUs that are able to maintain position without being anchored to the seabed, and as such MODUs are self-propelled, they would be subject to the ISPS Code and 33 C.F.R. part 104. Additionally, the Coast Guard is conducting a study designed to help determine whether additional actions could better ensure the security of offshore energy infrastructure in the Gulf of Mexico, including MODUs. This study is expected to be completed in the fall of 2011. Gaining a fuller understanding of the security risks associated with MODUs could better inform Coast Guard decisions and potentially improve the security of these facilities. Further, the Coast Guard has implemented a new risk-based oversight policy for MODUs, including foreign-flagged MODUs, to address safety and environmental protection issues. This policy includes a targeting matrix to assist inspectors in determining whether a foreign-flagged MODU may require increased oversight, based on inspection history or other related factors, through more frequent examinations by the Coast Guard. Additionally, the policy calls on Coast Guard field units to conduct random, unannounced examinations of a portion of all MODUs in their areas of responsibility. Although this policy does not directly address security, increased oversight resulting from this new policy could help mitigate some of the ways in which a MODU might be at risk of a terrorist attack. Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee, this completes our prepared statement. We would be happy to respond to any questions you may have at this time. For questions about this statement, please contact Stephen L. Caldwell at (202) 512-9610 or [email protected], or Frank Rusco at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contacts named above, key contributors to this testimony were Christopher Conrad, Assistant Director; Jon Ludwigson, Assistant Director; Lee Carroll and Erin O'Brien, analysts-in- charge; and Alana Finley. Thomas Lombardi provided legal support and Lara Miklozek provided assistance in testimony preparation. Maritime Security: Coast Guard Should Conduct Required Inspections of Offshore Energy Infrastructure. GAO-12-37. Washington, D.C.: October 28, 2011. Deepwater Horizon Oil Spill: Actions Needed to Reduce Evolving but Uncertain Federal Financial Risks. GAO-12-86. Washington, D.C.: October 24, 2011. Maritime Security: Progress Made, but Further Actions Needed to Secure the Maritime Energy Supply. GAO-11-883T. Washington, D.C.: August 24, 2011. Oil and Gas: Interior's Restructuring Challenges in the Aftermath of the Gulf Oil Spill. GAO-11-734T. Washington, D.C.: June 2, 2011. Maritime Security: DHS Progress and Challenges in Key Areas of Port Security. GAO-10-940T. Washington, D.C.: July 21, 2010. Oil and Gas Management: Interior's Oil and Gas Production Verification Efforts Do Not Provide Reasonable Assurance of Accurate Measurement of Production Volumes. GAO-10-313. Washington, D.C.: March 15, 2010. Mineral Revenues: Data Management Problems and Reliance on Self- Reported Data for Compliance Efforts Put MMS Royalty Collections at Risk. GAO-08-893R. Washington, D.C.: September 12, 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. Maritime Security: The SAFE Port Act: Status and Implementation One Year Later. GAO-08-126T. Washington, D.C.: October 30, 2007. 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 April 2010 explosion of the Deepwater Horizon, a mobile offshore drilling unit (MODU), showed that the consequences of an incident on an offshore energy facility can be significant. A key way to ensure that offshore energy facilities are meeting applicable security, safety, and production standards is through conducting periodic inspections of the facilities. The Coast Guard and the Department of the Interior (Interior) share oversight responsibility for offshore energy facilities. The Coast Guard is to conduct security inspections of such facilities, whereas based on an agreement between the two agencies, Interior is to conduct safety compliance inspections on some offshore facilities on behalf of the Coast Guard as well as its own inspections to verify production. This testimony addresses: (1) the extent to which the Coast Guard has conducted security inspections of offshore energy facilities, and what additional actions are needed; (2) the extent to which Interior has conducted inspections of offshore energy facilities, including those on behalf of the Coast Guard, and challenges it faces in conducting such inspections; and (3) the Coast Guard's oversight authority of MODUs. This testimony is based on GAO products issued from September 2008 through October 2011. The Coast Guard conducted about one-third of its required annual security inspections of offshore energy facilities from 2008 through 2010 and does not have procedures in place to help ensure that its field units conduct such inspections in accordance with its guidance. The Coast Guard's guidance does not describe specific procedures for the way in which Coast Guard staff should track whether annual inspections have been conducted. For example, Coast Guard field unit supervisors and marine inspectors GAO interviewed from five of the six Coast Guard field units that are to conduct annual security inspections said that they do not maintain any tool to track whether such inspections had been conducted. GAO recommended in October 2011 that, among other things, the Coast Guard develop policies and procedures to monitor and track annual security inspections. The Coast Guard concurred and stated that it is planning to update its guidance for field units to address these issues. Interior's inspection program has not consistently met its internal targets for production inspections, and faces human capital and reorganization challenges, but has met its limited target for compliance inspections conducted for the Coast Guard. In March 2010, GAO found that for four district offices it reviewed, Interior only met its production inspection goals once during fiscal years 2004 through 2008. Further, GAO reported that difficulties in hiring, training, and retaining key staff had contributed to challenges in meeting its inspections goals. However, in recent years, Interior reported that it met its 10 percent target to conduct compliance inspections of staffed, fixed offshore energy facilities on behalf of the Coast Guard. In fiscal year 2010, Interior reported that it exceeded its target and conducts such inspections on 169 of the 1,021 staffed, fixed offshore energy facilities and has met this target for such inspections for the previous 5 years. In May 2010, Interior reorganized its bureau responsible for overseeing offshore energy activities. In June 2011, GAO reported that while this reorganization may eventually lead to more effective operations, GAO is concerned with Interior's ability to undertake this reorganization while meeting its oversight responsibilities. Among other things, Interior plans to hire additional staff with expertise in inspections and engineering. Amidst these changes, Interior reported that it was difficult to determine how many inspections it would conduct in fiscal year 2012. The Coast Guard has limited authority regarding the security of MODUs registered to foreign countries, such as the Deepwater Horizon. MODUs are subject to Coast Guard security regulations if (1) they are self-propelled or (2) they meet specific production or personnel levels. Whereas the Coast Guard may physically inspect a U.S.-flagged MODU to ensure compliance with applicable security requirements, the Coast Guard's oversight of foreign-flagged, self-propelled MODUs, such as the Deepwater Horizon, is more limited. The Coast Guard is conducting a study designed to help determine whether additional actions could better ensure the security of offshore energy facilities, including MODUs. Further, the Coast Guard has implemented a risk-based oversight policy for all MODUs to address safety and environmental protection issues. Although this policy does not directly address security, increased oversight resulting from this policy could help mitigate the risk of a terrorist attack to a MODU. GAO has previously recommended that the Coast Guard develop policies and procedures to monitor and track annual security inspections for offshore energy facilities and that Interior address its human capital challenges. The Coast Guard and Interior agreed.

The enormous challenge involved in making information systems Year 2000 compliant is managerial as well as technical. Agencies' success or failure will largely be determined by the quality of their program management and executive leadership. The outcome of these efforts will also depend on the extent to which agencies have institutionalized key systems development and program management practices, as well as on their ability to execute large-scale software development or conversion projects. To assist agencies with these tasks, our Year 2000 assessment guide discusses the scope of these challenges and offers a structured, step-by-step approach for reviewing and assessing an agency's readiness to handle the Year 2000 problem. The assessment guide states that the Year 2000 program should be managed as a single, large information systems project. The assessment guide describes in detail the five phases of a Year 2000 conversion process (i.e., awareness, assessment, renovation, validation, and implementation). Each of these phases represents a major Year 2000 program activity or segment. To successfully address the Year 2000 problem, effective program and project management is required for all five phases. Appendix I contains a description of these phases. To make its information systems Year 2000 compliant, IRS must (1) convert existing systems by modifying application software and data and upgrading hardware and systems software, if needed; (2) replace systems if correcting them is not cost-beneficial or technically feasible; or (3) retire systems if they will not be needed by 2000. IRS' Chief Information Officer (CIO) established several parallel efforts to help ensure that IRS achieves Year 2000 compliance by January 1999. These efforts include creating the Century Date Change Project Office, which is responsible for coordinating the conversion of most existing information systems that can be made Year 2000 compliant as well as ensuring that all systems are converted in accordance with the same standards. The Century Date Change Project Office adapted our Year 2000 conversion model phases and established a 14-step process to track the progress of its Year 2000 conversion efforts. Some of the steps involved in converting existing systems include (1) converting applications; (2) upgrading hardware and/or systems software for mainframes, minicomputers/file servers, and personal computers; (3) upgrading telecommunications networks; and (4) ensuring that external data exchanges are Year 2000 compliant. The other parallel Year 2000 efforts are 2 major replacement efforts: (1) the replacement of the Distributed Input System (DIS) and the Remittance Processing System (RPS) with the Integrated Submission and Remittance Processing (ISRP) system and (2) the consolidation of the mainframe computer processing operations at 10 service centers to 2 computing centers. IRS personnel use DIS to input taxpayer data and RPS to input remittance data. According to IRS, these systems are old, and it is not cost-beneficial to make them Year 2000 compliant. Therefore, IRS decided to replace DIS and RPS with ISRP. A two-phase pilot of ISRP is under way during 1998 at IRS' Austin Service Center. Nationwide implementation is scheduled for January 1999. As a part of its mainframe consolidation effort, IRS is to (1) replace and/or upgrade service center mainframe hardware, systems software, and telecommunications infrastructure; (2) replace about 16,000 terminals that support frontline customer service and compliance operations; and (3) replace the communication replacement system that provides security functions for on-line taxpayer account databases. Replacements of the terminals and the communication replacement system are critical to IRS' achieving Year 2000 compliance. IRS is undertaking the non-Year 2000 aspects of mainframe consolidation because it concluded that consolidation would satisfy the Office of Management and Budget's Bulletin 96-02, which directs agencies to consolidate information processing centers; be consistent with IRS' planned modernization architecture; and save an estimated $356 to $500 million from fiscal years 1997 through 2003. IRS' original mainframe consolidation schedule called for moving mainframe computer processing operations and the communication replacement system from 10 service centers to 2 computing centers between December 1997 and December 1998. The mainframe consolidation project is to provide the hardware, systems software, and telecommunications infrastructure for 40 mission-critical systems whose application software is being converted under the direction of the Century Date Change Project Office. IRS is experiencing delays in completing conversion efforts for its existing systems and major systems replacement efforts. IRS has made the most progress in converting its applications for the systems it has deemed mission-critical. Conversion efforts for systems software and hardware, telecommunications networks, and external data exchanges are still in the initial steps of IRS' 14-step conversion process. The completion schedule for mainframe consolidation, with the exception of the Year 2000 critical aspects, has been extended beyond December 1998. Table 1 shows how IRS has allocated each of the 14 steps in its conversion process to our Year 2000 assessment, renovation, validation, and implementation phases. Much of IRS' early Year 2000 efforts in 1996 focused on the awareness and assessment phases of the applications for existing information systems controlled by the CIO. In May 1997, IRS began assessing the date dependencies of applications for information systems that were controlled by either field offices or business functional areas (hereafter referred to as field/customer systems). As a result of the CIO and field/customer system assessments that were completed as of March 31, 1998, IRS had identified 127 mission-critical systems, including 7 telecommunications systems. As of April 24, 1998, IRS reported that it had completed the first 12 steps of its 14-step conversion process on applications for about 46 percent (59 systems) of its 127 mission-critical systems. In doing so, IRS fell short of its goal of having the applications for 66 systems converted by January 31, 1998. IRS' schedule calls for completing the first 12 steps for the remaining 54 percent (68 systems) of the mission-critical systems by January 1999. IRS officials said that they believe they are on track for meeting that goal. IRS is still in the initial steps of its 14-step conversion process for most of its systems software, hardware, and telecommunications network components. IRS is also still in the initial stages of converting its external data exchanges. Appendix II provides additional information on the status of the conversion process for each of these areas. Of these infrastructure areas, according to IRS, telecommunications networks present the most significant conversion challenge and may be at the highest risk for not being done by January 1999. According to IRS, the capability to exchange information, both voice and data, between various computer systems is the backbone of IRS' ability to perform all of its tax processing and customer service functions. IRS uses a telecommunications network that is supported through the Department of the Treasury and additional networks that are unique to IRS. As of March 10, 1998, IRS had an inventory of the components that are included in Treasury's network and was verifying a preliminary inventory of the components in the networks unique to IRS. At the time of our review, a contractor was doing a risk assessment to help develop a conversion schedule so that the most important work would be scheduled first to minimize adverse impacts if IRS is not able to complete all of its telecommunications work by January 1999. IRS' systems replacement efforts (i.e., ISRP and mainframe consolidation) are experiencing some delays. For example, certain ISRP software development that was to be completed in April 1998 is now scheduled to be done by June 16, 1998. As a result, the time available for testing before the start of the second phase of the pilot has been reduced. ISRP project office officials still anticipate that ISRP will be implemented nationwide by December 1998. The completion schedule for consolidating the data processing portion of service center operations has been extended from December 1998 until after June 1999. According to IRS officials, the need for this extension stems from numerous factors, including field office concerns about the ambitious schedule and expanded business requirements for security, disaster recovery, and testing. At the time we were finalizing this report, IRS officials said they were assessing various technical alternatives for meeting the expanded business requirements. They said they expect a revised business case and budget estimates that reflect the impact of both the schedule and requirements changes to be completed in June 1998. IRS officials said they expect to complete the Year 2000 portions of mainframe consolidation (i.e., terminal replacement and the communication replacement system) by the original completion date of December 1998. However, the communication replacement system has been experiencing some difficulties and is somewhat behind its original schedule for system testing. In our briefing to your office, we said that IRS' ability to meet future milestones was at increased risk because IRS lacked a master schedule showing the relationships and interdependencies among the many Year 2000 efforts that must be completed in 1998. According to our assessment guide, a master conversion and replacement schedule should be a part of an agency's Year 2000 program plan. This schedule could be used to (1) establish the sequential relationships among all of the tasks associated with all Year 2000 activities; (2) identify how much a task's milestone completion date could slip without affecting other tasks; (3) help determine whether programming and testing resources will be available when needed, given the concurrent milestone completion dates for various tasks; and (4) provide a tool for assigning programming and testing resources that are essential to the success of all efforts in the most efficient manner. Understanding the schedule and resource interdependencies of all the key activities that are needed to make its systems Year 2000 compliant is imperative if IRS is to make its mission-critical systems Year 2000 compliant on time. For example, IRS' mainframe consolidation project is behind schedule because of start-up delays and problems with implementing the systems software that is being used to consolidate one of the mainframe platforms. As a result of the problems with the commercial off-the-shelf software, additional testing is being done that was not initially expected. This testing requires staff from IRS' Information Systems Office of Technical Support, which is also supporting the Century Date Change Project Office in other efforts. A master schedule showing both task and resource requirements should help identify whether any of the individual Year 2000 efforts will require the same staff for the same time period. Recognizing that several major and complex projects, including application software changes that are needed to implement recent tax legislation, must be completed before the 1999 filing season, in November 1997, the Commissioner of Internal Revenue announced the establishment of an executive steering committee. This committee is to identify risks to the 1999 filing season and the entire Year 2000 effort and take actions to mitigate those risks. As a part of this effort, IRS developed a Century Date Change Project Schedule for its Year 2000 activities. While the project schedule identifies the tasks for major Year 2000 activities, their corresponding start and finish dates, and the primary organizations responsible for them, the schedule does not yet establish a link between related tasks or analyze how the timing of the various tasks may affect resource availability. Until these actions are complete, IRS cannot project whether resources will be available when needed for concurrent tasks. Thus, IRS faces the risk that resources may not be available when needed. On February 12, 1998, IRS issued a statement of work for a contractor to provide program management support to the Commissioner's newly established executive steering committee. One of the support activities that IRS identified in the statement of work was the development of an integrated schedule identifying (1) the interfaces and dependencies among Year 2000 projects and (2) efforts to implement legislative changes for the 1999 filing season. IRS expects this schedule, along with related tasks and dependencies, to be available in June 1998. If properly developed, this schedule should meet the intent of the master conversion and replacement schedule called for in our assessment guide. The contractor is to work closely with IRS staff who are responsible for the various Year 2000 efforts to assess resource needs for new requirements or resource shortages for existing requirements. The contractor also is to identify and recommend alternatives for allocating resources to help IRS meet all of its requirements. Contingency planning was the second risk area we identified during our briefing to your office. Under IRS' contingency planning approach, IRS may be jeopardizing the continuity of operations for core business processes in the event that Year 2000-induced system failures occur. IRS' Century Date Change Project Office has developed a "Century Date Change Contingency Management Plan." This plan states that "developing contingency procedures for all of IRS' numerous systems will require a significant amount of knowledgeable resources, in most cases the same resources assigned to perform the actual century date change conversion effort." To minimize the number of contingency plans that IRS would have to develop, the contingency management plan calls for developing contingency plans only for those business functions or processes that are supported by application software projects that are at risk of not being made Year 2000 compliant on schedule. The Century Date Change Project Office has established criteria to identify such projects. For these projects, IRS is to initiate a business function impact analysis. Once that analysis is complete, technical and business owners evaluate available alternatives, including using any existing contingency procedures, such as manual procedures, or an alternative technological solution, such as commercial off-the-shelf software. IRS plans to use a similar approach for initiating contingency plans for business functions when the conversion of infrastructure areas, such as systems software, external data exchanges, and telecommunications network components, falls behind schedule. IRS' "Century Date Change Contingency Management Plan" does not address the likelihood that information systems that are converted on schedule may experience system failures. As a result, IRS will be ill-prepared to effectively manage Year 2000-induced system failures that could affect core business processes. IRS' contingency management plan does not address the possibility that (1) IRS may have overlooked a date dependency during its assessment phase of applications or infrastructure areas or (2) even if system conversion and replacement efforts are completed on time and fully tested, unexpected failures may occur. Aspects of contingency planning are under way for IRS' replacement projects (i.e., ISRP and mainframe consolidation). For example, the ISRP project office has developed a contingency plan that identifies (1) various risks to the ISRP pilot and nationwide implementation, (2) the probability of those risks, and (3) contingency options for addressing those risks. IRS is also taking steps to make its existing service center mainframe computers Year 2000 compliant in the event that the consolidation of tax processing to the computing centers is not completed according to schedule. IRS expects to make its existing service center mainframe computers Year 2000 compliant by January 1999. Also, as part of a larger effort to enhance IRS' disaster recovery capabilities, IRS officials said they have identified expanded disaster recovery requirements for service center data processing. At the time we were finalizing this report, IRS officials said they were assessing various technical alternatives for meeting those requirements so they can be incorporated in the mainframe consolidation project. Our exposure draft on business continuity and contingency planning states that agencies must start business continuity and contingency planning now to reduce the risk of Year 2000 business failures. Among other things, the exposure draft states that agencies need to do a business impact analysis to determine the effect of mission-critical system failures on the viability of agency operations. This analysis is to include examining business priorities; dependencies; service levels; and, most important, the business process dependency on mission-critical information systems. According to our exposure draft, the business impact analysis triggers the development of contingency plans for each core business process, including any information system components that support that process. Contingency plans would also address the actions IRS may take, for example, to notify taxpayers in the event that Year 2000 failures cause significant delays in processing tax returns and issuing refunds. IRS has undertaken efforts in the past to identify its core business processes as a part of various reengineering efforts that could be the starting point for a business impact analysis. For example, in 1996, as part of an effort to redesign its work processes, IRS began an effort to identify and map core business processes. IRS is still assessing some of its infrastructure components and faces the risk of not completing all of its Year 2000 efforts by January 1999. Moreover, IRS, like other agencies, is likely to encounter Year 2000-induced failures in some systems that were fully assessed, tested, and implemented. IRS' "Century Date Contingency Management Plan" focuses on developing contingency plans only for business functions that are supported by application software projects that are behind schedule. The possibility exists that existing contingency or disaster recovery plans that were developed for other than Year 2000 purposes may be applicable to Year 2000 failures. However, if these plans are not applicable, under IRS' "Century Date Contingency Management Plan," IRS has no assurance that its core business processes will be able to continue to function, albeit, possibly at some reduced level of service, in the event that Year 2000-induced failures occur in systems that were converted according to schedule. We recommend that the Commissioner of Internal Revenue take the following steps to better ensure that IRS has adequately assessed the vulnerabilities of its core business processes in the event of Year 2000-induced system failures: solicit the input of business functional area officials to identify IRS' core business processes and prioritize those processes that must continue in the event of Year 2000-induced failures; map IRS' mission-critical systems to those core business processes; determine the impact of information system failures on each core business assess any existing business continuity and contingency plans that may have been developed for non-Year 2000 reasons to determine whether these plans are applicable to Year 2000-induced failures, and develop and test contingency plans for core business processes if existing plans are not appropriate. We requested comments on a draft of this report from the Commissioner of Internal Revenue or his designated representative. IRS provided us with comments during a May 4, 1998, meeting with the Acting Chief Information Officer and his staff. Those comments were reiterated in a May 8, 1998, letter from the Commissioner of Internal Revenue, which is reproduced in appendix III. The Commissioner said that IRS agrees that it must develop contingency plans to manage any adverse impacts of a less-than-fully successful century date program, and that IRS will take the following actions to address our recommendations regarding contingency planning. He said that to leverage the limited resources on the remaining Year 2000 conversion and testing efforts, IRS will focus contingency planning on those areas that have the greatest risk and highest business impact. Specifically, the Commissioner said the Acting Chief Information Officer will be working with the other Chief Officers to document IRS' current business processes, the systems that support them, the impact if these processes or systems fail, and the probability or potential for Year 2000 risk. The Commissioner said that contingency plans will be developed for those areas that meet all of the following criteria: (1) high business impact, (2) high risk associated with failure, and (3) high probability of systems failure/instability due to Year 2000 conversion. We believe that these actions, if implemented properly, address most of the steps we identified in our contingency planning recommendations and should put IRS in a better position to respond to unexpected failures as a result of the Year 2000 problem than was the case under its previous contingency planning approach. However, we remain concerned that IRS will be ill-prepared in the event a failure occurs in a high business impact area that is supported by a system that IRS assesses as having a low probability of failure, but subsequently fails unexpectedly. We recognize that IRS needs to leverage its resources, particularly its information systems resources, to ensure that it completes all of the required Year 2000 conversion work on schedule. However, we believe it would be prudent for IRS' business officials who are responsible for high business impact areas, regardless of the perceived Year 2000 risks, to begin identifying alternative business procedures or processes that may need to be implemented in the event of unexpected systems failure. In addition to commenting on our recommendations, IRS provided us with updated information on the status of its Year 2000 efforts. We have incorporated that updated information in the report where appropriate. The updated information is also included in IRS' "Status Update Summary," which is also reproduced in appendix III. To determine IRS' progress and identify the risks facing its Year 2000 conversion efforts, we interviewed officials from the National Office, computing centers, service centers, regions, and district offices. We analyzed and compared IRS' planning, budget, and performance-monitoring documentation with our Year 2000 assessment guide as a part of a structured approach for reviewing IRS' conversion efforts. We did not review existing business continuity or contingency plans that IRS may have been developing for other than Year 2000-induced failures. We conducted our work in accordance with generally accepted government auditing standards between October 1996 and May 1998. We are sending copies of this report to the Subcommittee's Ranking Minority Member; the Chairmen and Ranking Minority Members of the House Committee on Ways and Means and the Senate Committee on Finance, Subcommittee on Taxation and IRS Oversight; various other congressional committees; the Secretary of the Treasury; the Commissioner of Internal Revenue; the Director of the Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. The major contributors to this report are listed in appendix IV. Please contact me at (202) 512-9110 if you have any questions about this report. Our Year 2000 assessment guide describes in detail the five phases that agencies need to complete when making their systems Year 2000 compliant. Each of the following phases represents a major Year 2000 program activity or segment: Awareness. This phase entails defining the Year 2000 problem, gaining executive level support and sponsorship, and ensuring that everyone in the organization is fully aware of the issue. It is also during this phase that the agency is to establish a Year 2000 program team and develop an overall strategy. Assessment. This phase entails assessing the Year 2000 impact on the agency, identifying core business areas, inventorying and analyzing the systems supporting the core business areas, and prioritizing the conversion or replacement of these systems. It is also during this phase that the agency is to initiate contingency planning and identify and secure the necessary resources. Renovation. This phase deals with converting, replacing, or eliminating selected systems and applications. In so doing, it is important that the agency consider the complex interdependencies among the systems and applications. Validation. This phase deals with testing, verifying, and validating all converted or replaced systems and applications and ensuring that they perform as expected. This entails the agency testing in an operational environment the performance, functionality, and integration of converted or replaced systems, applications, and databases. Implementation. This phase entails deploying and implementing Year 2000-compliant systems and components. It is also during this phase that the agency's data exchange contingency plans are implemented, if necessary. This appendix contains additional information on the status of IRS' infrastructure areas that were in the initial steps of IRS' 14-step conversion process at the time of our review. These initial steps are comparable to either our assessment or renovation phase of our Year 2000 Conversion Model. According to the Office of Management and Budget's guidelines, agencies were to have completed the assessment phase by June 1997. IRS placed a priority on assessing its mainframe computers first because these computers encompass most of IRS' tax processing systems. IRS is still assessing its telecommunications networks, external data exchanges, and the systems software and hardware for minicomputers/file servers and personal computers. IRS has completed its assessment of its mainframe computers and has scheduled their conversion. All existing mainframe hardware and systems software are currently scheduled to be converted between January 1998 and January 1999. IRS' mainframe computer systems constitute the core of IRS' data processing activities, including the processing of tax return and remittance data and the storage of taxpayer account and collection activity data. These systems are currently located at IRS' 10 service centers, the Martinsburg Computing Center, and the Detroit Computing Center. Most of IRS' mainframe computers are being replaced as a part of IRS' mainframe consolidation project. In the event that not all centers can be consolidated by 2000, IRS is proceeding with plans to make its existing mainframe hardware and systems software at the service centers Year 2000 compliant. Some mainframe computers, such as those supporting master-file processing at the Martinsburg Computing Center and others at the Detroit Computing Center, are not included in the mainframe consolidation project. These mainframe computers are to be upgraded to achieve Year 2000 compliance by January 1999. IRS is still in the assessment phase for its telecommunications networks. IRS relies extensively on telecommunications networks to accomplish its mission. According to the IRS' Year 2000 Telecommunications Project Management Plan, the IRS' telecommunications network is a critical component of IRS' tax processing and customer service operations. The capability to exchange information, both voice and data, among its various computer systems is the backbone of IRS' ability to perform all of its tax processing and customer service functions. According to the Commissioner's Executive Steering Committee documents, the telecommunications networks conversion is significantly behind schedule for meeting the January 1999 milestone. Although IRS has established conversion schedules for the mission-critical areas of its telecommunications networks and is integrating these schedules into an overall plan, many of the individual components that make up these mission-critical areas have not been fully assessed. Generally, these components have not been fully assessed because IRS' inventory of telecommunications resources has not been sufficiently detailed to allow IRS to (1) confirm the Year 2000-compliant status of all telecommunications components, (2) develop detailed conversion schedules, and (3) track conversion progress against those schedules. In part, the inventory has been difficult to compile because IRS' telecommunications networks include both IRS-owned and multiple vendor-maintained networks and equipment, such as the Treasury-supported network, that cannot be easily combined to serve as a comprehensive source of information. IRS, Treasury, and contractors have formed integrated teams to address the Year 2000 telecommunications issues. IRS is currently validating the inventory of the Treasury-supported network by conducting site-specific inventories at its service centers. In addition to needing quality inventory data, IRS' conversion solutions and plans for some areas are largely dependent on the ability of vendors to provide Year 2000-compliant products in a timely manner. After these products are received, IRS must test them to ensure that they work within IRS' own data processing environment. According to IRS officials, a test plan for the Treasury-supported network has been developed. Given the large extent to which IRS relies on telecommunications networks to accomplish its mission and the high degree of risk associated with not making IRS' telecommunications networks Year 2000 compliant, IRS' telecommunications project plan calls for steps to mitigate this risk. The plan calls for initiating efforts to ensure that the portions of IRS' telecommunications networks that are most critical to IRS' operations are scheduled first and receive the necessary resources in accordance with their priority to IRS' operations. At the time of our review, a contractor was doing a risk assessment to help develop a conversion schedule so that the most important work is scheduled first to minimize adverse impacts if IRS is not able to complete all of its telecommunications work by January 1999. According to IRS documents, this risk assessment will also trigger the development of contingency plans for mission-critical systems that are found to be at risk for not being converted on time. As an additional contingency measure, according to IRS, it is building redundancy into telecommunications networks to provide limited access if a portion of the network fails due to Year 2000 compatibility issues. IRS hopes to complete its assessment of external data exchanges by June 30, 1998. IRS, like most organizations, exchanges data in an electronic format with other organizations for a variety of purposes. These data exchanges involve both other government agencies as well as private sector organizations. For example, IRS (1) transmits information electronically to the Treasury's Financial Management Service (FMS) for the purposes of reporting revenue receipts and the issuance of refund checks and (2) receives wage information (W-2) from the Social Security Administration (SSA) to verify the accuracy of individuals' reported income. IRS also receives interest income data from banks and provides information to many states to assist them with taxpayer compliance activities. In September 1997, IRS initiated a plan to identify (1) all of its external data exchange organizations and (2) the actions needed to ensure that data exchanges are not adversely impacted by the Year 2000 problem. IRS has notified these organizations that Treasury has adopted a four-digit date field. IRS reports that as part of its application conversion efforts it has already converted more than 50 percent of the more than 300 data files that it exchanges with more than 400 organizations. A key portion of the remaining work involves contacting each of the organizations and verifying that it is aware of the IRS' plans for conversion and it has taken steps to ensure the continued receipt and transmission of data. IRS has also identified a group of organizations whose external data exchanges are most critical to IRS' operations and plans to commit additional attention and resources to these organizations to ensure that Year 2000 data exchange issues are thoroughly addressed. These organizations include government agencies, such as FMS, SSA, and the Federal Reserve, as well as private firms that are involved in activities such as the Electronic Federal Tax Payment System for federal employment tax deposits and banks that provide "lockbox" processing of $170 billion in remittances annually. To ensure that these most critical areas are thoroughly addressed, IRS has hired a contractor to conduct site visits to validate that the systems that receive/provide these data are on track to be Year 2000 compliant. At the time of our review, IRS was validating its inventory of external data exchanges and obtaining agreements regarding the organizations' plans for converting their systems so that data exchanges can be made Year 2000 compliant. For the most part, IRS has completed its assessment of its minicomputer/file-server hardware and systems software. In the last 10 to 15 years, IRS has developed a number of information systems that use minicomputer and file-server technologies, rather than the mainframe-based technology that it has used for the past 30 years. IRS has identified 39 mission-critical systems that use minicomputer and file-server technologies. These systems support a variety of programs, including electronic filing, customer service, returns processing, fraud detection, criminal investigation, and compliance research activities. Many of these systems input data to IRS' mainframe-based systems and, as such, are key elements of IRS' tax processing system. Because organizational control over these systems is scattered across various project offices within IRS' information systems organization and business or functional units, IRS has taken longer to identify and assess these systems than it has taken for its mainframe-based systems. The lack of an accurate inventory has also hindered progress in completing the assessment of these systems. IRS is relying on vendors to provide the Year 2000 solution for 12 platforms (i.e., a combination of computer hardware and systems software). These platforms currently support 39 mission-critical systems and several other important applications. According to the Commissioner's Executive Steering Committee documents, IRS established March 15, 1998, as the date by which IRS wanted some assurance by the vendors that a Year 2000 solution existed for these platforms. Of the 12 platforms, 2 will be retired (1 of which will be replaced when ISRP is implemented nationwide.) IRS has determined that two platforms cannot be made Year 2000 compliant, and, at the time of our review, IRS was still evaluating its replacement options for them. As of April 10, 1998, IRS had either received or was about to receive the eight remaining platforms. IRS had identified a relational database as its greatest risk for its minicomputers and file servers because it supports 15 mission-critical systems, and IRS is the vendor's only customer for this product. IRS officials told us that as of May 8, 1998, the vendor had provided a version of this database to IRS for testing. IRS officials said that once testing is completed, they will take the necessary steps to procure this database and make it available to the various users. Despite having identified the Year 2000 solutions for various minicomputer/file-server platforms, as of May 8, 1998, IRS had not yet completed a plan for migrating business or functional organizations from their current minicomputer/file-server platforms to the ones that are Year 2000 compliant. Specifically, as of May 8, 1998, IRS was beginning to develop for business and functional organizations (1) a schedule of critical tasks, (2) the associated milestones for completing the tasks, and (3) guidance on how to complete the tasks. IRS is in the assessment phase for personal computer hardware and commercial software (i.e., systems software and applications). IRS uses personal computers extensively for a wide range of functions, including (1) providing customer service staff with access to taxpayer account databases, (2) allowing compliance staff to collect detailed information and do complex calculations while working in the field, (3) entering information from tax returns and remittances, and (4) doing essential administrative functions. IRS has identified 134,000 personal computers that it must assess to determine if the hardware and/or the associated systems software is Year 2000 compliant or must be converted. IRS has estimated that approximately 60,000 of these computers support mission-critical functions. Of these 60,000 computers, IRS is currently replacing approximately 16,000 as part of IRS' service center mainframe consolidation project. IRS' goal is to convert all personal computers by January 1999. The Century Date Change Project Office is assigning Year 2000 conversion responsibility for personal computers to the organizations within IRS that currently share responsibility for purchasing and maintaining personal computers and their associated commercial software. According to the Century Date Change Project Office, as of March 1998, it had assigned responsibility for converting 75,000 of these personal computers. A. Carl Harris, Assistant Director Joanna Stamatiades, Evaluator-in-Charge Robert Arcenia, Senior Evaluator Linda Standau, Senior Evaluator Ronald Heisterkamp, 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. 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GAO reviewed the Internal Revenue Service's (IRS) efforts to have its information systems function correctly when processing dates beyond December 31, 1999, focusing on: (1) IRS' progress in converting its systems according to the guidelines in GAO's year 2000 assessment guide; (2) the risks IRS faces to completing the year 2000 effort on time; and (3) risks to the continuity of IRS operations in the event of year 2000-induced system failures. GAO noted that: (1) according to IRS, before January 1999, it needs to complete 12 steps of its 14-step process for converting: (a) the applications for its existing systems; (b) the telecommunications networks; and (c) systems software and hardware for mainframes, minicomputers/file servers, and personal computers; (2) in addition, before January 1999, IRS needs to: (a) ensure that external data exchanges will be year 2000 compliant; (b) implement the Integrated Submission and Remittance Processing System and, at a minimum, the year 2000 portions of mainframe consolidation; and (c) modify application software to implement tax law changes for the 1999 and 2000 filing seasons; (3) if these efforts are not completed, IRS' tax processing and collection systems may fail to operate or may generate millions of erroneous tax notices, refunds, interest calculations, and account adjustments; (4) for the conversion of its existing systems, IRS has made more progress on its applications than on its information systems infrastructure; (5) specifically, as of April 24, 1998, IRS reported that it had completed the first 12 steps of its 14-step conversion process for applications for about 46 percent of the 127 systems it has deemed as mission-critical; (6) IRS expects to convert the applications for the remaining 54 percent of the mission-critical systems by January 1999; (7) the two major systems replacement efforts, which are also expected to follow IRS' 14-step conversion process, are experiencing some schedule slippages; (8) IRS officials said they expect to complete the year 2000 portions of the mainframe consolidation by the original completion date of December 1998; (9) GAO identified two risk areas for IRS' year 2000 effort: (a) the lack of an integrated master conversion and replacement schedule; and (b) a limited approach to contingency planning; (10) since GAO's briefing, IRS has decided to have a contractor develop an integrated schedule of its year 2000-related efforts, including making all of the necessary tax law changes for 1999; (11) IRS officials said they hope to have a baseline, master integrated schedule in June 1998; and (12) in part, due to IRS officials' concerns that the same resources that are doing year 2000 conversion work would be needed to do contingency planning, IRS officials decided to develop a process that would minimize the number of contingency plans that would have to be developed.

The federal government plans 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 mission-related outcome. For example: 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. 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 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 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 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 Veterans Affairs' Scheduling Replacement Project 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, FITARA was enacted in December 2014. 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. 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 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 IT investments are adequately implementing OMB's incremental development guidance, (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 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. 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 the law. OMB's guidance states that it is intended to, among other things: assist agencies in aligning their IT resources to 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 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 May 2016, 22 of the 24 Chief Financial Officers Act agencies had made their plans publicly available. In addition, OMB recently released proposed guidance for public comment on the optimization of federal data centers and implementation of FITARA's data center consolidation and optimization provisions. Among other things, the proposed guidance instructs 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 defined performance metrics (including server utilization) on a quarterly basis as part of their data center inventory submissions. The proposed guidance also directs agencies to develop a data center consolidation and optimization strategic plan that defines the agency's data center strategy for the subsequent 3 years. This strategy is to include a timeline for agency consolidation and optimization activities with an emphasis on cost savings and optimization performance benchmarks the agency can achieve between fiscal years 2016 and 2018. Finally, the proposed guidance indicates that OMB will 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 reviews of troubled projects, an emphasis on incremental development, a key transparency website, reviews of agencies' operational investments, data center consolidation, and 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 acquisition 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 our previous recommendations, such as developing comprehensive inventories of federal agencies' software licenses. As noted in that report, we have made multiple recommendations to improve agencies' management of IT acquisitions and operations, many of which are discussed later in this statement. Between fiscal years 2010 and 2015, we made approximately 800 such recommendations to OMB and federal agencies. As of May 2016, about 33 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, and achieve no less than 80 percent of the planned PortfolioStat savings and 80 percent of the planned savings for data center consolidation. 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 comment. Most recently, in March 2016, we reported that the 24 departments and agencies participating in FDCCI collectively made progress on their data center closure efforts. Specifically, as of November 2015, 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. Agencies are also planning to close an additional 2,078 data centers--for a total of 5,203--by the end of fiscal year 2019. See figure 1 for a summary of agencies' total data centers and reported and planned closures. In addition, we reported that 19 of the 24 agencies reported achieving an estimated $2.8 billion in cost savings and avoidances from their data center consolidation and optimization efforts from fiscal years 2011 to 2015. Notably, 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. See figure 2 for a summary of agencies' reported achieved and planned cost savings and avoidances from fiscal years 2011 through 2019. However, we noted that planned savings may be higher because 10 of the 21 agencies that reported planned closures from fiscal years 2016 through 2018 have not fully developed their cost savings and avoidance goals for these fiscal years. Agencies provided varied reasons for not having this information, including that they were in the process of re- evaluating their data center consolidation strategies, as well as facing other challenges in determining such information. We noted that the reporting of planned savings goals is increasingly important considering the enactment of FITARA, which requires agencies to develop yearly calculations of cost savings as part of their multi-year strategies to consolidate and optimize their data centers. We concluded that, until agencies address their challenges and complete and report such information, the $8.2 billion in total savings and avoidances may be understated and agencies will not be able to satisfy the data center consolidation strategy provisions of FITARA. Finally, we reported that agencies made limited progress against OMB's fiscal year 2015 core data center optimization performance metrics. In total, 22 of the 24 agencies reported data center optimization information to OMB. However, of the nine metrics with targets, only one--full-time equivalent ratio (a measure of data center labor efficiency)--was met by half of the 24 agencies, while the remaining eight were each met by less than half of the agencies. See figure 3 for a summary of agencies' progress against OMB's data center optimization metric targets. Agencies reported a variety of challenges in meeting OMB's data center optimization targets, such as the decentralized nature of their agencies making consolidation and optimization efforts more difficult. We noted that addressing this challenge and others is increasingly important in light of the enactment of FITARA, which requires agencies to measure and report progress in meeting data center optimization performance metrics. We concluded that, until agencies take action to improve progress against OMB's data center optimization metrics, including addressing any challenges identified, they could be hindered in the implementation of the data center consolidation provisions of FITARA and in making initiative- wide progress against OMB's optimization targets. To better ensure that federal data center consolidation and optimization efforts improve governmental efficiency and achieve cost savings, we recommended that 10 agencies take action to complete their planned data center cost savings and avoidance targets for fiscal years 2016 through 2018. We also recommended that 22 agencies take action 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 22 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 comment. Most recently, as part of our ongoing work, we determined that agencies had not fully considered risks when rating their major investments on the IT Dashboard. Specifically, our assessment of 95 investments at 15 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 select investments' CIO ratings. Aside from the inherently judgmental nature of risk ratings, we identified three factors which contributed to differences between our assessments and CIO ratings: Forty-one 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 span longer than 1 month. Longer processes mean that CIO ratings are based upon 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 are recommending in our draft report, which is with the applicable agencies for comment, that 15 agencies take actions to improve the quality and frequency of their CIO ratings. 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 CIO's certify that IT investments are adequately implementing OMB's incremental development guidance. In May 2014, we reported that almost three-quarters of selected investments at five major agencies did not plan to deliver capabilities in 6-month cycles, and less than half planned to deliver functionality in 12- month cycles. We also reported that most of the five agencies reviewed had incomplete incremental development policies. 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. More recently, as part of our ongoing work, we determined that agencies had not fully implemented incremental development practices for their software development projects. Specifically, as of August 31, 2015, on the IT Dashboard, 22 federal agencies reported 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, including 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 software development projects that agencies reported plans to deliver functionality, from highest to lowest. In reviewing seven selected agencies' software development projects, we determined that the percentage delivering functionality every 6 months was reported at 45 percent for fiscal year 2015 and planned for 54 percent 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, the percentage of software projects delivering every 6 months that was reported to us by the Department of Commerce decreased by about 42 percentage points from what was reported on the IT Dashboard. In contrast, the Department of Defense reported a 55 percentage point increase from what was reported on the IT Dashboard. Figure 5 compares what the seven agencies reported on the IT Dashboard and the numbers they reported to us. We determined that the significant differences in delivery rates were due, in part, to agencies having different interpretations of OMB's guidance on reporting software development projects and because the information reported to us was generally more current than the information reported on the IT Dashboard. We concluded that, until the inconsistences in the information reported to us versus the information provided on the IT Dashboard are addressed, the seven agencies we reviewed are at risk that OMB and key stakeholders may make decisions regarding agency investments without the most current and accurate information. Finally, nearly all of the seven agencies we reviewed had not yet implemented the FITARA requirement related to certifying that major IT investments are adequately implementing OMB's incremental development guidance. Specifically, only one agency--the Department of Homeland Security--had processes and policies to ensure that the CIO will certify that major IT investments are adequately implementing incremental development, while the remaining six agencies had not established such processes and policies. Officials from most of these six agencies reported they were in the process of updating their existing incremental development policies to address certification. To improve the use of incremental development, we are recommending in our draft report, which is with the applicable agencies for comment, that agencies take action to update their policies for incremental development and IT Dashboard project information. We are also recommending that OMB provide clarifying guidance on what IT investments are required to use incremental development and for reporting on projects that are not subject to these requirements. In summary, with the recent enactment of FITARA, 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. However, improvements are needed in several critical IT initiatives, including data center consolidation, efforts to increase transparency via OMB's IT Dashboard, and incremental development--all of which are related to provisions of FITARA. Accordingly, OMB and federal agencies should expeditiously implement the requirements of the new IT reform law 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. 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 Dave Hinchman (Assistant Director), Justin Booth, Chris Businsky, Rebecca Eyler, Linda Kochersberger, and Jon Ticehurst. 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 plans 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 into law, aimed at improving agencies' acquisition of IT. Further, in February 2015, 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. Between fiscal years 2010 and 2015, GAO made about 800 recommendations related to this high-risk area to OMB and agencies. As of May 2016, about 33 percent of these had been implemented. This statement primarily summarizes: (1) GAO's published work on data center consolidation, and (2) GAO's draft reports on the risk of major investments as reported on the IT Dashboard and the implementation of incremental development practices. These draft reports with recommendations are currently with applicable agencies for comment. The Office of Management and Budget (OMB) and agencies have taken steps to improve federal information technology (IT) through a series of initiatives; however, additional actions are needed. Consolidating data centers. In an effort to reduce the growing number of data centers, OMB launched a consolidation initiative in 2010. GAO recently reported 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. However, these planned savings may be higher because 10 agencies had not fully developed their planned savings goals. In addition, agencies made limited progress against OMB's fiscal year 2015 data center optimization performance targets, such as the utilization of data center facilities. GAO recommended that the agencies take action to complete their cost savings targets and improve optimization progress. 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. In a draft report, GAO's assessments of the risk ratings showed more risk than the associated CIO ratings. In particular, of the 95 investments reviewed, GAO's assessments 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 ratings not being updated frequently. In its draft report, GAO is recommending that agencies improve the quality and frequency of their CIO ratings. Implementing incremental development. An additional key reform initiated by OMB has emphasized the need 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 a draft report, GAO determined that 22 agencies reported that 64 percent of 469 active software development projects had plans to deliver usable functionality every 6 months for fiscal year 2016. Further, for seven selected agencies, GAO identified significant differences in the percentage of software projects delivering every 6 months reported to GAO compared to what was reported on the IT Dashboard. For example, the percentage of software projects reported to GAO by the Department of Commerce decreased by about 42 percentage points from what was reported on the IT Dashboard. These differences were due, in part, to agencies having different interpretations of OMB's guidance on reporting software development projects. In its draft report, GAO is recommending that OMB and agencies improve the use of incremental development. 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 comment.